The UAE’s Banking Sector: A New Era of Efficiency and Stability

25 September 2024

Josleen Deeb

The UAE's banking sector has undergone a transformative shift in recent years, thanks to the introduction of Federal Decree-Law No. 14/2018. 

Dubai: This comprehensive legislation has modernized the regulatory framework, enhancing efficiency, promoting competition, and bolstering consumer protection.

UAE Banking Law Amendments: A Modernized Framework

The UAE's Federal Decree-Law No. 14/2018 introduced significant amendments to the Banking Law, aiming to enhance the sector's efficiency, stability, and alignment with international best practices. These changes have far-reaching implications for banks, financial institutions, and consumers alike

·        Revised Definition of Transfer Orders: The expanded definition of Transfer Orders as mentioned in Article 1 now encompasses a wider range of instructions within financial infrastructure systems, including those related to securities settlements and retail transactions. This aligns the UAE with global trends in payment systems.

Transfer Order within Financial Infrastructure Systems, includes:

1.        Instructions by a participant to transfer funds to another participant within a settlement system.

2.        Putting funds under a participant’s control according to the rules of a financial system.

3.        Instructions to release a party from payment obligations as per the settlement system’s rules.

4.        Instructions to settle obligations by transferring securities.

5.        Instructions that result in taking on or releasing a party from payment obligations for retail transactions.              

·        Expanded Currency Definition: The inclusion of digital currency within the definition of currency has positioned the UAE at the forefront of technological advancements in the financial sector. The definition of Currency has been expanded to include the state’s official national currency banknotes, coins, and digital currency, with Dirham as the monetary unit.

·        Opening Accounts: The provisions of Article 42 were replaced to allow the Central Bank to open various types of accounts: 

1.        Accounts in the national currency or foreign currencies for licensed financial institutions, accepting deposits, and managing interests.

2.        Accounts for monetary authorities, other central banks, foreign banks, international financial and monetary institutions, and Arab and international monetary funds.

3.        Any other accounts within the limits and according to the rules set by the Board of Directors.

4.        Maintenance of digital currency financial balances as deemed appropriate by the Board of Directors.

·        Currency:

o   Issuance and Legal Tender as per the provisions of Articles 55 and 56; The issuance of currency remains an exclusive right of the State, exercised by the Central Bank. The amendments ensure that: Only the Central Bank can issue currency. Currency notes and digital currency issued by the Central Bank are considered legal tender with absolute legal force. Currency coins have legal tender force for payments up to AED fifty, with the Central Bank accepting larger amounts without limitation.

o   Currency Specifications, Features, and Denominations as per the provisions of Article 57: The Central Bank is authorised to issuing paper currency and coins, determining their specifications, and ensuring their maintenance. The Board of Directors is responsible for the proposal and features of digital currency, publishing these decisions in the Official Gazette.

o   Digital Currency: as per the provisions of Article 60 Bis, which is added to regulate the issuance, circulation, and withdrawal of national digital currency. The Central Bank is not obligated to refund lost or tampered digital currency.

o   Mutilation of Currency (Article 141): Intentional mutilation, destruction, or tearing of currency is punishable by imprisonment and a fine of no less than AED 10,000.

·        Central Bank's Expanded Role: The Central Bank has been granted additional authority to open various types of accounts, hold digital currency balances, and regulate the issuance and circulation of national currency. This strengthens the Central Bank's role as a financial regulator and monetary authority.

o   Monetary Base Coverage: as per the provisions of Articles 62; The Central Bank may maintain reserves of foreign assets to cover the Monetary Base, including gold, foreign currency deposits, securities, and digital currencies issued by other central banks.

·        Enhanced Consumer Protection: The amendments have introduced measures to protect bank customers, including regulations for handling complaints and ensuring fair treatment in credit facilities.

o   Protection of Customers and Credit Facilities as per the provisions of Articles 121 and 121 bis: The Central Bank will establish regulations to protect customers of Licensed Financial Institutions and may create an independent unit to handle complaints. Financial institutions are required to obtain sufficient guarantees for credit facilities provided to customers, with sanctions for non-compliance.

·        Modernized Clearing and Settlement Systems: The introduction of new articles governing clearing and settlement operations aligns the UAE with international standards and facilitates efficient financial transactions; therefore as per the provisions of Articles 124; The Central Bank can establish and operate clearing and settlement systems, link them to domestic and international systems, and create central depositories for securities. Regulations for these systems and their participants will be issued by the Board of Directors.

·        Licensing Framework for Financial Infrastructure Systems: The new licensing requirements for financial infrastructure systems promote transparency and accountability in the sector. As per the provisions of Articles 124 and Articles 124 bis 2 - The Central Bank has the discretion to approve or reject applications based on the financial sector’s capacity and market needs.

·        Interpretation of Technical Terms, as per the provisions of Article 157: References to currency terms in legislation now include digital currency. Default Assets used for payment or exchange are subject to Central Bank regulations. The Central Bank may issue a glossary of technical terms, published on its official website.

Key Reforms Impact on the UAE leading position as a financial hub

·        Streamlined Licensing: The new law has simplified the process for obtaining a banking license, encouraging innovation and fostering a more competitive landscape.

·        Enhanced Corporate Governance: Banks are now subject to stricter corporate governance standards, ensuring transparency, accountability, and effective risk management.

·        Robust Risk Management: Institutions are required to implement comprehensive risk management frameworks, covering areas such as credit risk, market risk, operational risk, and liquidity risk.

·        Consumer Protection: The law has strengthened consumer protection measures, empowering customers and fostering trust in the banking system.

·        Resolution Framework: The introduction of a resolution framework provides a mechanism for addressing distressed banks, safeguarding financial stability.

The Ripple Effect

These reforms have had a far-reaching impact on the UAE's banking sector:

·        Increased Resilience: The stronger regulatory framework has made the banking system more resilient to economic shocks.

·        Boosted Investor Confidence: Enhanced corporate governance and risk management have instilled greater confidence in investors.

·        Empowered Consumers: Customers now enjoy greater protection and transparency in their banking relationships.

·        Innovation and Competition: The streamlined licensing process has encouraged innovation and competition among banks, leading to a wider range of products and services.

A Global Benchmark

The UAE's banking sector reforms have positioned the country as a global benchmark for financial regulation and stability. These advancements have contributed to attracting foreign investment, fostering economic growth, and enhancing the country's reputation as a leading financial hub.

Conclusion

The amendments to the UAE Banking Law represent a significant milestone in the country's financial development. By prioritizing efficiency, stability, and consumer protection, the UAE has created a robust and competitive banking sector that is poised to play a key role in driving future economic growth.

A significant step forward in modernizing the country's financial sector. These reforms have positioned the UAE as a leading financial hub.