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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

The principal governmental and regulatory policies that govern the banking sector are:

  • UAE Federal Law No. 10 of 1980 concerning the Central Bank;
  • the Monetary System and the Organisation of Banking (the Banking Law);
  • UAE Federal Law No. 18 of 1993, as amended (the Commercial Code);
  • UAE Federal Law No. 6 of 1985 concerning Islamic banks, financial establishments and investment companies (the Islamic Banking Law); and
  • various circulars, notices and resolutions issued by the board of governors of the UAE Central Bank, from time to time.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

The Banking Law establishes the UAE Central Bank and contains detailed provisions on the role of the UAE Central Bank, which, among other things, includes:

  • issuance of currency;
  • organising, promoting and supervising banking;
  • directing the credit policy;
  • advising the government on financial and monetary issues;
  • acting as the government’s bank;
  • maintaining gold and foreign exchange reserves; and
  • acting as bank for other banks in the UAE.

The Banking Law also contains detailed provisions on the registration, licensing and operation of:

  • commercial banks;
  • investment banks;
  • financial institutions;
  • monetary and financial intermediaries; and
  • representation offices.

The Banking Law is, however, not applicable to:

  • public credit institutions set up by law;
  • governmental investment institutions and agencies;
  • governmental development funds;
  • private savings and pension funds; and
  • insurance and reinsurance companies and agencies.

The Commercial Code contains detailed provisions on banking operations, which include, among others, provisions governing:

  • bank deposits;
  • bank accounts;
  • guarantees;
  • documentary credits;
  • bills of exchange;
  • loans;
  • promissory notes; and
  • cheques.

The Islamic Banking Law contains provisions relating to the establishment and operation of Islamic banks. Islamic banks shall also be subject to the provisions of the Banking Law, with certain exceptions.

The various circulars, regulations, notices and resolutions issued by the UAE Central Bank deal with various aspects of banking including:

  • bank accounts;
  • maintaining certain reserve ratios;
  • capital adequacy norms;
  • measures to combat money laundering; and
  • reporting requirements to the UAE Central Bank.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

The UAE Central Bank is primarily responsible for overseeing banks in the UAE, except in the Dubai International Financial Centre (DIFC), where the regulatory authority is the Dubai Financial Services Authority (DFSA) and in the Abu Dhabi Global Market (ADGM), where the regulatory authority is the Financial Services Regulatory Authority (FSRA).

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

Deposits are not insured in the UAE. In practice, the government has intervened on occasions to ensure that depositors do not suffer a loss. From time to time, the governments of various emirates of the UAE or entities owned by such governments have taken ownership interests in the banking sector. Such interests have not increased or decreased as far as we are aware.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

In this regard there are prescribed percentages of maximum exposure that a bank may incur to its parent company or subsidiaries or other subsidiaries of its parent company. A subsidiary is a company in which a bank holds a minimum of 40 per cent of share capital or has controlling influence (eg, through the composition of the board of directors).

Also, Circular No. 16/93 issued by the UAE Central Bank governs large exposures incurred by banks. Large exposures are funded exposures (fewer provisions, cash collateral and deposits under lien). Banks are restricted from exceeding the maximum exposure per client or group. Circular No. 32/2013 dated 11 November 2013 has been issued by the UAE Central Bank to replace Circular No. 16/93. Revised restrictions have been imposed with regard to lending to government and government-owned entities. Banks cannot lend sums exceeding 100 per cent of their capital to governments or their related companies or more than 25 per cent to an individual borrower. The rules also prescribe the manner in which different categories of assets are to be risk-weighted. The 2013 Circular provided five years to the banks to meet the exposure limits set out in the circular. Given the current banking situation, the deadline is likely to be extended.

With respect to permissible activities of a commercial bank, under the Banking Law, a commercial bank is an institution that customarily receives funds from the public in the form of demand, under notice, time deposits, or that carries on the placement of debt instruments or deposit certificates to be used, in whole or in part, for its account and at its risk, for granting loans and advances. The Banking Law further provides that commercial banks also carry on operations relating to the issue and collection of cheques, the placing of public or private bonds, trade in foreign exchange and precious metals, or any other operations allowed for commercial banks either by law or by customary banking practice.

With respect to Islamic banks, permissible activities are not specified in the Islamic Banking Law, which provides that Islamic banks means those whose memoranda of association include a commitment to abide by the provisions of sharia law and conduct their activities in accordance with them. Islamic banks have the right to carry on all or part of banking, commercial, financial and investment services and operations. They have the right to engage in all types of services and operations practised by banks and referred to in the Banking Law whether those operations and services were conducted for the Islamic bank’s own account or for or in partnership with a third party. Islamic banks also have the right to establish companies and participate in enterprises provided that activities of the latter are in conformity with shariah. The Islamic Banking Law provides that Islamic financial institutions and investment companies shall have the right to carry out lending, credit and other financial operations. They may also participate in enterprises, invest their funds in movable assets and receive deposits for investment thereof in accordance with the provisions of shariah law. In terms of the Islamic Banking Law, Islamic banks are subject to the provisions of the Banking Law.

With respect to prohibited activities, article 90 of the Banking Law provides that no commercial bank shall:

  • carry on for its own account commercial or industrial activities or acquire, own or trade in goods, unless the acquisition of such goods is for settlement of debts due from others, in which case the goods must be disposed of within the period defined by the governor of the UAE Central Bank;
  • acquire immovable property for its own account, except immovable property required for the conduct of the bank’s business or for housing or amenities for its staff, or immovable property acquired in settlement of debts, in which case, however, the property must be sold within three years (this period may be extended by decision of the governor of the UAE Central Bank);
  • hold or deal in the bank’s own shares unless they are acquired in settlement of a debt, in which case they must be sold within two years from the date of their acquisition; and
  • purchase shares of, or bonds issued by commercial companies, in an amount that would raise the bank’s holding in it above 25 per cent of the bank’s own funds, unless acquired in settlement of a debt, in which case the excess must be sold within two years from the date of acquisition.

Article 90 of the Banking Law further states that the prohibition shall not apply to the acquisition or holding of bonds issued or guaranteed by the government or other public-sector institutions.

Article 91 of the Banking Law provides that commercial banks shall not grant loans or advance funds on current accounts to members of their board of directors, to managers of departments or to similar staff members, except by prior licence from the board of directors of the UAE Central Bank, which must be renewed annually. Article 91 further provides that this prohibition shall not include the discount of commercial paper, the issuance of bank guarantees or the opening of documentary letters of credit. Article 91 provides that no bank may offer to its customers credit facilities against the shares in the bank. Further, no bank may grant loans or advances for the purpose of constructing commercial or residential buildings, exceeding in total 20 per cent of its total deposits. This prohibition does not apply to banks specialising in real estate loans and authorised to do so by the UAE Central Bank.

Article 92 of the Banking Law provides that no commercial bank may issue travellers’ cheques without prior authorisation from the UAE Central Bank. Article 93 of the Banking Law provides that no person who has been convicted of theft, dishonesty, fraud, embezzlement or the writing, with bad intent, of cheques against insufficient funds may be or remain a member of the board of directors of any commercial bank and no member of the board of directors or manager of any commercial bank may hold, without permission from the board of directors of his bank, a position as bank manager or member of the board of directors of any other bank.

The Islamic Banking Law does not contain specific provisions for prohibited activities. However, article 4 of the Islamic Banking Law provides that Islamic banks, financial institutions and investment companies incorporated in the country, along with branches and offices of foreign Islamic banks, financial institutions and investment companies licensed to operate in the country shall be exempted from the provisions of clause (a) of article 90 of the Banking Law (see above). Article 4 of the Islamic Banking Law further provides that Islamic banks, financial institutions and investment companies shall also be exempted from provisions of clause (b) of article 90 of the Banking Law and in a manner not contravening established legislation in the emirate concerned.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

The principal regulatory challenges derive from the fact that the Banking Law has not been amended or updated since it was promulgated in 1980 and, accordingly, does not address developments in financial services that have taken place since 1980. The subsisting regulations generally lack sophistication. Draft amendments to the Banking Law were proposed a decade ago but have yet to be promulgated.

In addition, the banks and the financial institutions in the UAE are now required to comply with the US Foreign Account Tax Compliance Act. The UAE and the US reached an agreement in May 2014 to include the UAE on the list of jurisdictions to be treated as having an intergovernmental agreement (IGA) in effect. The UAE has adopted Model 1 and banks and financial institutions in the UAE have started to comply with IGA requirements.

In another significant regulatory change, banks are required to implement the International Financial Reporting Standards 9 (IFRS 9) from January 2018. The new regulation strongly affects the way credit losses are recognised. This is likely to increase the compliance costs and have an impact on the balance sheets of the banks.

The UAE has committed to implement the Common Reporting Standard (CRS), with the first exchange to take place by September 2018. The banks have started collecting information from their customers on tax residency status for the purposes of CRS reporting.

Consumer protection

Are banks subject to consumer protection rules?

The UAE has promulgated Federal Law No. 24 of 2006 and certain other regulations for consumer protection. However, this legislation does not expressly include ‘banks’ within their ambit. In addition, as the banks are supervised by the UAE Central Bank, it is unlikely that this legislation would have a bearing on the banking sector.

There are no specific customer protection rules for the banking sector. However, any complaint against a bank can be made by a consumer to the UAE Central Bank.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

As noted in question 6, an overhaul or substantial amendment of banking legislation is overdue. DIFC’s successful completion of a decade in the Emirate of Dubai, with its own jurisdiction and body of modern laws, and its widening jurisdictional approach, is precipitating changes to wider UAE legal and regulatory policies. Following the success of DIFC, a financial free zone in Abu Dhabi (Abu Dhabi Global Market) became operational from the second half of 2015; becoming, to date, quite active.

The regulatory policy for the banking industry is likely to follow a conservative approach.

In a significant development that would have wide-ranging implications, the new Bankruptcy Law of the UAE was enacted on 20 September 2016 as Decree-Law No. 9 of 2016 (the Bankruptcy Code). It came into effect on 31 December 2016. The new Bankruptcy Code replaces and repeals the previous legislation on the subject, Book 5 of the Commercial Code, which was seldom used in light of its perceived shortcomings. Perhaps the most important new feature of the new Law is the introduction of a regime that allows for protection and reorganisation of distressed businesses.

In a significant development, Value Added Tax (VAT) was introduced in the UAE from 1 January 2018. The rate of VAT is kept low at 5 per cent for most goods and services (unless exempted or zero rated). Interest-bearing banking transactions are zero rated, while transaction fees and margin-based transactions will attract VAT at the rate of 5 per cent. For the purposes of VAT, Islamic banking products will be generally treated at par with conventional banking products. The development will marginally increase the cost of banking for customers.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

Banks are supervised by the UAE Central Bank through the various reports that are required to be filed by banks with the UAE Central Bank on a periodic basis. Further, under the Banking Law, the UAE Central Bank is entitled to inspect the books, records and accounts of any bank at its discretion. In certain cases, the Central Bank has appointed administrators or representatives to temporarily manage a bank. These audits are ordinarily conducted once a year and are reasonably extensive.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

Any failure by banks to comply with the laws and regulations would be notified by the UAE Central Bank, with the bank given an opportunity to rectify the breach. Continued failure would attract consequences ranging from fines to cancellation of the licence to conduct banking.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

The most common issues facing the regulator and banks have included approval of investment products, issues pertaining to selling of investment products and concerns regarding institutions operating within the scope of their licences. In July 2012, the Emirates Securities and Commodities Authority (SCA) issued the much-anticipated new UAE Investment Fund Regulation (Fund Regulation). The Fund Regulation transfers regulatory responsibility for the licensing and marketing of investment funds and for a number of related activities from the UAE Central Bank to the SCA. The sale, marketing and promoting of foreign securities and funds in the UAE and the establishment of domestic funds requires SCA consent. However, even under the new regulations, the ambiguity regarding registration requirements for an investment product continues.

Resolution

Government takeovers

In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?

The banks may be taken over by the government or regulatory authorities in the interest of the bank’s depositors. If a bank has insufficient liquidity to meet its obligations and there is risk to the bank’s depositors, the bank may be taken over by the government.

While such instances are uncommon, a few such takeovers were reported recently in the wake of the financial crises. The Dubai Bank was taken over by the government of Dubai in 2011 through its majority-owned bank, Emirates NBD.

Bank failures

What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?

Any commercial bank operation in the UAE is required to maintain a minimum paid-up capital. If the bank’s capital falls below the required minimum, the deficiency must be met within the time prescribed by the UAE Central Bank. This period must not be more than one year from the date the deficiency is made known to the concerned bank. There is no specific plan or similar document prescribed under UAE laws.

Are managers or directors personally liable in the case of a bank failure?

Managers or directors are not personally liable unless the bank’s failure is attributable to any fraud or illegality committed by them.

Planning exercises

Describe any resolution planning or similar exercises that banks are required to conduct.

There are no such mandatory requirements.

Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

The UAE Central Bank issued a new circular, Circular No. 52/2017, dated 23 February 2017, whereby all banks are obliged to comply with Basel III. Therefore, the UAE banking system has moved from Basel II to the Basel III standard.

These regulations and the accompanying standards apply to all banks in the UAE. Banks must ensure that these regulations and standards are adhered to on the following two levels:

  • the solo level capital adequacy ratio requirements, which measure the capital adequacy of an individual bank based on its standalone capital strength; and
  • the group level capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its capital strength and risk profile after regulatory consolidation of assets and liabilities of its subsidiaries.

Compliance with the regulations is effective from 1 January 2018.

How are the capital adequacy guidelines enforced?

Banks are required to report compliance with the capital adequacy guidelines as per the format and frequency prescribed by the UAE Central Bank. In case of breach, the UAE Central Bank is most likely to issue a notice and seek adherence to the guidelines. If the breach continues, the UAE Central Bank has wide discretion to take appropriate actions for enforcing the guidelines.

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

If a bank is undercapitalised at any point, it must rectify the deficiency within one year or any shorter period as may be notified to it by the Central Bank. Any failure to so rectify could attract consequences ranging from fines up to cancellation of its licence to conduct banking.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

Commercial banks in the UAE are incorporated as public joint-stock companies or as branches of foreign banks. Investment banks and other financial institutions may be incorporated as public joint-stock companies, private joint-stock companies or as branches of foreign investment banks and financial institutions. Monetary and financial intermediaries may be incorporated as public joint-stock companies, private joint-stock companies, limited liability companies or as branches of foreign monetary and financial intermediaries.

Insolvency of public joint-stock companies, private joint-stock companies, limited liability companies and branches of foreign companies are governed by the provisions of the UAE Federal Law No. 2 of 2015, as amended (the Companies Law) and the provisions of the Bankruptcy Code. Additionally, pursuant to the Banking Law, a notice of liquidation of any commercial bank must be published in the Official Gazette and in at least two local daily newspapers.

The notice of liquidation shall give the bank’s customers at least three months’ notice to take necessary steps to enforce their rights. The notice shall also provide the name of the liquidator entrusted with the payment of the outstanding deposits and other transactions relating to the bank.

Traditionally, if locally incorporated banks faced a bankruptcy situation, they were merged with other banks.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

See question 16.

Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?

Under the Companies Law, at least 51 per cent of any company incorporated in the UAE (outside the free zones) must be owned by UAE nationals or entities wholly owned by UAE nationals. Additionally, as per the relevant UAE Central Bank’s resolutions, for finance companies, at least 60 per cent of the shares must be held by UAE nationals or entities wholly owned by UAE nationals.

Foreign ownership

Are there any restrictions on foreign ownership of banks?

Yes. A bank incorporated in the UAE must be majority owned by UAE nationals. There are several branches of foreign banks operating in the UAE.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

The experience and expertise of an entity that acquires control of a company involved in banking and financial services will be considered by the UAE Central Bank to approve the controlling acquisition. However, there are no formal restrictions on such an entity carrying on any other business.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

The legal and regulatory duties and responsibilities of an entity or individual who controls the bank would be to ensure that the banking operations are conducted in accordance with the requirements of the Banking Law, the Commercial Code and the various notices, circulars and resolutions of the UAE Central Bank. There will be no express obligation on the shareholders to provide additional capital in the event that a bank becomes undercapitalised, but the Central Bank will require the capital to be increased, failing which the bank may be fined or have its licence cancelled.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

Generally, no legal liability attaches to the controlling entity as a result of insolvency of a bank.

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?

There is no specific definition of control (save in relation to determination of large exposure). Therefore, ‘control’ should mean a majority shareholding interest in the bank, a right to exercise control through representation at the bank’s board, or both. Any change in such a controlling entity requires the prior written approval of the UAE Central Bank. Upon receipt of the approval, subsequent approvals of the emirate’s local licensing authorities where the bank is incorporated must also be obtained.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

In the view of the local ownership requirements, a foreign party may not acquire a UAE-incorporated bank.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?

A change in ownership or control of a bank is a relatively rare phenomenon in the UAE. Most of the locally incorporated banks are owned by the governments or the ruling families of the relevant emirates in which they are based. In the event of a proposed acquisition, we would expect the UAE Central Bank to consider issues such as the identity of the acquirer, its track record, any conflicts of interest as well as the purpose and term of the investment.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

See questions 26 and 27.

Timeframe for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

All approvals from the UAE Central Bank are at its discretion and no approximate time frames may be stated. However, depending on the identity of the acquirer, approval of the Central Bank would be a matter of months, rather than days or weeks.