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Amongst the several new laws and regulations being introduced in the UAE, the UAE Central Bank (“Central Bank”) has on10 May 2018 issued new Finance Company Regulations (“Regulations” or “2018 Regulations”) which are to come into effect one month after its publication.
These Regulations replace the previous finance company regulations issued in 1996 and finance companies regulations for companies conducting business as per Islamic sharia’a principles issued in 2004 (“Previous Regulations”) and aim at providing a detailed regulatory framework for Finance Companies to operate and develop within the UAE and also covers in its ambit the framework for protecting the customers of such Finance Companies.
These Regulations consolidate the regulations for both Islamic finance and conventional finance companies (“Finance Company/ies”) and incorporate certain significant changes including changes to capital requirements and corporate governance, to also be followed by existing Finance Companies. We have set out below certain noteworthy features of these Regulations and a comparative table on the key changes from the Previous Regulations on subject.
Pursuant to these Regulations, conducting financing activities in the UAE without a central bank license is prohibited. An application for such license must include the proposed scope of activities, a feasibility study illustrating the financial activities and products to be launched, estimated financial projections, risk factors, corporate structure, start-up costs, branches and a recruitment plan.
Another important requisite is for the applicant to provide an unconditional guarantee from a UAE Bank, in favour of the Central Bank for an amount equivalent to the minimum required paid-up capital. The License will be granted for a period of three years and may be renewable for the same period unless otherwise required by the Central Bank.
Any changes to the ownership of the Finance Company of 5% or more will require prior approval from the Central Bank.
Cancelling or Revoking a License
The Central Bank has the discretion to approve or refuse the License application, but must notify applicants in writing with reasons in case there is a refusal. Licenses can also be amended, revoked or cancelled at the discretion of the Board. The Regulations set out instances when the license can be cancelled which include providing false/misleading information, risking interests of the potential customers, or if there is a bankruptcy order filed against the Finance Company.
If a Finance Company wishes to cease operations it must apply to the Central Bank at least six months in advance providing the reasons for such a cessation or suspension.
The Regulations also provide for penalties that will be imposed if such company does not follow the provisions of the Regulations including adhering to the anti-money laundering policies laid down by the Central Bank.
Article 10.1 of the Regulation details out the types of activities that are permitted, which are:
The Central Bank can review and amend this list from time to time.
Article 10 further sets out the do’s and dont’s in relation to the business of the Finance Company, certain key features are:
Minimum Capital, Liquidity Requirements and Credit Exposure Restrictions
The minimum paid-up capital for a Finance Company is 150 million UAE Dirhams. UAE national ownership of the Finance Company must comprise at least 60% of total paid-up capital. Finance Companies must also allocate at least 10% of annual net profits to establishing a statutory reserve until the reserve equals 50% of its paid-up capital.
To withstand short-term liquidity stress, Finance Companies are required to hold an amount equivalent to 10% of their aggregate liabilities in liquid assets i.e. cash held in UAE bank, Certificates of deposit issued by the Central Bank held via a UAE bank, short term deposits with a UAE bank with maturity upto 30 days and UAE federal and local government bonds, which must not exceed 30% of the total liquid assets. For the purpose of calculating the 10% amount, a Finance Company may deduct from its aggregate liabilities, cash collateral, bank guarantees from UAE banks and sovereign guarantees.
The credit exposure is considered ‘large’ if the value of such exposure to one borrower or group of related entities is 7% or more. The Regulations set out maximum exposure limits for different borrower types.
Organisational Structure, Composition and Policies of the Finance Company
Differences in the new Regulations from the Previous Regulations
The 2018 Regulations are far more detailed in the nature of investments permitted, liquidity requirements, organisational structure to be followed, investor guidance; we have set out below certain differences in the provisions between the Previous Regulations and 2018 Regulations.
These Regulations apply to all Finance Companies. Accordingly companies licensed prior to the date of the issuance of these Regulations need to comply with the 2018 Regulations and are given a period not exceeding 3 years from the publication to conform. However, the Central Bank may amend the requirement of compliance within 3 years if it deems the finance company to be substantially in compliance with these Regulations. All existing Finance Companies will require to provide the Central Bank with a detailed adjustment plan to comply with the articles of these Regulations.
Al Tamimi & Company’s Banking and Finance team regularly advises on the Finance Company Regulations. For further information please contact Mark Brown (email@example.com) or Maymoona Talib (firstname.lastname@example.org).
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