Central Bank of the UAE released Short-Term Lending Regulatory Framework
01 February 2024
The Central Bank of the UAE has introduced a regulatory framework for short-term lending, including Buy Now, Pay Later (BNPL) products. Issued through Circular No. 3/2023, effective from December 27, 2023, the Finance Companies Regulation has been updated to enhance transparency, establish clearer rules, and improve consumer protection.
Dubai: Providers of short-term lending in mainland UAE are now required to obtain a license from the Central Bank or collaborate with a licensed financial institution. The regulation applies to finance businesses and licensed financial institutions offering short-term credit in mainland UAE directly or through approved agents.
SHORT TERM LENDING CREDIT PRODUCTS
Short-term lending encompasses various credit products that provide quick access to small amounts of financing for a brief period. Popular among these is BNPL, allowing consumers to make immediate purchases with the option to repay the amount in interest-free installments over a few months. While such products offer quick access to funds for those ineligible for traditional finance, failing to repay on time can lead to significant costs.
Global trends show a rising preference for short-term loans, especially BNPL, prompting the need for regulatory oversight. The new Regulation establishes a framework for 'Restricted License Finance Companies,' setting minimum capital requirements, limiting loan amounts, and enforcing due diligence on borrowers' creditworthiness. It also mandates fair treatment of borrowers with transparent fees, restricting total fees to 30% of the initial loan amount.
Key changes include the introduction of a 'Restricted License' category for short-term lending companies, requiring a minimum capital of AED 20 million or 5% of outstanding lending volume. Such companies must obtain a license from the Central Bank and adhere to specific limitations, including loan amounts, repayment periods, and due diligence on borrowers. The Regulation also emphasizes the implementation of internal complaint and dispute resolution systems.
Existing providers must either obtain a license directly from the Central Bank or partner with a licensed financial institution. Non-licensed providers are given a 90-day grace period to comply or cease operations. The updates demonstrate the Central Bank's commitment to consumer protection and responsible lending practices, balancing technological advancements with regulatory safeguards.
The expectation is that other UAE regulators may follow suit, as indicated by the Dubai Financial Services Authority's consideration of regulating BNPL products in the Dubai International Financial Centre. Businesses entering the industry should carefully review the Regulation for compliance, and legal advice is available for navigating the licensing process.
ALKETBI team is highly skilled and frequently provides legal assistance specializing in sustaining companies’ financial needs and financial exposure. We can assist all providers of short-term lending in mainland UAE in their licensing process. If you request further guidance with relation to the application of the new regulatory framework on your company or your individual finances, Let us know!