Debt finance

Lending

Licensing requirements in the UAE

The Central Bank of the UAE (Central Bank) and the Securities and Commodities Authority (SCA) are the main regulatory bodies for financial services in the UAE (except in the DIFC and ADGM) . Pursuant to Federal Law No. 14 of 2018 (New Banking Law), the Central Bank regulates financial institutions, including those who wish to provide financing in or from onshore UAE.

Lenders including commercial banks, investment banks, investment companies, finance companies, Islamic banks, Islamic finance companies and real estate finance companies are regulated by the Central Bank and require a license. .

In order to obtain a license from the Central Bank to carry out one or more licensed financial activities , a letter of application, certain corporate documents of the applicant and a business plan are submitted to the Central Bank. The specific documents required for the license are not listed by the Central Bank but the applicant should expect to be notified if additional documents are necessary for the process to be finalized. The New Banking Law provides that the Central Bank should issue its acceptance within 60 working days from the date all documents and conditions are met. If the applicant does not receive a decision within 60 working days, then this would mean the Central Bank has rejected the application.

UAE lenders who enter into financial arrangements with a borrower in the UAE without a license may face imprisonment and/or a fine and the relevant institution may be liable for civil and criminal claims.

Licensing requirements in the Dubai International Financial Centre (DIFC)

The principal regulator for regulating financial services within the DIFC is the Dubai Financial Services Authority (DFSA). An individual or entity based in the DIFC which provides a financial service must be authorized by the DFSA by obtaining the appropriate license.

An entity who wishes to satisfy the eligibility requirements in the DIFC must be structured as any one of the following forms of business: limited liability company; company limited by shares; limited liability partnership; protected cell company; investment company; branch of foreign company or partnership; or special purpose company.

The consequences of licensing violations can be severe. If a lender does not satisfy the requirements, then the DFSA (under the regulatory law and DFSA's Enforcement Rulebook) can enforce the following actions as punishment:

• a fine of US$100,000 per contravention; damages or restitution;
• injunctions and restraining orders; corporate penalties – unlimited fines through the Financial Markets Tribunal (FMT); and
• a banning order through the FMT.

As a consequence of violating the Financial Services Prohibition section of the regulatory law, lenders will also face censure by way of publication of any enforcement action leading to critical reputational damage and the loan arrangement may also be considered unenforceable.

Borrowing

Mortgage for property

In the last quarter of 2013 the Central Bank issued set of regulations (Regulations) on mortgage lending which defines the eligibility of various categories of borrowers based on a loan-to-property value ratio (LTV). The primary aim of the Regulations is to ensure that banks, finance companies and other financial institutions providing mortgage loans to UAE nationals and expatriates do so in accordance with best practice and have control frameworks in place. The Regulations applies without exemption to banks and institutions providing Shari’a-compliant loans for the purchase of properties. 

Whether these Regulations would still be in force or new set of regulations would be issued by the UAE Central Bank following the implementation of the New Banking Law, remains to be seen. As of now, these Regulation would appear to continue to apply as they are still made available to banks in the Central Bank’s website.Pursuant to these Regulations, the following LTV requirements apply.

UAE nationals (inclusive of Gulf Corporation Council (GCC) nationals)

• Properties >AED 5 million, the LTV = 80% of the property value
• Properties <AED 5 million, the LTV = 70% of the property value
• Off-plan properties, the LTV = 50% of the property value

Each borrower is only entitled to seek a loan for one property falling within these two categories and therefore it would appear that these LTV ratios are intended for owner occupiers.

If UAE nationals seek loans for a second home or investment property, the LTV must not exceed 65% of the value of the property.

Non GCC nationals

• Properties >AED 5 million, the LTV = 75% of the property value
• Properties <AED 5 million, the LTV = 65% of the property value
• Off-plan properties, the LTV = 50% of the property value

Each borrower is limited to one loan for the purchase of properties within these categories.

In the event of a second home or an investment property purchase by a non-UAE national, the Regulations state that the maximum loan available will be 60% of the value of the property.

UAE Law No. 2 of 2015 concerning Commercial Companies provides that shareholders in LLCs can pledge security, and that such pledges must be made in accordance with the company's memorandum and articles of association, and be notarized. For more information, see Giving and taking guarantees and security. 

Lending in the UAE can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.

A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).

Syndicated facilities by their nature involve more parties (such as agents which fulfil certain roles for the finance parties), and are more highly structured, involving more complex documentation. Larger financings will typically be done on a 'club' or syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.

Loans will be structured to achieve specific objectives, eg term loans, working capital loans, equity bridge facilities, project, real estate facilities,  trading finance and letter of credit facilities.

Loan durations

The duration of a loan can also vary between:

• a term loan, provided for an agreed period of time but with a short availability period;
• a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
• an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
• a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.

Loan security

A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security. 

Loan commitment

A loan can also be:

• committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
• uncommitted, meaning that the lender has discretion whether or not to provide the loan.

Loan repayment

A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).

Shari’a and Islamic finance

Islamic banking and finance transactions are based on Islamic principles and jurisprudence (together referred to as Shari’a or Islamic law) which is derived from a number of sources, including the Qu'ran. Islamic finance structures and techniques have developed in accordance with Shari’a principles and these principles must be adhered to when deciding whether a proposed financing structure or product is Islamically acceptable.

The key principles are as follows:

• No interest – Under Shari’a, money is regarded as having no intrinsic value and also no time value. The payment and receipt of interest (riba) is prohibited under Islamic law and any obligation to pay interest is considered to be void. This rule also prevents a financier from charging penalties and/or default interest.
• No uncertainty – Uncertainty (or gharrar), particularly any uncertainty as to one of the fundamental terms of an Islamic contract (such as subject matter, price or delivery), is considered to be void under Shari’a. This principle is fairly broad as it requires certainty on all fundamental terms of a contractual arrangement.
• No speculation – Contracts which involve any speculation are not permissible (haram) and are considered to be void. This does not, however, prevent a degree of commercial speculation which is evident in a lot of commercial transactions. The prohibition applies to forms of speculation which are regarded as gambling. The general test is whether something has been gained by chance.
• Unjust enrichment/exploitation – A contract where one party is regarded as having unjustly gained (at the expense of another) is also void. The principle also extends to the enrichment of one party who exercises undue influence or duress over the other party.
• Investments – The proceeds in Islamic finance should not be used for the purposes of purchasing or investing in products or activities that are prohibited. These prohibited items and activities include the manufacture and/or the sale or distribution of alcohol, tobacco, pork products, music or pornographic productions, the operation of gambling casinos or manufacturers of gambling machines – but also extend to conventional banking and insurance activities, as well as defense and weaponry.

Islamic financiers or investors work closely with Shari’a scholars – Muslim scholars who specialize in providing guidance on the application of Shari’a principles to commercial activities – to make sure that structures and products remain compliant with the rules and principles outlined above. In effect, these scholars have the controlling say in whether or not a particular structure, product or document should be approved. However, it is important to note that Shari’a is not a codified system of law and interpretations of the key principles can vary, particularly between the different ‘schools of thought’ within Islam.

Islamic principles do not prohibit a financier in an Islamic finance transaction from making a profit, rental or other return on its asset or investment. To that end, a number of contemporary structuring techniques (or Islamic contracts) have developed which allow Islamic bankers to structure transactions and products in a way that comply with Islamic principles While also replicating the economics of conventional loans and products. Alternatively, a structure may demonstrate that the financier has assumed some of the commercial risk inherent in an underlying transaction or business venture. Sometimes these structures or approaches can be combined.

Some examples of Shari’a contracts

• Sukuk – These are a type of certificate or note (often called Islamic bonds) which represent a proportionate interest (sometimes also described as a participatory interest) in an underlying asset or investment. They are generally considered to be debt securities (akin to bonds) which, depending on the underlying asset or transaction, can be traded in the secondary market. The Sukuk certificates are often 'layered' on top of an underlying Islamic financing technique which is intended to derive a return from an underlying asset or investment (such as Ijara – see below).
• Ijara – This is Islamic financing's equivalent of leasing and is often described as a hybrid between an operating lease and a finance lease. In general terms, the financier will act as lessor and the borrower entity will act as lessee and will pay rentals to the lessor.
• Murabaha – The financier will buy an asset or a commodity from a supplier and will then on-sell the asset to the customer on deferred payment terms at an agreed marked-up price (cost price plus profit).
• Wakala – This is an agency relationship between an investor or principal (muwakkil) and the agent (wakil).
• Istisna’a – This is essentially a sale contract whereby the seller or manufacturer undertakes to deliver a specific asset according to certain agreed specifications. The price of the asset and the date of delivery are specified at the outset.
• Mudaraba – This is a contractual arrangement between investors (rab al-maal) and a manager (mudareb). The investors typically put up capital which the manager then invests.

Lending to institutional/professional borrowers is subject to different regulatory oversight and may be less burdensome from a compliance perspective.

The Central Bank issued regulations No 29 of 2011 regarding Bank Loans & Services Offered to Individual Customers. The regulations control lending activities and excessive charges by banks and aim to protect banks by regulating lending and encouraging banks to carry out detailed due diligence on their potential borrowers. The regulations enable individual customers to borrow only up to 20 times their salary or monthly income and requires that repayment instalments should not exceed 50% of the borrower's gross salary or any regular income from a specific source. With the introduction of the New Banking Law, it is expected that a new set of regulations for loans made available to consumers will be issued in the next 2-3 years.

For more information, see Lending and borrowing – restrictions.

The concept of ‘trusts' and ‘trustees' are more regularly referred to in the UAE as ‘agent' or ‘security agent' or due to concerns around trusts not being recognised onshore in the UAE. By contrast, agency is a largely recognized concept and often utilized in onshore, offshore (including the Dubai International Finance Centre) and Islamic finance structures. In Islamic transactions, if the transaction is structured in compliance with Shari’a, the addition of an agent is not uncommon, in order for them to represent a group of lenders and guard their interests.

Further, onshore and offshore entities in the UAE may require a security agent to be employed, particularly in the context of security over certaim type of assets (such as shares) which is granted in the region and can only be enforced by local institutions or entities that have specific licenses. Typically, this only becomes an issue upon enforcement; however, lenders should be mindful of this as it may affect the value they place on such types of security.

It is also worth noting that parallel debt language is often used to support a security agent's rights to claim against a security provider in the UAE.

Financial assistance

Under the Companies Law it is not possible for a public joint-stock company (PJSC) target, or any of its subsidiaries, to provide any financial aid (such as loans and guarantees) that will assist a purchaser in acquiring its shares. However, limited liability companies are exempt from such restrictions under Ministerial Resolution No. 272 of 2016 on the Implementation of Certain Provisions of the PJSC to LLCs.

Standard form documentation

Most syndicated finance transactions are governed by documentation based on recommended forms published by the Loan Market Association. Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house.

Borrowers may often be limited in the kinds of transactions and financings they can enter into, particularly in cases where the transaction is highly structured and involves the issuance of debt securities. In addition, restrictions arise when the relevant financiers or borrowers are Shari’a-compliant. However, most of the major international lenders have their own Islamic banking desks and many retain Shari’a advisory boards. Such institutions are growing more comfortable with the main Islamic financing mechanisms.

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers to do so. In general, the directors'/managers' duties requirements under the Companies Law require the directors/manager to ‘preserve’ the company's rights which is similar to the English law requirement that directors act in the best interests of the company. However, provided that the giving of a guarantee or the granting of security is considered to be in the best interests of the group as a whole, there should be no issues from a directors' duties perspective. This should be recorded in the authorizing resolutions when the security is granted.

Public joint-stock company (PJSCs)

Special care needs to be taken if a PJSC is granting security or giving a guarantee. Article 154 of the Companies Law requires directors to have express powers to enter into mortgages (over moveable and immoveable property). Consequently, a separate shareholders' resolution will be required if such express powers are not already provided in, for instance, the company's constitutional documents. Although the legislation would appear to capture LLCs as well, it was clarified by a 2016 Ministerial Decision that this requirement does not apply to LLCs.

In addition, there is a broad prohibition on PJSCs providing financial assistance for the purchase of its own (or of its holding company's) shares. It is important to note that there is no ‘whitewash’ procedure available of the type seen in other jurisdictions.

Insolvency

Guarantees and security may be at risk of being set aside under the UAE Insolvency Law if granted by a company within a certain period of time prior to the onset of insolvency.

No concept of trust

There is no concept of trust as exists in common law jurisdictions and the use of a local security agent holding security for the benefit of lenders through a parallel debt mechanism has become market practice (although has not been tested by the courts).

Notarization

With respect to security over certain assets (such as share security taken with respect to certain companies), it is necessary that the signing of the security is notarized in front of a UAE notary public. In order to notarize the signing of a document, the notary public will generally require all relevant documents (such as constitutional documents of the grantor, required board or shareholder resolutions and licenses to be translated into Arabic, notarized in the relevant jurisdiction of the shareholders and then legalized both in the country of the shareholder and then brought onshore and stamped by the Ministry of Justice).

Common forms of guarantees

Guarantees are common in the UAE and it is also quite common to see personal guarantees given in relation to a loan for commercial purposes.

Guarantees are specifically codified in Chapter V of the Civil Code. Separate rules apply to bank guarantees under the Commercial Transactions Law. Although UAE courts have taken different approaches as to whether a guarantee of a bank loan is a civil or commercial transaction, it is common to disapply certain provisions of the Civil Code which may have an impact on the lenders' position (such as Article 1092 of the Civil Code which provides that a creditor must claim for a due debt within six months from the date of maturity).

The Commercial Code recognizes bank guarantees (which often take the form of a bond). Certain rules apply to these instruments such as assignment and time limits and there is a provision that ‘in exceptional circumstances’, the guarantor can successfully resist payment. It should be noted that the courts have been reluctant to apply this provision.

Types of security

Security over real estate and real estate interests (such as usufructs and musatahas (akin to a development agreement) are taken by way of mortgage. Some of the Emirates (and free zones) have specific laws dealing with mortgages but in the absence of legislation, mortgages are governed by the Civil Code. Although the practices of the relevant registrars may differ (and the practice at a particular registrar might evolve as well), generally mortgages over real estate may only be granted in favor of a bank which is licensed by the UAE Central Bank, be translated into Arabic and notarized prior to registration.

In relation to moveable property, UAE Law No. 20 of 2016 on the Mortgage of Moveable Assets to Secure a Debt (Pledge Law) governs how security is taken over certain classes of moveable assets such as accounts, trade payables, equipment and tools, goods and raw materials and agricultural products.  The Pledge Law provides that security over such moveable property should be by way of written security agreement or mortgage and, contrary to the previous position in the UAE, allows security to be taken over property without demonstrating possession and also allows security to be taken over future property (including bank accounts with fluctuating balances). It is therefore possible to take security over such moveable property which is similar in effect to an English debenture or law floating charge (provided that the requirements of the Pledge Law are adhered to).

We note, however, that the Pledge Law does not govern security over all moveable assets, and so care should be taken when securing a particular asset class to ensure that the security is in the correct form. For example, the Pledge Law specifically excludes insurance contracts and proceeds from its operation, meaning that any security taken over insurance contracts and proceeds should follow the traditional form (which is security by way of assignment). Security over ships, aircrafts and vehicles are also subject to different laws and regulations in the UAE. Depending on the nature of a transaction, this may require the security document to be notarized and for registration to be made in an appropriate asset register.

Due to the introduction of the new Companies Law, it is possible to take security over the shares in a company, including onshore LLCs. (It should be noted that the position differs from free zone to free zone and would need to be checked.) The process for taking security over pledges of shares should be checked with the relevant department in each Emirate as the process differs. However, generally the practice has been that this security may only be granted in favor of a bank licensed to carry out business in the UAE and is subject to notarization requirements.

Giving or taking guarantees

The Civil Code provides that a lender should not be obliged to first prove the bankruptcy of the borrower before claiming against the guarantor and that the borrower and the guarantor shall not be discharged from the balance of the debt if the parties agree a composition in relation to part of the debt. These provisions can be set aside.

There is no concept of a deed under UAE law and accordingly, guarantees should be executed in the same manner as any other contract. There is also no requirement for guarantees to be notarized, although it is quite common for the signature of a personal guarantor to be witnessed.

However, if a guarantee were to be brought before a local court, it would need to be translated into Arabic by a certified translator and the Arabic version would prevail- for this reason, parties sometimes require a guarantee to be translated into an agreed version of Arabic prior to execution although there is no universal practice in this regard.

Giving or taking security

As mentioned above, there is no concept of a deed under UAE law. Depending upon the type of security and where the asset is located (onshore or in a free zone), there may be a prescribed form of security (for example, the Dubai Land Department requires a short form mortgage to be registered, so a practice has developed that both a long form and short form mortgage are signed).

In relation to security taken over moveable property pursuant to the Pledge Law, in order to perfect such security it is necessary to register the security on the register established under the Pledge Law, which is known as the "Emirates Moveable Collateral Registry". The Emirates Moveable Collateral Registry is an online registry, and so in order for a secured party to effect a registration with this registry it is a matter of the secured party creating an online account with the registry and then submitting via an online form the required information about the secured property and the security provider.

The registration requirements in relation to other forms of security should always be checked as there are time periods required by some free zone registries.