New UAE Banking Law 2024, Late Registration of UAE Corporate Tax Fine

New UAE Banking Law 2024, Late Registration of UAE Corporate Tax Fine

UAE: Why New Law Changes Are Posing Challenges for Investors and Banks

The United Arab Emirates (UAE) is rapidly becoming a global financial center. In the UAE, there are three main types of banks, including commercial banks, Islamic banks, and foreign banks, all of which are regulated by the Central Bank of the UAE. The five largest banks in the UAE by total assets are First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, and Mashreq Bank. The legal framework for banking in the UAE is based on the Banking Law, with the Central Bank responsible for licensing and regulating banks and financial sectors.

In February 2024, new amendments were introduced to the banking law in the United Arab Emirates (UAE). The recent changes in the UAE banking law are posing challenges for both investors and banks in the country. These amendments have introduced new rules that are making it difficult for people who invest money and for the banks that manage those investments. These changes include Article 121 of the UAE Banking Law (as amended), which requires banks to get sufficient security from people who run businesses alone or together with someone else. Another change is Article 409(2) of the New Commercial Law, which says banks must have enough security before giving loans. The Central Bank of the UAE has introduced measures to enhance governance frameworks, transparency, and accountability in the banking sector. While these changes aim to promote a healthy financial environment, they also pose challenges for banks in adapting to new regulatory requirements. This article provides detailed information on the new law changes and their impact on investors and banks in the UAE.

Recent changes in UAE banking laws:

Recently, the UAE made several changes to its banking laws and introduced significant changes that impact both investors and banks. It includes:

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Article 121 bis is a new addition under Chapter 6 of the UAE Banking Law amendment.

It focuses on credit facility guarantees and is part of the “Customer Protection” section. This article requires Licensed Financial Institutions (LFIs) to obtain “sufficient guarantees” for credit facilities granted to individuals or sole proprietorships. However, it does not cover corporate borrowing or personal guarantees related to corporate borrowing. The goal is to reduce defaults and improve regulations in the banking sector, but the term “sufficient guarantees” isn’t defined clearly, causing confusion for financial institutions.

Article 409(2) of the New Commercial Law in the UAE states that banks must have “sufficient securities or guarantees” against loans they provide. This requirement applies to all borrowers of commercial loans, including retail and corporate lending. The new law broadens financial institutions’ obligations, ensuring they have adequate security for loans granted. Both of these changes went into effect on January 2, 2023. Additionally, the new laws have a retrospective effect, applying to existing loans as well. This change aims to protect consumers and improve regulation in the banking sector. But since the guidelines aren’t detailed, it creates challenges for both lenders and borrowers. The new law introduces a “negative list” of industries where foreign investors cannot hold more than a specified percentage of shares, making it harder for some types of investors to participate
in certain sectors.

Challenges Faced by Investors and Banks Due to Recent Changes in the UAE Banking Law:

The recent amendments to the UAE banking law have brought about challenges for both investors and banks in the country. These changes are  important because they are impacting many aspects of the banking and financial sector in the UAE.

  • Banks are facing increased operational burdens as a result of global compliance requirements, such as enhanced due diligence and sanctions.
  • The new regulations impose strict guidelines and requirements on banks, increasing the time and difficulty of opening and maintaining accounts.
  • Banks face greater competition because the new law allows foreign investors to own up to 100% of companies in certain designated sectors.
  • Banks are aligning with international standards like the Common Reporting Standards (CRS) and Foreign Account Tax Compliance Act (FATCA), resulting in more rigorous procedures for checking and verifying accounts.
  • Banks acting as international correspondent banks face severe fines from the US government, resulting in stricter procedures for monitoring and verifying accounts.
  • The administrative overhead of responding to inquiries from corresponding banks is significant, so some banks choose to close accounts rather than go through the process.

The new changes to UAE banking law pose challenges for both investors and banks. Investors must carefully assess the risks associated with higher costs and stricter ownership limitations, while banks must adapt to increased competition and new regulatory demands. However, these changes also create opportunities for growth and innovation in the UAE financial industry.

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