UAE ORGANIZATION OF BANKING AND FINANCE

2.1     Commercial Banks

Article 78(1) of the 1980 Federal Law concerning the Central Bank defines a commercial bank as “any institu- tion which, customarily, receives funds from the public in the form of demand, under notice or time deposits, or which carries on the placement of debt instruments or deposit certificates to be used, in whole or in part, for its account and its risk and for the granting of loans and advances”.

Paragraph (1) of Article 78 further provides that “Commercial banks also carry on operations relating to the issue and collection of cheques, the placing of public or private bonds, trade in foreign exchange and precious met- als, or any other operations allowed for commercial banks either by law or by customary banking practice”.

This legislation requests all institutions that engage in commercial banking to be in the form of joint-stock com- panies chartered by law or decree for this purpose.

However, branches of foreign banks operating in the United Arab Emirates are by virtue of Article 79 of the 1980 Law, exempt from this requirement.

The paid up capital of any commercial bank shall not be less than U.A.E. Dirhams 40 million. Branches of any foreign bank must produce evidence that the equivalent of U.A.E. Dhs.40 million has been allocated as capital funds for their operation in the United Arab Emirates.

Article 83 of the 1980 Law stipulates that commercial banks may not commence operations until they have been licensed by the Central Bank and their names are entered in the Register of banks maintained by the Central Bank for this purpose.

Moreover, all registered commercial banks shall seek the Central Bank’s approval for any contemplated amend- ments to their Articles or Memoranda of Association.

2.1.1  Prohibitions

Commercial banks may not engage in non-banking activities. In particular no bank shall:

a)     carry on its own commercial or industrial activities or acquire, own or trade in goods, unless the acquisi- tion of such goods is for settlement of debts due from others, in which case the goods must be disposed of within the period defined by the Governor of the Central Bank;

b)    acquire immovable property for its own account, except in the   following cases:

(i)    immovable property required for the conduct of the bank’s business or for housing or amenities for its staff;

(ii)   immovable property acquired in settlement of debts, in which case, however, the property must be sold within 3 years. (Incidentally, this period may, by a decision of the Governor of the Central Bank, be extended).

c)     hold or deal in the bank’s own shares unless they are acquired in settlement of a debt in which case they must be sold within two years from the date of their acquisition;

d)     purchase shares of, or bonds issued by, commercial companies in an amount which would result in rais- ing the bank’s holding thereof above 25% of the bank’s own funds, unless acquired in settlement of a debt, in which case the excess must be sold -within two years from the date of acquisition. (This prohibition does not apply to the acquisition or holding of bonds issued or guaranteed by the U.A.E. Government or other public sector institutions).

A further list of prohibitions is contained in Articles 91 and 92 of the 1980 Law namely;

•   Commercial banks may not grant loans or advance funds on current account to members of their Board of

Directors, to managers of departments or to similar staff.

•   Members, except by prior licence of the Central Bank, such licence being subject to annual renewal.

However, this prohibition shall not include the discounting of commercial paper, the issuance of bank guarantees or the opening of documentary letters of credit.

•   No bank may offer its customers credit facilities against their       shares in the bank.

•     No bank may grant loans or advances, for the purpose of constructing commercial or residential buildings, exceeding in total 20% of its total deposits. However, this prohibition would not apply to banks special- ized in granting real estate loans and authorised to do so by the Central Bank; and

•   No commercial bank may issue travellers’ cheques without prior authorization by the Central Bank.

2.1.2  Supervision

Articles 94 - 100 of the 1980 Law inclusive give the Central Bank extensive powers in relation to supervising commercial banks, particularly relating to a banks credit policies (Article 94), ratio requirements (Article 95), maximum lending (Article 96), in addition to the establishment of a department within the Central Bank to super- vise commercial and other banks (Article 99) and investigate the financial position of a particular bank (Article

100).

2.2     Investment Banks

For the purposes of implementing the 1980 Law, investment banks are defined as “those banks which are usu- ally called merchant, investment, development, medium term, or long term banks, or any such expression or name distinguishing them from commercial banks as defined in Article 78 principally in that they do not accept deposits for less than two years”. (Article 113) Investment  Banks (as defined above) may borrow from their main offices, from local or foreign banks and from the financial markets. Paragraph 3 of Article 113 of the 1980 Law empowers the Board of Directors to determine the extent and conditions of operations of this type of banks to which the provisions of the 1980 Law shall also apply unless specifically- exempted by the Board of Directors of the Central Bank from some of the provisions and regulations therein.

2.3     Financial Institutions

The term “Financial Institution” refers to those institutions whose principal functions are to extend credit, to carry out financial transactions, to take part in the financing of existing or planned projects, to invest in moveable properties, and such other functions as may be specified by the Central Bank.

Pursuant to Article 114 of the 1980 Law financial institutions “may not accept funds in the form of deposits but may borrow from their head offices, from local and foreign banks or from financial markets”.

A financial institution may not, according to Article 115, commence operations in the United Arab Emirates or open branches abroad unless so licensed by the Central Bank.

2.4     Financial and Monetary Intermediaries

The term “Financial and Monetary Intermediaries” refers to any physical or juridical person, other than Financial Institutions,who:

a)     practices the profession of foreign exchange dealing based on the purchase and sale of currencies, curren- cy notes, coins of all kinds and travellers’ cheques; or

b)     acts as a stock-broker or agent who sells and purchases domestic as well as foreign stocks and bonds, in a local capacity or as agent of a foreign institution.

The 1980 Law empowers the Central Bank with the discretion to subject the professions referred to above to prior licensing in respect to operations in the United Arab Emirates and further to establish rules to govern the licensing requirement, professional obligations, supervision by the Central Bank and the circumstances under which licenses may be revoked.

2.5     Representative Offices

These are offices which represent foreign banks and financial institutions in the United Arab Emirates.

Such representative offices may not commence operations in the United Arab Emirates without  being first licensed by the Central Bank.

2.6     Islamic Banks, Financial Institutions and Investment Companies

Federal Law No. (6) 1985 concerning Islamic Banks, Financial Institutions and Investment Companies defines in Article 1 Islamic banks, financial institutions and investment companies as “those companies whose Articles and Memorandum of Association include an obligation to apply the Islamic Shariá Law and that their operations would be conducted pursuant to Islamic Shariá Law”.

Article 2 of the Law No.(6) of 1985 provides that such institutions are subject to the provisions of the 1980 Law in addition to Law No. (8) of 1984 relating to Commercial Companies.

Such banks and institutions are required to adopt the form of a public joint-stock company and must prior to commencing their operations, obtain a licence from the Central Bank.

An Islamic bank is entitled to commence all or any of the banking, commercial, financial or investment opera- tions. In addition, it is also entitled to carry out any of the services and/or operations referred to in the 1980 Law. It may also establish companies or finance projects provided that such projects are undertaken pursuant to Shariá principles.

An Islamic Financial or Investment Company is entitled to grant loans, provide credit facilities or finance proj- ects. It may also invest in movable property in addition to its ability to accept deposits from the public to invest such monies in accordance with Islamic Shariá principles.

Such Islamic banks and financial institutions (including licensed branches and offices of foreign Islamic banks and financial institutions and investment companies) are exempt by virtue of Article 4 of Law 6 of 1985, from certain of the prohibitions imposed on commercial banks relating (i) to carrying on for its own account com- mercial or industrial activities or acquire, own or trade in goods; (ii) acquire immovable property for its own account; (iii) having interest rates to be paid by banks on deposits and the rate of interest and commission to be collected from customers.

The Articles and Memorandum of Association of such companies must provide for the establishment of a Shariá committee of not less than 3 persons who will ensure the adherence by such companies to Shariá principles in their operation, and contracts. The appointment of the relevant Shariá committee within each of these compa- nies is subject to the approval of a Supervisory Shariá committee within the Ministry of Islamic Affairs.
 

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