12 Jan 2024

The Central Bank of the UAE issues its regulatory framework for short-term lending

Authored by: Aziz Yasin

In summary:

  • Short-term lending products (including Buy Now, Pay Later (“BNPL”)) are now regulated by the Central Bank of the UAE (“CBUAE”);
  • A provider of short-term lending products in mainland UAE must obtain a license from the CBUAE or partner with a UAE licensed financial institution; and
  • The regulation creates clearer rules, enhances transparency and improves consumer protection.

The Finance Companies Regulation (the "Regulation") was updated by the CBUAE Circular No. 3/2023, which became effective on 27 December 2023. The Regulation enables finance businesses and licensed financial institutions to offer short-term credit in mainland UAE to borrowers directly or through approved agents.

Short term lending refers to a variety of credit products that provide consumers with quick access to relatively small amounts of financing for a short duration. These facilities allow borrowers to purchase goods and services immediately while repaying the loan over a defined period, typically less than 12 months.

A popular type of short term lending is known as BNPL. With BNPL, consumers may acquire goods like apparel, electronics, and other consumer goods without having to pay the entire purchase price up front. Rather, the entire amount is divided into multiple interest-free instalments, usually spaced out over a few months.

For those who might not be eligible for conventional finance options, short-term lending products offer borrowers quick access to funds. However, if the loans are not paid back on time, there may be extremely expensive consequences.

Global trends indicate that consumers are regularly turning to short-term loans, and specifically to BNPL products, for ordinary, every-day, expenditures. BNPL providers continue to operate beyond the authority of many regulatory bodies across various jurisdictions, especially those associated with consumer credit. The rapidly expanding global popularity of short-term lending facilities, particularly among younger demographics, and the costly consequences of failing to repay such credit facilities on time, has prompted a global focus on the need for regulation of such facilities.

This Regulation establishes a framework for the regulation and oversight of ‘Restricted Licence Finance Companies’ and sets out the requirements for finance companies to contract with agents, all of which are only permitted to offer short-term loans to borrowers in or from the UAE. The Regulation aims to protect consumers and enhance the overall stability of the financial sector in the UAE.

Some of the significant changes arising from the Regulation include:

  • A new 'Restricted License' category is now available for short-term lending companies. For such companies, there is a minimum capital requirement of AED 20 million or aggregate capital funds (capital, reserves, and retained earnings) equal to 5% of outstanding lending volume;
  • Short-term lenders in the UAE are required to obtain a 'Restricted License' from the CBUAE before offering their services to borrowers;
  • Restricted Licence Finance Companies are limited to providing loans which do not exceed AED 20,000 or three months' verifiable net income for the borrower;
  • Restricted Licence Finance Companies must undertake due diligence on a borrower’s creditworthiness to verify their ability to repay the loan;
  • Loan payback periods are limited to 12 months from the initial agreement date;
  • Borrowers must be treated fairly with transparent fees, charges, and terms. The total fees, including late payment fees charged by a provider or agency on any short-term loan, must not exceed 30% of the initial loan amount;
  • Licensed banks in the UAE can offer short-term financing through their product offerings or collaborate with agents; and
  • Restricted Licence Finance Companies and agents must implement internal complaint and dispute resolution systems.

As a result, companies seeking to offer short-term loan products to borrowers in the UAE (including BNPL products) have the following options: -

  1. Seek a license directly from the CBUAE to operate as a Restricted License Finance Company; or
  2. Partner with an established financial institution (a licensed bank or finance company) licensed by the CBUAE.

Existing providers of short-term lending products, which are not currently licensed by the CBUAE, must comply with the Regulation by adopting one of the above-mentioned options, or otherwise they must wind down their operations and credit services and leave the UAE market. Pursuant to Article 35.2 of the Regulation, any person who is engaged in a licensed financing activity in the UAE which is not licensed, must within ninety (90) days of the effective date, apply to the CBUAE for the relevant license or immediately cease undertaking all financing activities. In any case, businesses must assess their business plans, credit extension policies, pricing structures, and product offers immediately to ensure compliance with the Regulation. Entities interested in entering this industry should carefully read the Regulation to determine their best options.

The updates to the Regulation demonstrates the commitment of the CBUAE to safeguard consumer protections as well as ensuring industry growth under its prudent oversight. The CBUAE framework strikes a balance between permitting new technologies demanded by consumers and ensuring responsible lending practices. Regulated short-term lending provides clearer rules, enhanced transparency and improved consumer protection. The Regulation also demonstrates that the CBUAE is keeping pace with current trends and is implementing innovative safeguards.

We expect that other UAE regulators are likely to follow suit and note that the Dubai Financial Services Authority (“DFSA”) is in the process of making the relevant changes to the DFSA Rulebook, by considering points raised in their recent consultation paper concerning the proposal to regulate BNPL products that are offered in or from the Dubai International Financial Centre (“DIFC”). It will be interesting to see how short-term lending products, including BNPL options, will evolve as an offering in mainland UAE as a result of the Regulation.

Our lawyers can provide advice on the Regulation and guidance on navigating the licensing process. Please reach out to a member of the Banking & Finance team for assistance with any UAE law banking or financial regulatory matter.


This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.