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Riyadh unlikely to unseat Dubai as regional financial hub
Al-Monitor Pro Members
Samuel Wendel
Senior Market Research Analyst, Al-Monitor
Dec. 21, 2022
2022 was a big year for Middle Eastern IPOs, which is seeing global banking players line up to snare more regional business. The UAE, as the preferred destination for banks and financial professionals eyeing regional opportunities, is a focal point of those moves, but the key player to watch currently is Saudi Arabia. Riyadh has long harbored ambitions of becoming a top regional financial center, but those efforts have mostly underwhelmed: the city ranked 98th in the most recent Global Financial Centres Index, which tracks the competitiveness of the world’s leading financial hubs. Dubai ranked 17th. But Saudi Arabia is making moves to upend the status quo, with the kingdom currently pushing multinationals to relocate regional headquarters to Riyadh if they want to secure government contracts from 2024 onwards. That ultimatum could move the needle for Riyadh’s financial hub ambitions as interest in Saudi Arabia’s market activity picks up, although it’s still unlikely to unseat Dubai.
- Saudi Arabia has poured money into establishing Riyadh as a major financial hub. That began in 2006, when it announced the King Abdullah Financial District, or KAFD, a $10 billion mega project designed to be the Middle East’s largest financial center.
- KAFD can be seen as Riyadh’s answer to the Dubai International Financial Centre, or DIFC, a freezone launched in 2004 that today reports over 4,000 active registered companies and has contributed to the UAE’s reputation as a business-friendly country that welcomes expats and tourists. That contrasts with Saudi Arabia, where it was historically hard to get a visa and social restrictions can alienate expats.
- KAFD so far has proved to be a cautionary tale. Still incomplete over a decade after work began, it has received plenty of media coverage around its struggle to attract tenants. Saudi Arabia’s Public Investment Fund (PIF) acquired KAFD in 2018 and shifted its focus, rebranding it as Riyadh’s business and lifestyle destination. As of 2022, construction was reportedly in the final stages.
- According to the most recent Global Financial Centres Index, published in September 2022, Dubai was the region’s top hub at 17, followed by Abu Dhabi at 32, Tel Aviv 53, Casablanca 54, Doha 57, Istanbul 77, Bahrain 81, Riyadh 98, Kuwait City 108 and Tehran 112. For Riyadh, that ranking was down from 86 in the previous index, published in March 2022.
- Still, Saudi Arabia does have things working in its favor. The PIF is one of the world’s most prolific investors and Saudi Arabia’s financial sector development program is evolving alongside steps to improve its business environment and attract foreign investment. Its Tadawul stock exchange — the region’s largest — joined the global indices FTSE and MSCI ahead of Saudi Aramco’s historic 2019 IPO. The kingdom has also pursued reforms, like removing a 49% ownership limit for foreign strategic investors in shares of listed companies in 2019.
- Crucially, Saudi Arabia is making a controversial play to lure companies away from Dubai. In 2021, its government announced that it would no longer grant contracts to multinationals with regional headquarters located outside Saudi Arabia by 2024. The effort is called the regional headquarters program, or RHQ. Companies that relocate get various labor and visa policy exemptions, among other benefits.
- Global banking players have Saudi Arabia in their crosshairs. Goldman Sachs, Citigroup, JPMorgan Chase and Deutsche Bank are all reportedly expanding in the Middle East after an IPO boom in the Gulf. That includes Rothschild opening an office in the kingdom in 2022, reports Bloomberg.
- Also, in September 2022 the financial advisory and asset management firm Lazard noted that Riyadh was the natural location for its “regional hub office” while announcing the hiring of Sarah Al-Suhaimi — previously Tadawul’s chair — as chair of its regional investment banking business.
- One factor to watch is Saudi Arabia’s new privacy and data law, called the PDPL. In 2022 the US Chamber of Commerce warned that the PDPL will raise costs of doing business and complicate efforts to attract foreign investors, as the law prevents the transfer of personal data outside the Kingdom, reported Bloomberg in March. Companies expressing concern include tech firms, banks and payment firms. Enforcement of the PDPL has been postponed until March 2023.
- Meanwhile, fintech is becoming a focus. In June 2022, Saudi Arabia’s Ministry of Finance announced a new fintech strategy, which aims to position Riyadh as a global fintech hub and increase the sector’s contribution to GDP to $3.46 billion by 2030. Funding for fintech companies in Saudi Arabia surpassed $400 million between September 2021 and August 2022, up 11% over the prior year, according to the nonprofit Fintech Saudi.
Scenario 1: KAFD finally delivers results as the RHQ program picks up.
The completed financial district welcomes a range of multinational tenants, including financial players, and becomes home to Riyadh’s foreign business community as more firms relocate regional headquarters to Saudi Arabia.
That said, while KAFD’s grand-opening will be a milestone, the RHQ doesn’t guarantee financial firms will line up to relocate regional HQs from Dubai. Already, the persistent lack of foreign banks announced as tenants and the district’s rebrand as a business and lifestyle hub speaks to a significant credibility gap that still needs to be overcome.
Scenario 2: Fintech moves give Saudi Arabia’s ambitions a spark, helping it make up ground as a financial hub.
Investments flow into local fintech companies as regulators pave way for adoption, which sees financial sector growth as Saudi Arabia’s large tech savvy young population embrace new apps and services. That positions homegrown fintech companies to expand regionally, boosting Saudi Arabia’s profile as a finance hub.
Yet, MENA’s nascent fintech ecosystem is shaping up to be competitive. Although Saudi Arabia is likely to see fintech winners in coming years, neighbors including the UAE and Egypt are also producing promising players.
Plenty of multinationals—including financial players—are likely to establish regional headquarters in Riyadh as the RHQ program takes effect, as many industries cannot afford to ignore government contracts. Despite this, Riyadh will be hard-pressed to surpass Dubai as the Middle East’s premier financial center. That’s partially because of trust: the UAE became a financial hub by successfully delivering globally competitive freezones and a business-friendly environment. Meanwhile, Saudi Arabia has moved slower and struggled to establish a similar track record. Strong-arming companies into relocating won’t necessarily help its reputation, while laws like the PDPL could hurt the cause too. That said, Saudi Arabia still has opportunities to develop Riyadh as a financial hub, thanks to the country’s economic growth and strategic importance, rising market activity and new infrastructure. This all makes 2023 a unique moment for Saudi Arabia to catch up to rival financial centers.
Samuel Wendel is a senior market research analyst with Al-Monitor covering economic, tech and business trends across the Middle East. He has previously served as a journalist with Forbes Middle East and Wamda, where he reported on key industry developments spanning a range of sectors in the region.
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