The UAE Central Bank (“Central Bank”) actively introduced new Finance Company Regulations (“Regulations” or “2018 Regulations”) on May 10, 2018, as part of several new laws and regulations in the UAE. These Regulations took effect one month after publication, replacing the previous finance company regulations issued in 1996 and the 2004 regulations for companies operating under Islamic Shari’a principles (“Previous Regulations”). The 2018 Regulations aim to provide a detailed regulatory framework for Finance Companies, enabling them to operate and grow within the UAE while also establishing a framework to protect their customers. Khairallah Law Firm highlights the importance of these changes, especially in the context of banking laws in UAE.

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The new Regulations consolidate the rules for both Islamic finance and conventional finance companies (“Finance Company/ies”), incorporating significant changes such as revised capital requirements and enhanced corporate governance. Existing Finance Companies must also adhere to these updated standards. Banking laws and regulations play a crucial role in shaping these changes. Below, we highlight some noteworthy features of the Regulations and provide a comparative table detailing the key changes from the Previous Regulations.

License Application Process Under Banking Laws in UAE

As for the UAE, these Regulations prevent anyone without a single central bank license from conducting financing activities. An applicant for this license needs to submit an elaborate application covering the proposed basket of activities in terms of financial services and products that are going to be launched, business plan with estimated financial projections and risk factors corporate structure including shareholding pattern etc., historical background & track record if available start-up costs indicative branch locations recruitment policy.

Unconditional guarantee in favor of the Central Bank from a UAE bank for an amount equal to required minimum paid-up capital by applicant. The Central Bank shall issue the license for a period of three years renewable in accordance with financial laws and regulations unless otherwise is decided by the CBL upon meeting this requirement.

In addition, financial laws and regulations will require that the Central Bank approve any changes in ownership of 5% or more in relation to that Finance Company.

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Revoking or Canceling a License

The license application will finally be approved or refused by the Central Bank. Where a refusal is made, the Central Bank must provide written notification of that fact and grounds for doing so. The Board may also modify, suspend or revoke any license as deemed necessary and proper. The Regulations set out certain other grounds for cancellation, including where the customer provides false or misleading information, it appears that the needs of prospective customers may be prejudiced, and if a winding-up order is made against the Finance Company. These are all under the banking practices of using banking laws in UAE.

Article 116 Reason for Cessation or Suspension If a Finance Company wishes to cease operations, it must apply in writing to the Central Bank at least six months before of cessation reason.

In addition, the Regulations provide for sanctions against companies that do not comply with its provisions regarding institutions and measures to prevent money laundering established by the Central Bank.

Permitted Activities Under Banking Laws in UAE

Article 10.1 of the Regulation specifies the types of activities that are permitted, including:

• Retail finance
• Mortgage Finance
• Wholesale finance
• Pre-paid cards
• Distribution of third-party products

The Central Bank reviews and amends this list periodically.

Additionally, Article 10 outlines the do’s and don’ts for the Finance Company’s business operations. Here are some key features:

• The Finance Company can extend loans only to ‘Juridicial Persons’ (as defined under Article 93 of the UAE Civil Transactions Law) and individuals in the UAE. However, it is prohibited from accepting deposits or loans from individuals. 
• It may accept deposits only from Juridicial Persons, subject to conditions outlined in Article 10.4. Additionally, it can borrow from UAE banks and receive foreign funding, provided that it adequately hedges its risk and does not exceed 25% of the total amount of its debt capital, in accordance with UAE banking law. 
• Before introducing any new product lines within the activities specified in its license, the
  The Finance Company must obtain a no-objection letter from the Central Bank. 
• The Finance Company may only invest in the share capital of brokerage companies, money exchanges, UAE banks, and other Finance Companies. Each individual investment cannot exceed 10% of its debt capital, and the total aggregate investment must not exceed 25% of its debt capital. 
• The Finance Company must obtain approval from the Central Bank to issue bonds. These bonds must be denominated only in UAE dirhams or US dollars. 
• Additionally, the Finance Company cannot finance borrowers who are not entities incorporated in the UAE or its free zones, nor UAE residents, or where the mortgaged assets are not located  
• in the UAE. It is also prohibited from engaging in the business of money exchange.

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Conclusion 

In a nutshell, the 2018 Finance Company Regulations by the UAE Central Bank revamped and strengthened the landscape for both Islamic and conventional finance companies. All these regulations tightened licensing, corporate governance, and customer protection provisions under the recently amended UAE banking law. The aim is to result in financial companies starting more responsible and robust debt issuers that are helping overall sectors by activating stability as growth. This serves to highlight the relevance of these updates concerning compliance as well as in traversing this new regulatory terrain, explained Khairallah Law Firm.

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