UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 9, 2010

UAE Banking Series Part III: Islamic Banks

 

Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions and Investment Companies

We, Zayed Bin Sultan Al-Nahyan, President of the United Arab Emirates, Having Perused the Provisional Constitution and,

Federal Law No. 1 of 1972 Regarding Jurisdictions of the Ministries and Powers of the Ministers and amending laws thereof, and,

Federal Law No. 7 of 1976 on the Establishment of the State Audit Bureau, and

Union Law No. 10 of 1980 regarding the Central Bank, the Monetary System, and

Organization of Banking and Amending Laws thereof and,

Federal Law No. 8 of 1984 regarding Commercial Companies, and,

In accordance with presentations by the Minister of Finance and Industry, endorsed by the Cabinet and the National Federal Council and ratified by the Supreme Union Council,

Promulgate the following law:

Article 1

Islamic Banks, financial institutions and investment companies shall mean those whose articles and memorandum of association include a commitment to abide by the provisions of the Islamic Shari’ah Law and conduct their activities in accordance therewith.

Article 2

  1. Islamic banks, financial institutions and investment companies shall be established in the country and carry on their activities in accordance with the provisions hereof.
  2. In respect of whatever is not particularly provided for herein, these banks, institutions and companies shall be subject to the provisions of Union Law No. 10 of 1980, Federal Law No. 8 of 1984 previously referred to and other established laws and regulations and prevailing practices.
  3. Those banks, institutions, and companies shall take the form of public joint stock companies and shall be established in accordance with the provisions of Federal Law No. 8 of 1984 previously referred to.  These banks, institutions, and companies shall be subject to the Central Bank’s licensing, supervision and inspection in accordance with the provisions of Union Law No. 1 of 1980 and in a manner not contravening with the provisions hereof.
  4. With the exception of those relating to establishment, the provisions stipulated in previous items shall apply to all branches and offices established in the country by foreign Islamic banks, financial institutions, and investment companies.

 

Article 3

  1. Islamic Banks shall have the right to carry on all or part of banking, commercial, financial, and investment services and operations. They shall also have the right to engage in all types of services and operations practiced by banks and referred to in Union Law No. 10 of 1980 and without adherence to the periods stipulated therein, whether those operations and services were conducted for the Islamic Bank own account or for in partnership with a third party.  Islamic Banks shall also have the right to establish companies and participate in existing or under establishment enterprises provided that activities of the latter are in conformity with Islamic Shari’ah law.
  2. Islamic financial institutions and investment companies shall have the right to carry out lending, credit and other financial operations.  They may also participate in existing or under establishment enterprises, invest their funds in moveable assets and receive deposits for investment thereof in accordance with provisions of Islamic Shari’ah Law.

 

Article 4

  1.  Islamic banks, financial institutions and investment companies incorporated in the country along with branches and offices of foreign Islamic Banks, financial institutions and investment companies licensed to operate in the country shall be exempted from provisions of Clause (a) of Article 90 and Clause (e) of Article 96 of Union Law No. 10 of 1980.
  2. Those agencies shall also be exempted from provisions of Clause (b) of article 90 of Union Law No. 10 of 1980 and in a manner not contravening with established legislation in the concerned emirate.

 

Article 5

A Higher Shari’ah Authority shall be formed by a cabinet decision, incorporating Shari’ah legal and banking personnel to undertake higher supervision over Islamic banks, financial institutions and investment companies to ensure legitimacy of their transactions according to the provisions of Islamic Shari’ah Law and also to offer opinion on matters which these agencies may come across while conducting their activities.  The opinion of the said Higher Authority shall be binding on the said agencies.  This Authority shall be attached to the Ministry of Justice and Islamic Affairs.

Article 6

The respective articles and memorandum of association of each Islamic Bank, financial institution and investment company should clearly stipulate that a Shari’ah Supervision Authority shall be formed of minimum of three members to render their transactions and practices accordant with the principles and provisions of Islamic Shari’ah Law.  The respective articles of association of each of these agencies shall determine the way in which this authority shall be formed, the manner in which it will discharge its task and in other terms of reference.  Names of members of the Shari’ah Supervision Authority shall be presented to the Higher Authority referred to in the previous article for approval prior to issuance of the formation decision.

Article 7

In case an Islamic Bank, financial institution or investment company is subject to the State Audit Bureau’s control as per provisions of Federal Law No. 7 of 1976; the Bureau’s mission shall be confined to post-audit.  The Bureau may not interfere in the process of works of these agencies nor challenge their policies.

Article 8

Islamic Banks, financial institutions, and investment companies along with branches and offices of foreign Islamic banks, financial institutions and investment companies who are existent at the time this law comes into effect should reconcile their positions with the provisions hereof within one year from the date of enforcement thereof. 

Article 9

Ministers and competent authorities in the UAE shall within their respective jurisdictions implement the provisions hereof.

Article 10

This law shall be published in the  Official Gazette and shall come into effect from date of publication thereof.

Zayed Bin Sultan Al Nahyan

President of the United Arab Emirates

Issued by us in the Presidential Court – Abu Dhabi

On 3: Rabiya Al Akhar 1406 Hijri

Corresponding to: 15 December 1985

http://www.centralbank.ae/en/pdf/OffGazetteB.pdf

UAE Banking Series Part II: The Central Bank

 

 

The central bank of the UAE was established by the UAE Currency Board on 19 May 1973 as per Union Law No. 2 of 1973 in order to issue a national currency to replace other currencies in circulation during the period which followed the establishment of the Union of the Emirates in 1971.  The currencies in use at that time were the Bahraini Dinar and the Qatari and Dubai Riyal.

The UAE dirham was put into circulation for the first time on 19 May 1973.  Subsequently, the Bahraini Dinar and the Qatari and Dubai Riyal were replaced at the rate of one Dirham for One Riyal and Ten Dirhams for one Dinar.  In total, 219 million Dinars and 131 million Riyals were replaced by AED 260 million United Arab Emirates Dirham. 

The Currency Board was not authorized to draw up the monetary policy of the country; its function was limited per law to issue the dirham and ensure full coverage in gold and foreign currencies.  The value of the dirham in gold stood at 0.186621 grams and was pegged to the American dollar at a rate of 3.94737 per dollar allowing for a narrow margin.
The Currency Board, despite its limited authorization, ensured and verified the organization of banking in the UAE and the establishment of rules governing the banking industry.  In so doing, the Currency Board helped in the establishment of a sound banking system and the development of its varied activities which covers all economic sectors in the country which in turn promoted the nation’s escalating economic growth.  The Board furthermore set up the first pillar of financial and economic stability on 10 December 1980 by issuing a new law, Union Law No. 10 of 1980 Concerning the Central Bank, the Monetary System, and Organization of Banking, through which the Currency Board was changed into the Central Bank of the UAE.  Such change in 1980 was  necessary  due to the huge economic development occurring in the UAE, which coincided with the establishment of  21national banks and during an era when the currency in circulation reached AED 2143 million as of 31 December 1980.

Union Law No. 10 of 1980 gave the Central Bank wide authorities, which include inter alia: organization of the monetary, credit and banking policy and the supervision of its implementation. 

In order to achieve this, the Central Bank was authorized to: (1) issue currency per the provisions of the said law; (2) ensure support for currency and its stability inside and outside the country as well as its free convertibility into foreign currencies; (3) ensure a credit policy which helped in achieving balanced growth of the national economy; (4) organize and develop provisions of the law; (5) function as the Bank of the Government; (6) offer monetary and financial advice to the Government; (7) maintain government reserves in gold and other currencies; (8) act as bank of banks operating in the country;  (9) act as the  financial agent of the UAE government at the International Monetary Fund and World Bank and other institutions and at Arab/International Monetary Funds.  The Central Bank is also authorized to handle all state transactions with such parties.

During the period from 11 December 1980 till date, the Central Bank, through the implementation of the provisions of the said law and the regulations, circulars and decisions issued by its Board, has established a strong and sound banking system, which is among the best banking systems in the world.  As such, the cash in circulation increased from AED 2.1 billion in December 1980 to AED 23.2 billion in June 2007.  Similarly, the Money Supply ( M1)  increased from AED 7.3 billion to AED 150 billion and private domestic liquidity (M2) from AED 23.5 billion to AED 475.3 billion during the same dates.

Credit facilities granted to the private sector by banks operating in the country increased from AED 25.17 billion at the end of December 1980 to AED 422.12 billion at the end of June 2007.  Similarly, foreign assets increased from AED 19.41 billion to AED 237.76 billion, monetary deposits from AED 5.21 billion to AED 126.77 billion, quasi-monetary deposits from AED 16.17 billion to AED 325.33 billion, and capital and reserves from AED 5.52 billion to AED 117.04 billion during the said dates.  By the end of June 2007, total assets/liabilities of the balance sheets exceeded Trillion dirhams to reach AED 1002.57 billion.

Monetary and financial markets have matured and the level of performance has become on par to that of developed countries.  In addition, the main cities in the country have evolved into international investment and commercial centers attracting multinational companies and people from around the world.    

*The Central Bank of the United Arab Emirates

UAE Banking Series Part I: Commercial Banks

 

 

Law Number 10 Regarding the Central Bank, The Monetary System and Organization of Banking

http://www.centralbank.ae/index.php

http://www.centralbank.ae/law.php

http://www.centralbank.ae/laws_circulars.php

Commercial Banks

A commercial bank shall be any establishment which customarily receives funds from the public in the form of demand, under notice or time deposits, or which invests loan instruments or deposit certificates to be used in whole or in part for granting loans and advances on its own account and responsibility.

Commercial banks also issue and collect checks, grant  public and private loans, trade in foreign exchange and precious metals, and conduct other banking operations prescribed for commercial banks either by law or by customary banking practice.

The Board of Directors of the Central Bank shall define the activities and conditions of operation of commercial banks with restricted licenses.  Such banks shall be considered to be commercial banks unless the Board excludes them from the provisions thereof.

In application of the provisions of this law, branches of any bank operating in the UAE shall be considered as one bank unless otherwise provided for by the law. 

Capital and Reserve Funds

All institutions engaging in commercial banking in the UAE shall be considered public joint stock companies chartered by law or decree.  Branches of foreign banks operating in the UAE shall be excluded from this provision.  A commercial bank’s paid up capital shall not be less than forty million Dirhams.

Apart from the obligations imposed by any commercial law,  joint stock companies,  or their Articles of Association, commercial banks and branches of foreign banks shall make an annual allocation of at least ten percent of their annual profits to form a special reserve until such reserve amounts to fifty per cent of the capital of the commercial bank or in the case of branches of foreign banks of the amount allocated as capital.

Registration, Mergers, and Deletion

No commercial banks shall request the Bank’s approval for any amendments to their Articles of Association or basic organization  nor to the particulars submitted to the Bank at the time of their application for a license.  However, if an amendment is requested after this time, any such amendment shall only become effective upon entry into the Register of the Bank.  The governor of the Central Bank shall decide on requests for amendments.  If he or she decides to refuse the amendment/entry, the matter may be put before the Board of Directors of the Central Bank, which shall make the final decision.

No registered commercial bank shall cease operations or merge with another bank without authorization from the Chairman of the Board of Directors of the Central Bank or whomever he or she may authorize on the approval of the Board.  The said authorization may only be issued if the Central Bank has established that the commercial bank has fulfilled all its obligations to its customers and creditors or that it has settled such obligations in a manner acceptable to the Central Bank. 

Prohibitions

Commercial Banks shall not engage in non-banking operations and no bank shall:

  1. Engage in commerce or industry or trade in goods on its own account unless the acquisition of such goods is in settlement of debts due from others; goods shall be disposed of within the period laid down by the Governor;
  2. Purchase immoveable property on its own account except in the following cases:  Immoveable property required for the conduct of its own business or for housing or amenities for the bank’s staff; immoveable property acquired in settlement of debts and in such case the Bank must sell the Property within three years; this period may be extended on the decision of the governor.
  3. Hold or deal in the bank’s own shares unless they are acquired in settlement of a debt.  In such a case, the bank must sell them within two years from the acquisition thereof;
  4. Purchase shares of or bonds belonging to commercial companies except within the limit of twenty five percent of the banks own funds unless acquired in settlement of a debt.  In such case, the bank must sell the excess within two years from the date of acquisition.  Such prohibition shall not apply to the acquisition of bonds issued or guaranteed by the Government or other public sector institutions.

 

Commercial banks shall not grant loans or credit on current account to members of their Board, managers, or to similar members of staff except by prior authorization from the Board of the Bank; such authorization must be renewed annually.  Such prohibition shall not include the discounting of commercial paper, the granting of guarantees, or the opening of documentary letters of credit.

No commercial bank may offer its customers credit facilities on the security of their shares in the bank.

No commercial bank may grant loans or advances for the purpose of constructing commercial or residential buildings exceeding a total of twenty percent of its sum deposits unless it specializes in granting real estate loans and has obtained the Central Bank’s approval for this rate to be exceeded.

No commercial bank may issue on its own behalf traveler’s checks without prior authorization by the Central Bank.

No person who has been convicted of theft, dishonesty, fraud, embezzlement or writing bad checks may be or remain a member of the Board of  Directors of any Commercial Bank.

No member of the Board or manager of any commercial bank may hold without permission from the board of the said bank, a position as bank manager or member of the Board of any other bank. 

*Emirates Institute for Banking and Financial Studies ‘Legal Environment in the United Arab Emirates, Laws Relating to Banking.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance