A general introduction to the banking regulatory regime in the United Arab Emirates
All the questions
The United Arab Emirates, and in particular Dubai, have become the key financial center of the Middle East in recent years. The United Arab Emirates is on its way to becoming a leading global financial center and has one of the largest Islamic banking markets in the world, after Saudi Arabia and Malaysia.
There are basically three main categories of banks in the UAE: commercial banks, Islamic banks and foreign banks, all of which are licensed and regulated by the UAE Central Bank. Based on total assets at the end of the third quarter of 2021, the five largest banks in the UAE are:
- First Bank of Abu Dhabi;
- Emirates NBD;
- Abu Dhabi Commercial Bank;
- Dubai Islamic Bank; and
- Mashreq Bank.2
In Moody’s long-term bank ratings, the UAE banking system moved from negative in 2019 to stable in 2021. The change was attributed to Moody’s view that the operating environment for UAE banks is recovering from the effects of the pandemic, attributed also to the Central Bank’s support program, which supported the UAE economy and, therefore, helped banks mitigate the deterioration in loan quality.3
The regulatory regime applicable to banks
The regulatory framework for the banking sector in the United Arab Emirates is based on the Banking Law,4 under which the Central Bank is responsible for issuing and managing the country’s currency and regulating the banking and financial sectors.
The banking law provides for the approval and regulation by the Central Bank of:
- banks, which are defined as including institutions authorized to engage primarily in the business of accepting deposits and other authorized financial activities such as granting loans, issuing and cashing checks, placing bonds, trading in currencies and precious metals and carrying out other transactions authorized by law or banking practice;
- exchange offices and money intermediaries (i.e. traders who buy and sell currencies);
- Islamic financial institutions, which are defined as financial institutions authorized to undertake all the activities of a commercial bank, but in accordance with the principles of Islamic Shariah; and
- other financial institutions.
The banking law does not apply to statutory public credit institutions, public investment institutions, development funds, private savings and pension funds, or the insurance sector. It also does not apply to free zones or financial institutions established there. The Central Bank, however, has the right to exercise its powers over financial institutions outside the UAE or in free zones after consultation with the competent authority.
Although the Central Bank is the primary regulator of banks and financial institutions in the UAE, all of these entities are also subject to additional registration and licensing requirements at the federal and emirate levels.
All commercial banks incorporated in the UAE must be incorporated as public limited companies and be majority-owned by UAE nationals. The majority of the directors of these companies must be nationals of the United Arab Emirates. The minimum UAE national shareholding requirement for financial companies, banks and exchange houses is 60%. Unlike branches of foreign companies in the UAE, foreign banks are not required to appoint a domestic agent to establish a branch in the UAE.
Based on data available on the Central Bank’s website, as of September 2021, 21 domestic banks, 27 foreign banks and 10 wholesale banks were registered in the UAE.5
The main difference in the treatment of local and foreign commercial banks is that local banks are not subject to any tax on their income, while foreign banks are subject to tax at the emirate level.
Non-resident banks can extend bilateral credit facilities and participate in syndications in the UAE. They are not deemed to be resident, domiciled or carrying on business in the UAE, and are not liable to pay taxes in the UAE simply because of these bilateral facilities or their participation in syndications. All licensed financial institutions are required by banking law to maintain the confidentiality of all customer data and information.
ii Emirates Securities and Commodities Authority
The Emirates Securities and Commodities Authority (SCA) regulates securities markets in the UAE. All banks in the United Arab Emirates are listed on one of two onshore markets, the Abu Dhabi Stock Exchange and the Dubai Financial Market. The SCA licenses all brokers, consultants and custodians who provide services related to listed securities. The Investment Fund Regulations issued by the SCA in July 2013 transferred regulatory responsibility for the licensing and marketing of investment funds, and a number of related activities, from Central bank at the SCA. The sale, marketing and promotion of foreign securities and funds in the UAE and the establishment of domestic funds require the approval of the SCA. This requirement was clarified and established under SCA Board Decision No. 3 of 2017 on the Regulation of Promotional and Arranging Activities.
iii Dubai International Financial Center
The Dubai Financial Services Authority (DFSA) has adopted a regulatory approach modeled, at least in part, on the former Financial Services Authority in the United Kingdom. The DFSA does not grant banking licenses per se; rather, it authorizes financial service providers to undertake specific financial services. Financial services relevant to banks include the provision of credit and the taking of deposits. Around 630 financial services companies have a presence at the Dubai International Financial Center (DIFC). Of these, a significant number of institutions do not have the authority to take deposits. This reluctance of the various institutions to be a “real” bank has its origin in two causes:
- DIFC entities were historically unable to deal with retail customers. This restriction was lifted several years ago, but the business model of the vast majority of institutions within the DIFC has been to focus on corporations or high net worth individuals; and
- banks have been reluctant to seek permission to take deposits because they still cannot trade in dirhams or accept deposits from UAE markets.
Most of the banks that have set up in the DIFC have done so as branches of foreign companies; this was done for capital adequacy reasons. Recently, however, the policy of the DFSA has been to encourage banks to bring new subsidiaries into the DIFC and to capitalize these subsidiaries to an acceptable level.
iv Abu Dhabi Global Market
Following the success of the DIFC, a financial free zone, the Abu Dhabi Global Market (ADGM), was established in Abu Dhabi and became operational in the second half of 2015. The financial services regulatory framework for the ADGM aims to reflect international news. best practices by assimilating key aspects of other regulatory regimes around the world. The ADGM has its own regulatory body, the Financial Services Regulatory Authority (FSRA). Like the DFSA, the FSRA does not grant banking licenses per se. Banks licensed with the ADGM are prohibited from accepting deposits from the UAE market and may not accept deposits or engage in foreign exchange transactions involving UAE dirhams .
v U.S. Foreign Account Tax Compliance Act
The UAE and the United States reached a substantive agreement in May 2014 to include the UAE on the list of jurisdictions to be treated as having an intergovernmental agreement in force regarding the U.S. Foreign Account Tax Compliance Act (FATCA). The UAE has adopted Model 1. Banks and financial institutions now consistently comply with FATCA requirements.
vi Common Reporting Standard
The Cabinet approved the Agreement on Mutual Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement through Cabinet Resolution No. 9 of 2016. Thus, the Common Reporting Standard (CRS) of the Organization for Economic Co-operation and Development (OECD) has been in force in the UAE since January 1, 2017 to implement the automatic exchange of financial account information. International Financial Reporting Standard 9 must be adhered to by banks and financial institutions in the UAE. International Financial Reporting Standard 16 (which applies to leases and replaces IAS 17) came into force on January 1, 2019.
The UAE has implemented the Joint Disclosure and Exchange of Information for Tax Purposes standards set by the G20 and the OECD. This follows the Cabinet decision requiring the Ministry of Finance to coordinate with various government authorities to collect financial information in order to implement exchanges of information for tax purposes. The CRS requires jurisdictions to obtain information from their financial institutions and to automatically exchange this information with other jurisdictions each year. Banks and financial institutions started collecting the required financial data from January 1, 2017.