Global Compliance

Regulations Governing Foreign Banks - UAE

While UAE is largely known around the world for its high quantities for its high quantities of oil, this is not its only source of income. While it is true that at this current stage, the country as a whole is largely oil dependent, cities such as Dubai prove that it is possible for the economy to be weaned away from the oil dependence. The city itself is not overly oil rich, and instead relies on business and tourism to fuel its economy.
Due to the high profile nature of the city of Dubai, the country has become a highly favorable business destination and hub for many international entities to gather. This is very much the case in the financial services and banking industry, and the country has seen a large number of national and foreign banks rise throughout the years. With around 28 foreign banks within the UAE, there is a strong pull for these entities to come into the country.
However, as was seen in the UAE Economic Crisis, the non-oil bases economy of Dubai is far more fragile than it should be. Dubai had to be bailed out by Abu Dhabi’s oil wealth, and this may be seen by some as an issue and warning. However, this took place in the period of 2007-2010, and the country and Dubai have since made progress in moving forward and recovered from the impacts.

Regulations for Foreign Banks
The general regulations that cover branches of foreign banks within the UAE are much the same as the regulations on national banks. Foreign banks that wish to set up branches in the UAE must still ensure that their set up within the UAE is 51% national owned, much as is the case with any form of business. The only exception to this is branches set up within the DIFC (Dubai International Financial Center) free zone. These can be 100% foreign owned, and the governing entity for these is the DFSA (Dubai Financial Service Authority)

Foreign Banks in the UAE mainland:
Foreign banks that wish to set up in the UAE must first apply for a license within the country. Any bank found to be operating without the necessary license may be investigated by the Central Bank at any point, and the Central Bank will be able to take any legal action necessary to stop said entity.
Foreign banks existed within the country alongside national banks prior to the introduction of the currency board and central bank, and so the laws of the central bank apply to all foreign banks in much the same way as they do to national banks. The primary legislation that govern banks within the UAE is the Union Law Number 10 of 1980.
One area where foreign banks are governed differently to national banks is that foreign banks are limited to having a maximum of eight branches within the country. This is due to the fact that previously, there was a very rapid rise in the number of foreign banks within the country. Due to the disproportionality of this rise in the banks, the aforementioned regulatory entities saw it necessary to create the cap for the foreign banks. The basic idea behind the cap seems to have worked, as the number of national banks within the country is at 23, while the number of foreign banks is 28.
The Union Law Number 10 of 1980 dictates the permissible activities of all conventional banks within the country. However, in the case of Islamic banks, they are covered under Federal Law Number 6 of 1985. However, under this law, it is stated under Article 2 (2), that Islamic banks must follow the general provisions under the Union Law Number 10 of 1980. As such, Islamic banks will be similar in most ways to conventional banks, except in the areas of interest. They must also have a sharia compliance board within their structure

Foreign Banks in the DIFC:
As previously mentioned, the DFSA regulated the banking activities within the DIFC. The primary legislation that governs banks and banking activities within the free zones is the DIFC Law Number 1 of 2004. This law also empowers the DFSA to make regulations and changes as they see necessary within the free zone. The law also set out the general powers and responsibilities of the DFSA, and these are covered under part 2.
Part 3 regards the issues of setting up of a bank within the DIFC. The process begins with obtaining a license. Article 45 (2) states that one must apply to the DFSA in order to obtain, renew or add activities to their licenses.
In general, branches of foreign banks within the country must follow the same regulations that national banks are required to follow. This makes the system fairly simple to follow. The Central Bank of the UAE governs the matters and Central Bank Law of 1980 lays out their powers, duties and responsibilities. The central bank also sends out regular circulars that change or add to the regulations that are already present. These circulars can all be found on their website, and are sent out to all the relevant individuals and banks across the country. These circulars will have a date of commencement from which they will become active, and must be followed by all banks, whether they be of foreign origin or not. Legal action will be taken against those who are non-compliant.
The DIFC is the only financial free zone within the UAE, and any banks set up within will be under the authority of the DFSA, who perform a very similar role to the Central Bank on the mainland.

Glossary:

• Central Bank of the UAE: The UAE Central Bank is the governing bank of the UAE and is responsible for the maintenance and management of the country’s financial sector. Its duties include:
  • To produce legislation and circulars that financial sector businesses including banks must follow.
  • Ensuring the growth rate of the financial sector is as best as it can be and maintain the growth to acceptable levels.
  • Managing and distributing the national currency of the country (the UAE Dirham)
• DIFC: The DIFC is a financial sector free zone within Dubai
• DFSA: The DFSA is the regulatory body within the DIFC, and performs a similar task to what the Central Bank does on the mainland
• Conventional Banks: This term covers all banks that are not specifically Islamic Banks
• Islamic Banks: Islamic Banks function similarly to conventional banks, though they must ensure that all of their activities are sharia compliant. These banks will have to set up sharia compliance boards within their structures whose jobs it is ensure the banks function to their maximum capacity, while also ensuring all their activities are in line with the Islamic sharia laws
• UAE Mainland: The UAE mainland consists of the majority of the country. Within the mainland, the maximum foreign ownership of a company within the mainland is 49%, though a mainland entity is able to do business with the UAE local market
• Free Zone: The free zones within the UAE are specified locations across the country which are specifically set up to be more foreign investor friendly. It is possible for a foreigner to have 100% ownership of a free zone company.
• Union Law Number 10 of 1980: This is the UAE Banking law. It sets out the basic guidelines as to what the responsibilities and duties of the Central Bank of the UAE are, and the basic guidelines for all of the country’s banks
• DIFC Regulatory Law Number 1 of 2004 establishing Dubai Financial Services Authority.
• Federal Law Number 6 of 1985 regarding Islamic Banks, Financial Institutions and, Investment Companies.