UAE Central Bank introduces rules to regulate short-term credit services

The UAE Central Bank has issued the newly amended Finance Companies Regulation as it seeks to monitor companies that offer short-term credit and buy-now-pay-later products and services in the Emirates.

Under the new framework, entities operating as agents of licensed banks or finance companies can provide short-term credit following approval by the banking regulator, it said in a statement on Wednesday.

“Entities can also carry out this activity upon being licensed by the Central Bank as restricted licence finance companies,” it said.

“Unlicensed entities, which carry on any form of short-term credit activity and intend to continue to carry on these activities, must either apply to the central bank to be licensed as a restricted licence finance company or partner with a licensed finance company or a bank.”

Short-term credit refers to any credit that is granted to a borrower for a period of not more than 12 months for the purposes of purchasing goods or services without interest being charged, a lien being placed against collateral or a security deposit being required from the borrower, according to the Central Bank’s website.

The BNPL business model, which allows consumers to make online purchases instantly and spread their payments out over interest-free instalments, has boomed since the onset of the coronavirus pandemic, driven by millennials and Generation Z.

Global BNPL transaction values are projected to grow to $576 billion by 2026, up from $120 billion in 2021, according to data analytics company GlobalData.

BNPL accounted for 2.3 per cent of the global e-commerce market in 2021 or about $2 out of every $100 spent towards a transaction, the report said.

Under the new regulation, restricted licence finance companies are not permitted to contract with agents to offer short-term credit. Agents must partner with either a finance company or a bank before offering short-term credit, according to the central bank website.

“The regulation is aimed at protecting the customers of finance companies and restricted licence finance companies and enhancing the overall stability of the financial sector,” the Central Bank said.

The maximum total short-term credit extended to a borrower by a restricted licence finance company or agent must not exceed Dh20,000 ($5,446) or the total of three months’ verified net income of the borrower, whichever is lower, it added.

The maximum credit granted to a borrower should be based on the results of affordability assessments conducted, given due consideration to the repayment ability, reducing the risk of over-indebtedness, according to the central bank.

Restricted licence finance companies or agents must not charge interest on short-term credit, the regulator’s website said.

The total fees, including late payment fees charged on any short-term credit by a restricted licence finance company or agent, must not exceed 30 per cent of the original credit amount, it added.

The borrowers’ assets, including movable and immovable property, must not be used by restricted licence finance companies or agents to secure any short-term credit that they offer.

They must also request borrowers’ credit information from the credit information agency before extending credit in excess of Dh5,000.

The UAE Central Bank has launched a number of initiatives in recent months to further improve regulatory oversight of the financial sector.

These include an enhanced regulatory framework to supervise banks’ exposure to the property sector and new guidelines to help licensed exchange houses combat money laundering and the financing of terrorism.

In July, the UAE announced plans to establish federal prosecution offices dedicated to money laundering and other economic crimes.

The new offices are viewed as a “first step towards investigating and cracking down on economic crimes and money laundering”, state news agency Wam said at the time.

They will deal with corporate crimes, bankruptcy, regulation of competition, financial markets, intellectual property and trademarks, and customs evasion offences.

In 2021, the regulator also instructed all hawala providers – informal fund transfer agents operating outside the banking system – to register with it in an effort to strengthen oversight of money transfers.