Feasibility of Victoria Falls as an International Financial Centre
VICTORIA Falls has been earmarked as a Special Economic Zone with a focus on finance. The idea being to transform the resort town into a banking or international financial centre (IFC). This week we look at how feasible this idea is.
The term “international financial centre” is often used interchangeably with “tax haven” or “secrecy jurisdiction, “although the latter terms have more negative connotations. Scholars generally label as “tax havens” those territories that offer favourable tax regimes and bank secrecy laws designed to attract foreign investors.
An IFC is usually found within a tax haven, usually in a city. It is defined as a commercial community hosted by tax havens, which exploit the legislation and corporate secrecy offered by the tax haven to the benefit of foreign residents.
In an IFC, the clustering of financial intermediaries and service providers — bankers, lawyers, accountants — in one location allows for easier co-ordination of financial transactions and settlement of payments.
This reduces transactional costs and creates economies of scale, benefiting investors and other financial sector stakeholders.
IFCs typically share several characteristics: the presence of foreign investment opportunities, low or no foreign corporate taxes, connection with other financial centres, and a sophisticated regulatory and legislative framework.
They usually also offer a high concentration and diversification of banking activities such as credit for import, currency and foreign exchange trading, cross-border funds transfer, foreign borrowing and lending, and foreign investment and wealth management.
Examples of IFCs in Europe include London, Luxembourg, and Zurich; in North America, New York and Toronto; in Asia, Tokyo, Singapore, and Hong Kong; in the Middle East, Dubai; in South America, São Paulo; and in Africa, Johannesburg. In 2014 the top four global financial centres were New York, London, Hong Kong, and Singapore. Singapore as an IFC and the Zimbabwean case In the short 50 years since its independence, Singapore has established itself as a leading global financial centre. According to the latest iteration of the Global Financial Centres Index (GFCI) that was published by the think tanks Z/Yen and China Development Institute, Singapore was ranked the third most competitive financial centre in the world.
Similarly, Singapore was ranked second in PriceWaterHouse Cooper’s City of Opportunity index and sixth largest wealth management centre in the world by Deloitte. Singapore had a key regional and global role as a major banking hub. According to the Monetary Authority of Singapore (MAS), banks in Singapore held a total of US$2 trillion in assets as of 2013. It hosted a total of 126 commercial banks, of which five are local banks and 121 are foreign banks. Of these foreign banks, 29 were full banks, 55 are wholesale banks, and 37 are offshore banks. In particular, Singapore’s three largest local banks, Development Bank of Singapore (DBS), United Overseas Bank Limited (UOB), and OCBC, have been ranked among the world’s strongest and most valuable banking brands.
Having identified asset management as a key growth sector in the 1980s, Singapore has since emerged to become a leading asset management centre in Asia. In 2015, assets under management (AUM) in Singapore amounted to S$2,6 trillion, a nine percent growth from the year before.
These assets were managed by the 628 registered and licensed fund managers. A total of 80 percent of Singapore’s AUMs are sourced from outside the country, with 68 percent of all AUMs invested in the Asia Pacific area. As the MAS’s 2015 Asset Management Survey revealed, Singapore has become a regional hub for institutional investors seeking to access private market opportunities in Asia.
Singapore is also the largest foreign exchange centre in the Asia Pacific region, and ranks third in the world, behind London and New York. In 2016, average daily trading volume amounted to S$705 billion, with Singapore’s share of global foreign exchange rising to 7,9 percent Singapore’s position as a global hub for foreign currency exchange has also been beneficial for its emerging role as an offshore Renminbi (RMB) centre, as China seeks to internationalise its currency.
As Singapore’s economy digitised through the 2000s, the emergence of high-tech start-ups has given rise, in combination with Singapore’s advanced financial sector, to a burgeoning FinTech (Financial Technology) sector. However, the emergence of this FinTech sector is by no means a matter of coincidence. It is strongly associated with the Singapore Government’s Smart Nation initiative, which aimed to introduce digital and advanced ICT technologies to the city-state’s policy processes as well as explore potential industries that may emerge from such technologies. According to the consultancy firm Ernst and Young (EY), Singapore was ranked fourth among the world’s top FinTech hubs.
Singapore Strategic Advantages as IFC and can Zimbabwe match such efficiency?
Ranked second on the 2017 edition of the World Bank’s Ease of Doing Business, Singapore’s businessfriendly regulations continue to be a major draw for global financial institutions seeking to establish a presence in Asia but Zimbabwe which wants to copy and paste the Asian Tigers success matrix is ranked a distant 161 out of 190 economies in the same index making it a very challenging destination for capital as also seen by its FDI inflows amounting to US$1,7 billion between 1980 and 2013 while comparatively Zambia and Mozambique received US$7,7 billion and US$15,8 billion, respectively during the same period.
Singapore’s business-friendly regulations were complemented by the MAS’s Financial Sector Development Fund, which provided tax incentives and grants to financial institutions to establish or expand their operations in Singapore but interestingly Zimbabwe which wants to get the same level of investment does not encourage holding of large sums of money through legislation like the Bank Use Promotion Act (Chapter 24:24) and has even gone a step further to offer incentives to whistle blowers who report people found with large sums of cash outside the banking system, but money changers are teeming Bulawayo’s streets and hold more funds than most banks. All these tendencies are bad for business.
The liquidity crunch in Zimbabwe will not allow the movement of large volumes of financial transactions with secrecy as the case ought to be in an IFC. Singapore’s second value proposition as a financial hub arose from its cost competitiveness visa-vis other financial centres, and its well-developed urban and business infrastructure. While on the one hand costs of doing business such as wages and rental have steadily risen, office rental in Singapore remained significantly lower than that of leading rival financial centres such as London, New York, Hong Kong, and Tokyo. On the other hand, Zimbabwean banks instead of being competitive and creative in their product lines actually make their high profits by charging consumers hefty truncation charges and usurious monthly account maintenance fees.
Singapore’s strength as a global financial centre also lies in its well-established set of public infrastructures, including an efficient public transport system, advanced ICT infrastructure, and an extensive network of Free Trade Agreements (FTAs). Zimbabwe however, has seen most of its road and rail infrastructure deteriorating over the years. This has made it very expensive to do business in Zimbabwe as seen by the costs of shipping for exports of a 20 foot container from a warehouse outside Harare to Durban (the most frequently used port) being US$3 765.
That figure is between 20-25 percent higher than the also land-locked Botswana and Zambia, and the gap is much larger with South Africa. Poor internet infrastructure and speed coupled with connectivity constraints and high charges for data also need to be addressed. The next article will address how despite all the disadvantages, Zimbabwe can still still make the IFC concept a success.
Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com or +263776607524.