Global Financial Centres and their impact on banking and finance sectors

14 December 2015 06:30 pm Views - 2962

The government in its budget proposals for 2016 has indicated that a financial centre will be established in Colombo called the “Colombo International Financial Centre”. 

It has been proposed to identify a zone and demarcate it as an off shore centre   with a facility covering 300,000 square feet in D.R.Wijewardena Mawatha.
The proposed centre will be modeled in line with the Dubai International Financial Centre.

In this regard, I would like to draw the attention of the policy makers and leading financiers of the operation of international financial centers gleaned from a publication titled “Global Financial Centers Index “by an independent think tank called Z/Yen Group and Long Finance established in 2007 with funding and logistical support from the City of London Corporation and Qatar Financial Centre (QFC).

The Global Financial Centre Index (GFCI) was first published by the Z/Yen group in March 2007 following a research project related to competitiveness of cities as financial centres undertaken in 2005 and since then this index of competitiveness is published every 6 months.

The major objectives of the GFCI  is to examine the major financial centres of the world  in terms of competitiveness by providing profiles  ratings and ranking  and the GFCI 18 published in September 2015 analyses the compositeness  and related issues of 84 financial centres and 14 associate centres . 


Methodology of compiling GFCI
The Z/Yen  Research group in the GFCI  provides in its publication every 6 months  ratings and rankings for financial centres  on the basis of two separate sources of data and information namely (a) instrumental factors and (b)responses to an on line survey.

The instrumental factors learnt from previous research indicate the key factors that make a centre competitive and broadly grouped as “areas of competitiveness” namely business environment, financial sector Development, Infrastructure, Human Capital and Reputational and general factors. 
To this end, evidence of centres performance is drawn from a range of independent external factors  for example  ICT Development index( supplied by the United Nations), Networked Readiness Index (supplied by the World Economic Forum), the Telecommunication Infrastructure Index(from the United Nations), and the World Wide Web Index(from the World Wide Web  Foundation)Etc.

GFCI 18 released in September 2015 has applied 105 factors as described above.

Financial centre assessments are ascertained for compilation of GFCI using responses to an ongoing on line questionnaire (www.zyen.info/gtfci/) completed by international financial services professionals .Respondents are requested to rate those centres with which they are familiar and to answer a number of questions relating to their assessment of competitiveness. For GCFI 18, responses from 3, 194 financial services professionals were collected in the 24 months to June 2015.These responses provided 28, 676 financial centre assessments with the older assessments discounted according to age.


Financial sector profiles
The above profiles are identified by three key measures along different dimensions of competitiveness namely Connectivity, Diversity and Specialty.
The 84 centres in GFCI 18 are thus assigned profiles on the basis of a set of rules for the three measures: how well connected the centre is, how extensive its services are and the divergence of specialty. 

Accordingly, GFCI 18 Financial Centre Profiles are grouped as Global, Transitional and Local.


The salient features of GFCI 18 -Executive Summary
 “London has moved ahead of New York (No 2 position in GFCI 17) to retain the number 1 position. London has climbed 12 points in the ratings to lead New York by eight points. The GFCI is on a scale of 1000 points and we believe that a lead of fewer than 20 points indicates relative parity. London and New York are often as much complimentary as competitive. It is noticeable that the assessments for London have been higher since the general election in May 2015.”
“London, New York, Hong Kong and Singapore remain the four leading Global Financial Centres. New York (2nd) is now only 33 points ahead of Hong Kong (3rd) .Tokyo (5th) is only 25 points behind the leading four centres.”

“Western European centres show signs of recovery. The three leading centres in Europe are London, Zurich and Geneva. Frankfurt has moved up to fourth place just ahead of Luxembourg .Of the 29 centres in this region, 23 centres rose in the ratings with Dublin doing particularly well. Liechtenstein appears in the GFCI for the first time and is ranked 60th.Reykjavik continues to reverse some of its recent decline.” A total of 29 centres have been studied. 

“Eastern European and Central Asian centres prosper .The leading centre is now Warsaw in 38th   place just ahead of Istanbul. The top seven centres also saw an increase in their ratings but the largest decline in this region was St Petersburg.” 

“Twelve of the top 15 Asia/Pacific centres see a rise in their ratings. With the exemption of Hong Kong and Singapore , the top Asia /Pacific  financial centres have all seen their ratings increase in GFCI 18.Singapore ,Tokyo and Seoul remain in the GFCI Top 10” . 

“All North American centres are up in the ratings. Toronto remains the leading Canadian Centre and is now the second North American centre behind only New York.” 

“Sao Palo and Rio de Janeiro rise strongly. Sao Palo remains the top Latin American centre in GFCI 18, and along with Rio Janeiro, made significant progress in the ratings and rankings. The Cayman Islands and Bahamas also showed good improvements. Mexico was the only centre that fell in the GFCI ratings.” 
“Middle East and Africa centres do well .All Middle Eastern and African centres except Abu Dhabi, and Riyadh showed gains. Dubai made strong gains after a fall in GFCI17.Doha rose in the ratings but fell a couple of places in the ranks.

 “There were two new entrants to the GFCI. Los Angeles joined in 49th place Liechtenstein joined in 60th place.”

“GFCI ratings are up overall and the volatility in ratings remain low. The majority of centres saw an increase in the ratings with only 11 of the 84 centres declining. The increase in ratings is driven by a nearly universal increase in average assessments given by finance professionals who are more confident than they have been in recent times. The top financial centres have performed well in GFCI 18 with only three of the top 25 dropping in the ratings.”

In South Asia, Mumbai is the only financial centre with a rank of 59 and a rating of 627. New Delhi is an Associate Centre but have to acquire more assessments to be included in the GFCI.

GFCI 18 shows the 15 centres likely to become more significant with Singapore heading the table , Shanghai (2nd place), Bussan (4th) Hong Kong (5th ) , Dubai (10th )and  Beijing (12th ).It is significant that out of the 15 centres   there are 7 centres in the Asian region  that will become significant  in the future.


Qatar Financial Centre (Doha) Profile
In order to evolve a commercial strategy and appropriate structure for the proposed Colombo Financial Centre (CFC), I give below the profile of the above financial centre:

“The Qatar Financial Centre (QFC) is a fully onshore business and financial centre located in Doha, and provides an excellent platform for firms to incorporate and do business in Qatar and the region. It consists of a commercial arm, the QFC Authority, an independent financial regulator, the QFC Regulatory Authority: and has an independent judiciary which comprises a civil and commercial court and a regulatory tribunal.”

“The QFC Authority is responsible for the organization’s commercial strategy and for developing relationships with the global financial community and other key institutions both within and outside Qatar.”

“The QFC allows 100 percent foreign ownership, unlimited repatriation of profits; no restrictions on the currency used for trading, and charge a competitive rate of 10 per cent corporate tax on locally sourced profits.”

“These foundations have helped to foster Doha‘s world class business environment, indeed, Qatar is currently ranked as the 16th most business friendly country in the world (Economic Forum Global Competitiveness Report 2014-2015)” 

“The QFC has undertaken several legal and structural enhancements, together with the process improvements, to encourage a broader range of professional and business services firms to be licensed, facilitated by streamlined processes significantly shortening the turnaround time for applications.”
“In 2015, the QFC celebrated its 10 -year anniversary representing a decade of facilitating firm’s success and contributing to diversifying Qatar’s economy.”


Recommendations
The government should first appoint a committee whose members are competent in evaluating and studying the Global Financial Centres with guidance from world recognized   investment consultant group and identify an effective platform for the Colombo Financial Centre Authority (CFCA) to   formulate an appropriate and effective commercial strategy for developing close relationships with the global financial community.

If the CFCA is to be used as an effective platform for issue of licences to individuals, businessmen and other entities for off shore operations CFCA should have a Regulatory Authority, an independent judiciary including a civil and commercial court and a regulatory tribunal as in Qatar.

The government should also decide whether it will allow 100 per cent foreign ownership , no currency restrictions for trading , total repatriation of profits whether 100 per cent investment locally and if so a competitive corporate tax rate  on local profits etc.


Tax havens
It is also of interest to note that the leading world tax heavens such as Cayman Islands, British Virgin Islands (BVI), Jersey, Bahamas, and Bermuda are ranked 34, 43, 53, 75, and 42 respectively in GFCI 18. Cayman Islands rank 5 in the Financial Secrecy Index based on a fairly high secrecy score of 65.  BVI rank 21 on the same index. 

“The Cayman Islands is now the world’s sixth biggest banking centre  with banking assets worth over US $ 1.4 trillion in June 2014and it hosts over 11, 000 mutual funds and other funds with a net asset value of US$ 2.1 trillion. It has 200 banks and 140 trust companies (managing numerous trusts and other arrangements) and over 95 000 registered companies.” (Narrative report on Cayman Islands –Google).

“The BVI is now the world’s leading centre for company incorporation , with a thriving industry selling corporate secrecy and over a million shell companies incorporated since landmark legislation was introduced in 1984.(International Business Companies Act  of 1984) .Of these , 479, 000 were still active in early 2015: 20 for each inhabitant. On paper BVI was the fourth largest recipient of Foreign Direct investment (FDI)  in 2013.and the world’s sixth largest source of outbound FDI .In reality , BVI is merely a conduit  or “brass plate” for licit and illicit financial flows between countries” (Narrative report on BVI  Google).

In 1990 with the handing over of Hong Kong wealthy Chinese who  had a fear of confiscation of their wealth  transferred their money and assets  over a number of secretive tax heavens and a DVI delegation visited Hong Kong in 1996 and established BVI as the off shore jurisdiction for such transfers. According to Naomi Rovnik reported in the South China Morning Post in 2011 “A so called satellite companies’ registry, replete with Chinese –language services, was temporarily established to help people set up BVI companies without leaving Hong Kong. As they have grown richer, people on the mainland seem to have caught the BVI bug from their Hong Kong cousins” Accordingly, the tradition of focusing on vulnerable and corrupt developing countries by BVI continues to the present.

Jersey is another leading International Financial Centre .According to Investment Consulting Associates (ICA) www.ic-associates .com  the international  Finance industry has been recognized as an economic development strategy by many small island economies(SIEs) located in the Caribbean (Cayman Islands, Bahamas ,and Netherlands Antilles)  , the Pacific (Vanuatu)the Indian Ocean (Mauritius)and the periphery of the European Union (the Channel islands, Isle of Man, Cyprus, Malta and  Madeira) .

In the last group Jersey emerged in the 1960s as a major International Financial Centre  (IFC).In this regard the investments made by corporate investors consists of two parties as an example the investment made by one company or entity (direct investor) in one country  into a company or entity based in another country  (direct investment enterprise). OECDs definition of such an arrangement states that the foreign investor must own at least 10 per cent or more of the voting stock or ordinary shares of the company in which the investment is made. The various modalities of FDIs are also explained in this web site.


Conclusions 

I have attempted to outline the various International Financial Centres that attract FDIs with the competitive Global Financial Centre Index as well as the many tax havens that are presently in operation.

It must be stressed that if Colombo is to develop into an attractive   Financial Centre it must be competitive at least with the 15 top Asia /Pacific centres which now shows a rise in their ratings (GFCI 18). To this end, the three key measures namely connectivity, diversity and specialty have to be identified and strengthened by bringing new legislation and inclusive and exclusive institutional modalities.

On the other hand if the proposed Colombo Financial Centre is to be a tax haven, effective controls should be introduced to prevent money laundering and transfer of funds for other undercover operations such as funds generated from trading in drugs and other illegal activities.

The Finance Minister in a recent statement has announced that Sri Lankans who have financial assets abroad will be able to transfer such assets to Sri Lanka without any questions asked by giving an amnesty for such individuals or other corporate entities.

In conclusion, I would strongly recommend that the government retains a world leading investment consultant group to formulate an effective and appropriate Financial Centre for Colombo on the guidelines identified by the law makers and financial experts in Sri Lanka. It must be stressed that there should a strong political will to embark on such financial development strategy where both capitalist as well as socialist countries especially China and Russia have recognized as to most effective mechanism to attract FDIs with competition.

(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be reached at fasttrack@eol.lk )