Fifteen years ago this month there was quite a lot of excitement around Dubai’s Trade Centre Tower.
The building – a landmark then as one of the few high-rise buildings in the emirate – was preparing for the opening of a new stock exchange in the Arabian Gulf, and the first in the UAE.
Essa Kazim, who was to become chairman of the new Dubai Financial Market (DFM), was closely involved in those preparations.
“The instruction had gone out from Sheikh Mohammed the previous year that we should build a full-automated capital market, and we had got it done in pretty short time. Now, 15 years later, we have the oldest financial institution in Dubai, apart from the banks, and we have a lot to be proud of,” says Mr Kazim.
Another leading light in the foundation of the DFM was Mohamed Alabbar, then head of the Dubai Economic Development Department, whose Emaar group had already been formed but whose shares were being traded informally on an over-the-counter basis.
Emaar, and a few other established Dubai corporates such as Union Properties and Dubai Investments, were keen to have their equity traded on a proper exchange.
“From the start, we wanted to have the best in technology, clearing and settlement systems, and depository functions,” says Mr Kazim.
There were challenges too, he recalls. Recruitment and training were obvious ones for a new institution, but perhaps a greater challenge came in the psychological shift that local investors were being asked to make.
“We needed to create a new mentality in two respects: people had to be persuaded to trust the system with their share certificates, which was a bit like asking people in the old days to hand over their cash to the bank. They didn’t always trust the bank, but it was a gradual process and people adapted. Now we are 100 per cent dematerialised, which means there is no paper involved any more,” he says.
The second challenge was perhaps more demanding: “You cannot have a modern economy without a stock exchange, it is an essential intermediary between savers and investors. I think now that retail investors in Dubai understand the need for a longer-term mentality.
“Trading on DFM is still dominated by retail investors who are about 70 per cent of daily trading. But the market has to have active traders to provide liquidity. I think we have the balance about right now,” says Mr Kazim.
The DFM opened for business on March 26, 2000, with 10 listed companies on a total market capitalisation of Dh30 billion.
The first couple of years’ trading was slow, but as the Dubai economy took off with the scrapping of foreign property ownership rules, so did the exchange. The “turning point” was the listing in 2004 of Amlak, the mortgage finance business, which typified the property boom. The DFM soared to a peak in 2005, then crashed back the following year, quite a shock to investors. “It was in their minds that shares could only ever go up, but actually the market then was overvalued and unsustainable,” says Mr Kazim.
The recovery was gradual until the next milestone, which came in 2007 when the DFM listed its own shares.
“We were the first Middle East market to go public, and it imposed a discipline and efficiency on us as a listed company and made us aware we were in business to make a profit,” he says.
If the crash of 2005-06 was not related to the real economy, the next crisis for DFM was very real indeed, and highlighted some of the defects in the way the exchange had developed. “It was a global crisis in 2008 of course, but because it grew out of the real estate and financial sectors, it hit Dubai all the harder. Many of the listed companies on DFM were from those sectors. “Today, there is a better representation of the Dubai economy on DFM,” says Mr Kazim.
By 2011, DFM was back on the upwards loop of the cycle again, driven by the emirate’s economic recovery and the perception that the market was a “safe haven” for investors at a time of regional instability.
Inclusion in the MSCI index in summer 2014 was a milestone in the DFM’s history, Mr Kazim says, and helped to prompt the surge of initial public offerings that took place in the second half of last year.
The decline in the oil price may have temporarily slowed plans by companies to bring new IPOs to market, but Mr Kazim remains confident the flow of new listings will resume.
“I’m optimistic there are a number of big IPOs out there. Investors are just waiting for a little more stability in the oil price. DFM – and Nasdaq Dubai – have all the ingredients in place to handle huge IPOs worth billions of dirhams,” he says.
This is what he regards as the DFM’s greatest achievement over 15 years: that it has built the capacity to handle big share transactions with cutting edge technology and international standards. “We were the first in the region to be fully automated, dematerialised and technologically up to date. Today, we are a ‘smart’ exchange, but there is still a long way to go,” he says.