Fathi Ben Grira, chief executive officer of Menacorp, the UAE-based brokerage house and investment bank, forecasts greater consolidation of the emirates brokerage industry as some competitors are forced out the market.
Menacorp currently competes with 49 other brokerage houses and Grira expects this number to fall in the coming years as competition intensifies.
We are seeing a very important consolidation trend in the stock brokerage industry in UAE. Today the top 10 brokerages control 65 to 70 per cent of the Dubai Financial Market (DFM) and our main challenge to be part of this trend, he tells MEED, saying that some companies will be unable to maintain serious investments the business requires and will close down.
A few years ago we were in a ridiculous situation where you had more brokerage houses than listed companies, so now we are at 50 it is OK. But really we should not exceed 25 brokerage houses for this market, he says.
The emirates brokerages came under close scrutiny in recent months following the meltdown on the Dubai Financial Market (DFM) between June and July, caused by the collapse in the value of UAE construction firm Arabtec shares.
Brokerages came under criticism for the way they managed margin calls during the market collapse, with accusations that they forced clients to sell off shares too quickly.
This led to an investigation by Securities and Commodities Authority (SCA) into brokerage practices surrounding margin calls.
Ben Grira disputes that the fault lay with brokerage firms. You will not find an industry in this country as much monitored as the brokerage business. Since the collapse of the market 2009-10 everyone is focusing on us, he says.
Everyone is trying to understand why market collapsed so much and the answer is easy, it was lack of disclosure from Arabtec and thats it, he says.
He also criticises a loophole in current regulations, which states that brokerages cannot finance investors at a ratio more than 1 to 1, but allows other institutions such as banks to offer higher levels of leverage.
It is quite common to have 5-1 ratios in mature markets where you have liquidity and low volatility, but in a market where you have low liquidity and high volatility it is dangerous, he says.
To combat such issues a new committee group has been set up by the UAE Central Bank and SCA to review regulation.
The company is targeting a net profit of AED80m ($21.8m) in 2014, but Ben Grira aims to expand the business further.
It is opening a new US desk in New York in the coming weeks to offer Gulf clients a single entry point into international markets.
Menacorp is also diversifying its business lines to compensate for the fluctuations in the regions equity markets. We want to build a track record in capital markets, IPOs [initial public offerings] for instance, he says.
The company is currently working with two companies on two IPOs, and expects the IPO market to remain buoyant in the forthcoming months.
However, he would like to see a greater range of companies listing on the Dubai exchange.
When you look at the DFM today the real issue is that the real economy is not really represented. You have banks, you have telecoms, you have real estate companies listed, but you dont have any airlines and you dont have any companies related to tourism, food and beverage, dairy companies, so the potential is really important and once we have these companies, it will be a game changer, he says.
The enthusiasm surrounding the oversubscribed greenfield IPO by Marka earlier in 2014 is evidence of the hunger for more diverse range of offerings.
People were excited by Marka. Investors were fed up with traditional real estate, contracting, banks, insurance that we have and they want something reflecting more the real economy, he says.
Menacorp is also working with Nasdaq Dubai on the development of the regions sukuk market and working with its clients, which comprise mainly of high-net worth individuals who head up Gulf family companies, on ways to tap the sukuk market as an alternative fund-raising method.