STA's Team of Lawyers in Abu Dhabi, Bahrain, Doha, UAE, Luxembourg, Moscow, RAK, Sharjah, and Singapore. Find a Lawyer. ..
Read more information
The Banking Sector of the UAE
The UAE is a Muslim Country, has several traditions which differ from the non-Muslim countries. In general, within the Country, there are a large number of Islamic laws (known as Sharia Laws). Now in terms of the banking sector, there are some vital differences between a conventional bank and an Islamic bank.
While the UAE is a Muslim Country, it is one of the more liberal countries within the Middle Eastern region. This has allowed it to become a hugely popular business destination and hub and has also allowed the Country to generate a flourishing tourism industry. With all of the foreign interest, Islamic banks are not the only type of banks within the Country. Rather, there are a large number of conventional banks that offer services in the typical ways that are to be expected, and many also offer Islamic financing options as an option to those who so desire it.
In fact, the Islamic banking industry is one which is currently experiencing huge growth and is becoming a more popular method by the day. By 2020, the expected size of the Islamic banking market globally is expected to be over US Dollars 3.2 trillion, and the annual growth is at around 17% globally.
The UAE has a market size of around AED 520 billion, with a growth of around 42% over the last 3 years. There are seven Islamic banking and financial institutions in the Country as of now, and the market is expected to expand further.
The Banking Regulations
Federal Law Number 6 of 1985 regarding Islamic Banks (the Islamic Banking Law):
This is the law that dictates the key matters that an Islamic bank must abide by. Article 1 is a basic definition of what an Islamic bank is, and the definition is as follows:
Article 2 (2) of the Islamic Banking Law mentions a vital point for the activities and legislation behind an Islamic bank. The Article states that whatever is not specifically provided for in the Islamic Banking Law, shall be subject to the provisions of the Union Law Number 10 of 1980 (the Banking Law), the Federal Law Number 8 of 1984 (the Commercial Companies Law), and any other established laws concerning conventional banks. The banks are treated equally under the law, except where otherwise stated. This is important to note, as these are the general banking laws that are observed by conventional banks within the UAE.
Article 2 (3) also clarifies that these banks and institutions shall take the form of public joint stock companies, and shall be set up in accordance with the aforementioned Federal Law Number 8 of 1984, and will be subject to the normal licensing, supervision, and inspection processes to such extent that it is not in conflict with the Islamic banking law.
It is confirmed in Article 3 (1) that Islamic banks shall be able to partake in all activities and services whether banking, financial, commercial or investment. Along with this, they shall be completely within their rights to partake in any activities stipulated under the Banking Law. Should they wish to establish companies with or without third parties, they shall have the right to do so, so long as all business and practices are in accordance with Sharia Law.
Article 4 mentions a couple of exemptions for Islamic banks from conventional banking laws, and they are as follows:
Article 5 states that a Higher Sharia Authority will be formed within the structure of the bank, and their job is to ensure that the transactions performed are legitimate and in line with the Sharia principles. Also, in case a matter arises where the bank is unsure of the standing of the Sharia Laws, they must take the matter up with the Higher Sharia Authority before proceeding. Any decisions of the Authority are binding upon the bank or financial institute.
Article 6 continues on this matter and states that the memorandum of association and articles of the entity should clearly stipulate that the Sharia Supervisory Authority will be formed with a minimum of three members, and the relevant articles should state the manner of the formation of the authority and the way it should go about handling its tasks.
The State Audit Bureau may approach banking institutes including Islamic banks, as per the provisions of the Federal Law Number 7 of 1976. However, the mission of the Bureaus will be confined to post-audit.
Article 8 simply provides that any Islamic banking entities present within the Country, at or before the implementation of the concerned law, will have to make necessary changes to their structure within a period of one year from the date the law comes into effect.
Beyond these differences, the Islamic banks are subject to the same practices and treatments as conventional banks as per the Banking Law.
Glossary