Tightening up: A renewed focus on regulation has followed the global slowdown

Since the global financial crisis struck Dubai in 2008/09, successive waves of new regulation have been brought in for banking and the financial sector in general. These have been both local and global, as Dubai and the UAE have sought to meet new international best practices and requirements while taking account of their own unique characteristics. These waves are likely to continue, with 2012/13 bringing important new legislative developments.

REGULATION: The basic legal framework governing the UAE’s entire banking sector consists of the 1980 Banking Law, which established the central bank and set down the rules for commercial and investment banks and other conventional financial intermediaries and institutions; the 1993 Commercial Code, which gives the rules for bank deposits, loans, bills of exchange and other banking products and services; and the 1985 Islamic Banking Law, which established the above for Islamic financial institutions. Institutions operating within Dubai International Financial Centre (DIFC), meanwhile, abide by regulations produced by the Dubai Financial Services Authority (DFSA), which are based on UK practice.

Prior to 2008/09 there had already been recognition that the UAE’s laws needed revision – the Banking Law in particular, as it had not been amended since 1980. When the crisis struck, the federal authorities responded by instituting a number of restrictions on lending, liquidating assets to meet central bank obligations, and a short-term liquidity fix using certificates of deposit to shore up the stressed lenders. A regulation was also issued allowing banks to convert central bank injections into Tier II capital, while there was also talk of issuing a deposit guarantee, although this was never finalised and has been largely dropped since the crisis abated.

In 2009 the federal authorities also moved to boost asset quality by requiring banks to register any loan over Dh10m ($2.7m) with the central bank. An online unit was also set up to resolve disputes between banks, as was a joint task force of government and banking representatives, aiming to produce further strategies for tackling the crisis.

Into 2010, the central bank revised the basis for classifying loans and their provisions, bringing these up to international, Basel Committee standards (the UAE’s banks had begun implementing Basel II in 2006). This involved tighter definitions of non-performing loans (NPLs), as well as clearer rules for provisioning different types of NPLs.

In 2011, rules on loans tightened further, regarding both conventional and Islamic banks. The limit on a personal consumer loan was set at 20 times the salary or total income, with a maximum 48-month repayment period, while the value of car loans was set at 80% of the value of the vehicle, with a maximum 60-month repayment period.

Credit cards could only be issued to those with an annual income of Dh60,000 ($16,300) or above, against a pledged deposit with the same stipulation. A formula for calculating the interest rates banks can charge on loans was introduced, along with a rule stipulating that an individual’s total loan repayments could not exceed 50% of his or her gross salary. Other regulations were brought in covering loans to members of the armed forces, while a more comprehensive framework for fees, commissions and charges was also introduced.

In 2012 the central bank issued new amendments concerning bank loans and services to customers. This allowed the transfer of outstanding loans from one bank to another, given the payment of a 1% or Dh10,000 ($2700) fee, whichever the less.

NEW WAVE: Also in 2012 the central bank introduced a new cap on lending by banks to emirate governments, government-related entities (GREs) and individuals. Aimed partly at addressing concerns over concentration risks, the new limits were set at 100% of the capital base of a bank for lending to governments and GREs, and 25% for lending to individuals.

A deadline of September 30, 2012 was given for banks to comply, although given that many banks may struggle to meet these limits by then – Emirates NBD (ENBD), for example, had a capital base of $11.8bn in March 2012, while total corporate and sovereign loans (GRE and non-GRE) amounted to $46bn – the central bank had indicated that it may extend exemptions on a case-by-case basis.

March 2012 also saw the first meeting of the Federal Credit Bureau Board, after a law establishing such an entity was passed in 2010. In Dubai, it has been mandatory since then for both local and international banks to share information on clients within the UAE with a private data collection agency, Emcredit. The new federal credit bureau, when fully up and running, should link credit information across emirates, boosting banks’ ability to accurately assess risk. Other legislative developments are likely to be in the pipeline. Many bankers interviewed by OBG expected revised liquidity rules to be on the way. These would follow the new liquidity requirements that came out in 2011, implemented as part of the move towards Basel III compliance.

TACKLING BANKRUPTCY: Work was also reported in local media to be under way on a revised bankruptcy law. Inability to pay off a debt can, as things stand, lead to jail in Dubai, as elsewhere in the UAE. This is seen as a deterrent to individuals and companies undertaking debt restructuring exercises, and sometimes leads them to skip the country instead, leaving their debt as an NPL. A December 10, 2012 report by the Gulf News daily said the law was expected to provide failing businesses with an opportunity to bounce back without fear of being dragged to court by creditors by giving them a chance to declare bankruptcy and then restructure.

The Ministry of Finance, Ministry of Economy and central bank have all worked on a new draft law tackling this, with the Ministry of Justice originally saying it would be ready by June 2012. While it was expected to come into force by the end of 2012, the end of 2013 seems to be a more realistic expectation. Existing French and German insolvency laws were the models used, according to press reports. Other regulatory changes were widely expected in the year ahead, in areas such as mortgages, capping credit card interest rates and real estate protection laws.

BACK IN DIFC: Meanwhile, the pace of regulatory and legislative change has also been rapid within DIFC. In late June of 2012 the DFSA announced that it was enacting a new Markets Law and a new Regulatory Law, both of which have implications for listed banks operating within the centre and include significant changes to prospectus disclosure and market misconduct among other things. The two are aimed at increasing corporate governance and strengthening disclosure rules, bringing them into line with EU and OECD standards.

As an international centre, DIFC has had to respond rapidly to global regulatory changes. This can be a challenge to smaller jurisdictions, as they are required to implement the same mass of international requirements as large ones, despite having less capacity. Yet DIFC has continued to keep up with rising global standards. A new credit rating agency for DIFC should be up and running by the end of 2012, while the centre is also on track for Basel III implementation. In 2013, meeting Solvency II requirements and new prudential regulations are also on the agenda. “There has been quite a heavy regulation and policy agenda since 2008,” Ali Hassan, the senior director of regulatory risk management and supervision at the DFSA, told OBG. “This is now in its implementation stage, which will continue over the next few years.”

Given that the majority of firms in DIFC are branches of companies based in other jurisdictions, the centre has sought to boost cooperation internationally on regulation. Another recent development has been the opening of DIFC’s courts as a forum for resolving contract disputes between companies outside DIFC, a move which potentially provides a UK law-based framework for bank contracts, as well as those for other sectors.

ONE SIZE FITS SOME: In parallel with efforts to implement international requirements both for conventional and Islamic banking, a debate on the importance of keeping local requirements in mind is also continuing, in Dubai as in other financial centres. As the global economy faces new challenges, regulations designed to prevent a recurrence of previous crises may no longer have the urgency they once had, while other, newer responses may be more appropriate. Yet the banking authorities in the emirate are clearly determined to move the sector forward in terms of corporate governance, diversification, capital and liquidity requirements and provisioning – regardless of any international requirement to do so. “We expect a continuing wave of regulation to be coming through in the period ahead,” Ben Franz-Marwick, the head of investor relations and finance wholesale banking with ENBD, told OBG. “A more robust regulatory environment is being created, with this process set to continue for some time to come.”