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Country Finance

United Arab Emirates

Released January 2012 The Economist Intelligence Unit 750 Third Avenue New York NY 10017 USA

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United Arab Emirates 1

Country Finance 2012 www.eiu.com © The Economist Intelligence Unit Limited 2012

Contents 3 Regulatory/market assessment

3 Regulatory/market watch

4 United Arab Emirates at a glance

5 Fundamental indicators

7 Banks and other financial institutions Overview Bank regulators Regulatory watchlist Domestic banks Foreign banks Investment banks and brokerages Development and postal banks Offshore banks Insurance companies Pension funds Mutual funds and asset-management firms Venture-capital and private-equity firms Factoring firms Financial leasing companies Other institutions

21 Corporate case study

22 Monetary and currency policies/regulations Overview Base lending rates Monetary policy Currency Loan inflows and repayment Repatriation and remittance of capital Restrictions on trade-related payments

25 Short-term instruments/regulations Overview Cash management Payment clearing systems Receivables management Payables management

Currency spot market Futures and forward contracts

Options Swaps Exotics Bank loans Time deposits Certificates of deposit Treasury bills Repurchase agreements Commercial paper Overdrafts Banker�s acceptances Supplier credit Intercompany borrowing Discounting of trade bills

34 Medium- and long-term instruments/regulations Overview Securities markets Portfolio investment Trading, clearing and settlement Corporate governance Listing procedures Recent initial public offerings Underwritten offerings Rights offerings Private placements GDRs/ADRs Alternative markets Bank loans Financial leasing Corporate bond issues Private placement of notes Structured finance Infrastructure financing Trade financing and insurance

46 Key contacts

Charts 5 Financial risk 24 Month-end exchange rates 5 Banking system openness 31 Indicative investment yields 5 Financial regulatory systems 36 Stockmarket indices 23 Base interest rates

2 United Arab Emirates


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Tom Ehrbar Managing editor, Country Commerce

Sal Genna

Amy Ha

Adriana Defillipi

Veronica Lara

Debarati Ghosh Managing editor, Country Finance

Andrew Salomone Viteritti



Regulatory/market assessment • In September 2011 the Emirates Securities and Commodities Authority (SCA) announced an agreement with the Abu Dhabi Exchange and the Dubai Financial Market to implement international financial reporting standards for listed companies. The system will use eXtensible Business Reporting Language (XBRL) and will issue a provisional report in 2012. 9

• The benchmark Emirates Interbank Offered Rate (EIBOR) continued to decline in the 12 months to end-2011. The three-month rate hit 1.52%, from 2.14% at the same period during the previous year; the six-month rate fell to 1.71% from 2.38%; and the 12-month rate dropped to 1.97% from 2.59%. Although lacking requirements to follow these rates, banks generally have set their internal rates above the EIBOR. 23

• Starting in November 2011 the Central Bank of the UAE introduced the International Bank Account Numbers (IBAN) system for use by all bank customers in the country. The system is designed to minimize the risk of errors during cross-border transactions and brings the UAE in line with Saudi Arabia and Kuwait, which already use it. 28

• Securities markets in the UAE have continued to suffer from adverse conditions within the global and domestic economies. The Dubai Financial Market closed at 1,353.39 points at end-2011, down from 1,630.52 points at end-2010. Meanwhile, the Abu Dhabi Securities Exchange closed at 2,402.28 points at end-2011, down from 2,719.87 points at end-2010. 36

• In September 2011 the autonomous Dubai-based Hawkamah Institute for Corporate Governance unveiled a corporate governance code for small and medium-sized companies in Dubai. Government agency SME Dubai, which falls under the emirate�s Department of Economic Development, also contributed to the effort. 39

• Despite recent efforts to strengthen the UAE�s regulatory environment, the country�s regulators have proven incapable of adequately punishing violators. A high-profile example involved the former governor of the Dubai International Financial Centre, who was held largely unaccountable for his embezzlement of public funds. 39

• The initial public offering (IPO) market came back to life in 2011, after two-and-a-half years of inactivity. This featured the listing of three companies on the Abu Dhabi Securities Exchange. The largest listing came from real-estate developer Eshraq Properties, which sold 55% of its shares, raising Dh825m. 40

Regulatory/market watch • Pending revisions to the 1984 Commercial Companies Law are expected to raise the permitted level of foreign ownership of local firms, up from the current 49%. They are also supposed to make changes to corporate governance, company foundation, and accounting principles, among other areas. However, the details on the revisions and their envisioned approval remained vague at end-2011. 9

• UAE banks are preparing to implement the Basle III framework established in September 2010. Although banks already were required to have Tier 1 capital adequacy of 8% by end-June 2010, above the 7% requirement of Basle III, the Central Bank of the UAE has expressed concern over whether they will be able to maintain these standards. 9

• In October 2011 the Ministry of Finance announced the establishment of a development bank to promote economic growth in the UAE and to finance housing and infrastructure projects. The Emirates Development Bank is scheduled to launch with Dh10bn in capital, but its exact launch date remained unknown at end-2011. 14

• In the first four months of 2011 the Insurance Authority (IA) announced an information-sharing scheme with the Dubai Financial Services Authority, the regulatory body of the free financial zone, the Dubai Financial Centre. The IA also announced the start of reporting requirements for all UAE insurance companies. However, by year�s end, these programmes had not started, and it was speculated that the IA would be dissolved into the central bank. 18

• Speculation has persisted over a possible merger between the Dubai Financial Market (DFM) and Nasdaq Dubai. Yet despite substantial interest from the heads of both exchanges, the merger still had not taken place at end-2011, and there was no sign of its certain progress in the immediate term. 22



United Arab Emirates at a glance

Elections: Popular elections have very little presence in the UAE. The Federal Supreme Council (FSC), which comprises the seven rulers of the individual emirates, selects the president and vice president for five-year terms with no term limits. The prime minister is appointed by the president. The most recent presidential election took place in November 2004, after the death of former President Sheikh Zayed bin Sultan al-Nuhayyan. His son, Khalifa bin Zayed al-Nuhayyan, was selected unanimously for the position. The most recent vice presidential election took place in January 2006, after the death of Sheikh Maktoum bin Rashid al-Maktoum. His brother, Muhammad bin Rashid al-Maktoum, was selected unanimously for the position. Elections for 20 of the 40 members of the UAE�s legislative branch, the Federal National Council (FNC), take place via an electoral college. The most recent contest was in September 2011, and the next will occur in 2015.

Government: The president (Khalifa bin Zayed al-Nuhayyan since November 2004) is the ruler of Abu Dhabi and operates as head of state for the entire UAE. The prime minister (Muhammad bin Rashid al-Maktoum as of January 2006) functions as head of government; Mr Al-Maktoum also serves as vice president under the administration of Mr Al-Nuhayyan. A Council of Ministers receives appointment by the president. A Federal Supreme Council (FSC) serves as the country�s highest constitutional authority. It is composed of the seven emirate rulers, and those of Abu Dhabi and Dubai hold veto power. The FSC meets four times per year, establishes general policies, and sanctions federal legislation. A legislative branch is housed in the 40-seat Federal National Council (FNC), which is comprised of 20 members appointed by the seven emirate rulers and 20 members elected through an electoral college for four-year terms. The FNC�s legislative abilities are limited, and while it can review legislation, it holds no powers of amendment or veto. The UAE�s constitution was drafted initially as a temporary document in 1971 and was made permanent in 1996.

Major political parties: Political parties are not permitted.

Fiscal year: January 1st�December 31st

Moody�s Investors Service: Aa2

Standard & Poor�s: NR

Fitch: NR

* Senior unsecured long-term foreign-currency debt ratings.

Economist Intelligence Unit country risk rating*

Sovereign risk Currency risk Banking sector risk Political risk Economic structure

risk Country risk BB BBB BB BBB B BB

* Overall scores for each risk category are on a numerical scale of 0�100 (0 least risky, 100 most risky). There are ten rating bands based on this numeric scale�AAA, AA, A, BBB, BB, B, CCC,

CC, C and D�each comprising ten units of the 0�100 scale. For example, scores 0�10 = AAA and > 10�20 = AA. If the score is in a boundary area between two rating bands (scores ending in 0,

1, 2 and 9), it is at the analyst�s discretion whether to assign the higher or lower rating. The overall score for each category of risk is a weighted combination of the scores assigned to the

qualitative and quantitative indicators that inform our credit risk model.

Political structure

Sovereign debt ratings*



Fundamental indicators

Financial risk(100=high risk)

Source: Economist Intelligence Unit.

Banking system openness(5=good)

Financial regulatory systems(5=high quality)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

UAEMiddle East and North Africa (av)

1110090820070.0

1.0

2.0

3.0

4.0

5.0


1312111009082007

0.0

1.0

2.0

3.0

4.0

5.0


1312111009082007



Financial regulation in United Arab Emirates

The 2008-09 global economic downturn and Dubai�s subsequent debt crisis have had severe implications for the entire UAE. Most significantly, they have shaken the local banking sector; drained liquidity throughout the country�s seven emirates; and drawn heavily on the oil wealth of Abu Dhabi, the country�s capital and, in recent years, its financial saviour. As of early 2012 government intervention still has failed to reverse the subsequent crisis in confidence that the country has faced. This uncertainty has been exacerbated by the painfully slow passage of the new UAE companies law, which should replace the existing Commercial Companies Law of 1984, but whose legislation is taking far longer than anticipated. The new law has been approved by the cabinet, though the details of its regulations have not been made publicly available. Revisions to the current law are expected to allow for higher levels of foreign ownership�presently every company incorporated outside the Dubai International Financial Centre (DIFC, the financial free zone) must be at least 51%-owned by a UAE national. The revisions also are anticipated to allow more market-driven pricing of shares on initial public offerings and rights issues. Other changes are expected to be made in the areas of corporate governance, company foundation and accounting principles. However, as of end-2011, the draft law was still awaiting the approval of UAE President Khalifa bin Zayed al-Nuhayyan, so it remains difficult to assign a time frame to the regulatory change, which initially had been expected to be in place in early 2011. The new regulations are an attempt to undo some of the damage done by the recent financial crises and to ensure that the same mistakes are not repeated once Dubai recovers its pre-crash poise. Dubai�s debt crisis had been sparked by the collapse of the once-booming property sector, which in 2008 accounted for more than half of the emirate�s economy. The flight of international investment in the wake of the global credit crunch caused property prices to plummet. Since 2008 more than half of the real-estate projects planned in the emirate have been cancelled outright. UAE banks have found themselves grossly overexposed to the sector, resulting in declining valuations compared with their peers in the region�a state of affairs that led to an emphasis on balance sheet repair and reducing loan-to-deposit ratios. As a result, lending in the UAE ground almost to a halt by end-2011, with financial institutions concentrating on shoring up bottom lines, as opposed to extending credit. The Dubai government turned to the federal government in Abu Dhabi to support heavily indebted firms that were either owned by or affiliated with the emirate�s government. This came in the form of a US$20bn bailout underwritten by the Central Bank of the UAE in February 2009. The funds were used to help pay for the debt of Dubai World, a large state-affiliated investment conglomerate that had undertaken massive infrastructure projects in Dubai. The central bank also established a number of measures designed to boost liquidity and guarantee deposits in the UAE�s wider banking system. The Ministry of Finance established a support facility of US$13.6bn to stimulate liquidity, while the government also set aside US$19bn to be injected directly into the banks. Of this sum, US$4.1bn was put into the Abu Dhabi banks and US$1.1bn into Dubai-based Emirates NBD, the country�s largest bank by assets at end-2010, according to latest available data. Most recently, in December 2011, the UAE government announced the establishment of a Dh10bn fund to aid low-income indebted citizens. This came as part of a response to domestic unrest, which followed the widespread political and social movements that erupted across the Middle East and North Africa during the 2011 year. Although the new fund will cater to individuals instead of banks or other financial institutions, it sends a clear message that the UAE government is willing to spend its way responsibly out of the crisis. Since the onset of debt troubles in Dubai and in many of the country�s banks, the government�s focus has fallen on legislative reform in the financial sector. There has been an urgent reassessment of loose regulations that initially served to attract investment to the UAE for much of the last decade but that now are considered counterproductive to restoring international investor confidence in the country and its banking system. The Dubai Financial Services Authority (DFSA) regulates firms in the DIFC, and the central bank supervises those in the rest of the country. Although DIFC firms are required to follow International Financial Reporting Standards (IFRS), the central bank still has much to do to bring the rest of the financial system in line with international standards. To that end, it has issued new laws on provisioning and capital adequacy; for example, effective June 2010, the central bank has obligated banks to maintain a Tier 1 capital-adequacy requirement of 8%, ahead of the 7% required by the Basle III framework issued in September 2010. Major issues with transparency and data collection have undermined efforts to restore confidence in the UAE economy. The federal government is making more of an effort with regards to corporate governance, but privately owned local firms still are able to operate in an opaque fashion with little apparent accountability. Meanwhile, a lack of available data on the government�s investment income and off-budget spending makes it difficult to assess the extent to which the UAE still relies on Abu Dhabi�s immense oil wealth.



Banks and other financial institutions

The UAE�s financial-services sector has expanded rapidly since 2003. Much of this growth has been bolstered by a boom in oil prices, which have supported state-led initiatives to tilt the economy�s reliance on oil exports towards the development of new sectors. As part of these efforts, the government has aimed to make the emirate of Dubai a hub for financial services within the region, particularly for the Gulf Co-operation Council�an economic union including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

In 2004 the government established the Dubai International Financial Centre (DIFC), a specialised free zone dedicated to financial services. The DIFC maintains its own legal jurisdiction within the UAE and is supervised by the Dubai Financial Services Authority (DFSA), a wholly independent regulatory body. Outside of the DIFC, financial-services firms are overseen and regulated by the Central Bank of the UAE. Companies established outside the DIFC (and other free zones) must register with the UAE Ministry of Economy and with the government authority of the emirate in which the company�s head office is located. As of end-2011 foreign ownership in these non-free-zone areas was limited to 49%.

The DIFC offers financial firms highly attractive incentives, such as unrestricted foreign ownership, and tax-free profits and repatriation of capital. The Registrar of Companies (ROC) incorporates companies in the zone, and the operations of financial institutions include banking and investment banking, insurance and reinsurance, wealth management, and Islamic finance. Compliance with international financial reporting standards (IFRS) is mandatory only for firms in the DIFC. An insolvency law is non-existent, and a bounced cheque can lead to imprisonment.

In November 2010 the central bank introduced a series of long-awaited guidelines on provisioning for bad loans, in a bid to bring the banking system in line with international standards of best practice. Banks were ordered to take provisions for bad loans on a quarterly basis, rather than delay them until the end of the financial year. A framework was outlined for the evaluation of loans and advances, as well. The central bank also mandated that banks must make general provisions for unclassified loans equal to 1.5% of risk-weighted assets, although government loans and the loans of state-owned or state-guaranteed loans are exempt.

In 2009 Dubai suffered a debt crisis largely stemming from the overleveraging of the emirate�s investment vehicle, Dubai World, which held stakes in global real estate and supported a construction boom in Dubai from 2005�08. The debt shock caused a sharp fall in investment confidence. By end-2010 foreign deposits in UAE banks (including foreign branches) had dropped to Dh51.5bn, down from Dh93.2bn at end-2009 and from Dh175.7bn at end-2008. There has since been a recovery of sorts, with deposits swelling to Dh66.2bn as of end-June 2011, according to the latest available central bank figures. In addition, foreign assets of UAE banks rose from Dh203.4bn at end-2008 to Dh233.5bn at end-2010, and to Dh260.9bn at end-June 2011. Despite this surge, banks

Overview



maintained their debtor status, since net foreign assets remained negative at Dh29bn at end-June 2011, compared with Dh38bn at the end of 2010.

UAE banks typically offer a wide range of services beyond traditional lending and deposit-holding. These include insurance, brokerage services and asset management. Local banks also have opened Islamic financial units in response to growing demand for sharia-compliant services, which are typically more risk averse than those of conventional banking. Under UAE law, Islamic financial institutions and investment companies may undertake lending, credit and other financial operations. As long as they operate at all times within the provisions of Islamic law, they also are permitted to invest their funds in moveable assets and receive deposits for investment in sharia-compliant opportunities. Under the tenets of Islamic law, the paying of interest is forbidden, as are most forms of speculative investment, including hedging and derivatives trading. Islam prohibits dealing in anything considered morally or socially harmful, and so investment in firms that deal with liquor, pork, gambling or pornography is not allowed (see Other institutions).

The Central Bank of the UAE, located in Abu Dhabi, implements and enforces the regulatory framework for the financial industry and is the lender of last resort. It supervises all banks and financial institutions, except those in the Dubai International Financial Centre (DIFC, a free zone focusing on financial services), which are supervised autonomously by the Dubai Financial Services Authority (DFSA). Firms operating in the DIFC must report directly to the DFSA, the sole regulator, and are subject to compliance with International Financial Reporting Standards (IFRS).

For firms undertaking Islamic finance business, the DFSA mandates compliance with standards outlined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Though the DFSA does not mandate AAOIFI governance standards themselves, the regulator establishes the manner in which these standards are implemented, such as the rules behind sharia reviews.

Outside the DIFC, the UAE does not have an accounting law or legally mandated accounting standards. The Companies Law of 1984 sets forth that accounting principles and practices should follow generally accepted standards; however, it does not specify or define them. The central bank has required that banks maintain Tier 1 capital of 8% since June 2010. Although this requirement arrived ahead of the Basle III framework, which in September 2010 called for an increase in Tier 1 capital from 2% to 7% by 2019, the central bank noted by late 2011 that additional liquidity tools would be needed to maintain these standards (see Regulatory watchlist). Although supervisory bodies, such as the Insurance Authority, are exerting a tighter hold on their respective industries, the central bank maintains ultimate authority over financial activities.

Established in January 2000 and headquartered in Abu Dhabi, the Emirates Securities and Commodities Authority (SCA) is the general governing body for the stock exchanges, securities, and commodities listed in the UAE. These include the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM), Nasdaq Dubai, and the Dubai Gold and Commodities Exchange

Bank regulators



(DGCX). The SCA has been rigorously streamlining licensing procedures for joint stock and securities companies. It also has levied high-profile fines against companies that breach market rules. In a further bid to implement best international practices, the SCA started issuing in November 2010 National Securities Identifying Numbers (NSIN) to shares of local companies listed on the ADX and DFM. Similarly, in September 2011, it announced it had signed an agreement with the ADX and the DFM to start implementing international financial reporting standards for listed companies, by using the eXtensible Business Reporting Language (XBRL). The new standard provides companies with a mechanism for releasing all types of information, including financial statements and corporate disclosures. The SCA stated that the first provisional report under the new system would coincide with the release of the governing body�s fourth quarter report for the 2011 year, which will cover 20 companies listed on each of the ADX and DFM; this should happen some time in 2012.

Regulatory watchlist

Long-awaited revisions to the Commercial Companies Law of 1984 are expected to contain a series of incentives to encourage investment in the UAE, including permission for a higher level of foreign ownership in locally incorporated firms, up from 49%. Other key provisions are expected to relate to the pricing of shares for public subscription, allowing more market-driven pricing of shares on initial public offerings and rights issues, and to exemptions on shareholders� pre-emption rights for new share issues. Changes also are expected to be made in the areas of corporate governance, company foundation, and accounting principles. More specific details on the law had not yet been released as of end-2011. Local banks are preparing to implement the regulations of the Basle III framework, established by the Swiss-based Bank for International Settlements in September 2010. The regulations set out new rules calling for phased increases of Tier 1 capital from 2% to 7% by 2019. Neither the Central Bank of the UAE (which regulates local banks) nor the Dubai Financial Services Authority (DFSA, which regulates banks located in the Dubai International Financial Centre, DFIC, the financial free zone) expects the implementation of the rules to have a strong impact on local banks. The central bank already had required banks to maintain a Tier 1 capital adequacy ratio of 8% (and Tier II capital of 4%) by end-June 2010. Moreover, the vast majority of banks in the DIFC are branches of foreign banks, and many of the steps for technical implementation will be completed in their home jurisdictions. Nonetheless, UAE Central Bank governor Sultan Nasser al-Suweidi offered a statement in October 2011, warning that the country needs to find more liquidity tools to ensure its banks will be able to maintain the Basel III requirements. Although UAE banks have high capital levels, they have a limited selection of liquid instruments they can use locally, as Gulf debt markets are less deep and varied than their more developed peers. Basel III, when implemented, will require banks to hold enough cash-like instruments to withstand a month of severe fund outflows. In October 2010 the central bank�s board of directors met to discuss the introduction of Macro Prudential Regulations in the UAE. At end-2011 it remained unclear what the central bank plans to introduce or when such measures might come into force.



Top ten domestic banks Ranked by assets as of end-2010�Dh m

Bank Pre-tax profit/loss Assets Market share (%)Emirates NBD 3,354 264,593 16.5National Bank of Abu Dhabi 3,786 211,427 13.2Abu Dhabi Commercial Bank 400 178,271 11.1

First Gulf Bank 3,546 140,758 8.8Dubai Islamic Bank 816 90,138 5.6

Mashreq Bank 856 84,846 5.3Union National Bank 1,357 81,780 5.1Abu Dhabi Islamic Bank 1,024 75,258 4.7

Commercial Bank of Dubai 821 38,511 2.4Emirates Islamic Bank 59 32,747 2

Total market 17,610 1,605,600 100.0

Sources: Emirates Bank Association; Central Bank of the UAE.

The Central Bank of the UAE updates aggregate-bank data on a monthly basis. According to its latest report, as of end-October 2011, there were 23 local banks with an extensive network of 762 branches located throughout the country. These figures compare with 23 banks and 720 branches at end-October 2010. Total assets stood at Dh1,670.4bn, up from Dh1,623bn 12 months earlier.

Most recent bank-level data is provided as of end-2010 only. According to these figures, the top five largest banks (all majority or partially state-owned) represented 55.1% of total banking assets, which stood at Dh1,605.6bn, up from Dh1,519.1bn at end-2009. These were the Dubai-based Emirates NBD (16.4% market share), the National Bank of Abu Dhabi (NBAD, 13.1%), Abu Dhabi Commercial Bank (11.1%), First Gulf Bank (8.7%) and Dubai Islamic Bank (5.6%). Emirates NBD was formed through a merger of Emirates Group and National Bank of Dubai (both state-owned banks) that was officially concluded on January 20th 2010. The merger was ordered in 2007 by the Ruler of Dubai (Mohammed bin Rashid al-Maktoum) with the aim of creating a regional banking giant that would be competitive internationally.

In 2009 Dubai suffered a debt crisis stemming from an overleveraging of the emirate�s investment vehicle, Dubai World, which held stakes in global real estate and supported a local construction boom from 2005�08. UAE banks since have maintained a cautious lending policy, as they look to build up loan loss provisions. Credit extended to the private sector slumped from Dh607bn at end-2009 to Dh582.9bn at end-2010. It stood at Dh587.8bn at end-September 2011, according to the latest figures available from the central bank.

Slackening credit activity in the UAE has prompted local banks to look for other sources of income, including foreign markets. The latest available figures from the central bank show that UAE banks boosted their foreign assets by just under Dh30bn, to Dh260.9bn in the first six months of 2011. The bulk of this increase can be attributed to loans and advances, including purchased or discounted commercial bills (up 23.5% since end-2010), and securities (up 15.4% in the same period). Recent developments in the local banking sector include the following:

• In October 2011 Emirates NBD, the UAE�s largest bank by assets, took over struggling Islamic finance house Dubai Bank, under the orders of the Ruler of

Domestic banks



Dubai (Mohammed bin Rashid al-Maktoum). Dubai Bank was 70% owned by Dubai Holding and 30% by Emaar Properties, before its nationalisation in May 2011 on the back of disappointing results. It has not reported figures since 2009, when it had total assets of Dh17.4bn against total liabilities of Dh15.7bn, and posted a loss of Dh291m. Many observers viewed the deal as a handover rather than as a typical merger, although officials denied that the government simply had bailed out the troubled lender, before passing it on to its larger rival after failing to find a buyer on the open market. Officials insisted that Dubai Bank had not received any injections of government cash since its nationalisation on May 16th 2011; however, they declined to give details of that investment. Under the terms of the takeover, Dubai Bank effectively has become a subsidiary of Emirates NBD.

• The global economic slowdown and concerns over the ongoing euro-zone sovereign debt crisis delayed bond plans by several regional issuers in 2011. However, Abu Dhabi Islamic Bank (ADIB) and Abu Dhabi Commercial Bank each raised US$500m in Islamic bonds, or sukuk, in November 2011. In addition, ADIB announced in December 2011 that it had fully paid an US$800m, five-year Islamic bond, which matured on December 12th that year. The bank had issued the maturing sukuk in 2006 as part of a US$5bn trust certificate programme.

• Leading global investment banks made significant job cuts in Dubai to save costs amid a dearth of work in the Gulf region. Credit Suisse (Switzerland), Nomura (Japan) and Deutsche Bank (Germany) all cut key equity research staff; Credit Agricole (France) and Bank of America (US) also announced job losses in the face of tough global economic conditions. Citigroup (US) similarly is expected to announce redundancies in early 2012, and local financial houses have let staff go, as well�Shuaa Capital made two rounds of job cuts affecting scores of employees, and Al Mal Capital shrank its workforce by around 25%, reducing its total number of employees to 20.

Top ten foreign banks Ranked by assets as of end-2010�Dh m

Bank Pre-tax profit/loss Assets Market share (%)HSBC Bank Middle East (UK) 1,125 96,124 6.0Standard Chartered Bank (UK) 1,250 77,879 4.8Citibank (US) 489 21,586 1.3

Bank Saderat Iran (Iran) 628 20,999 1.3Bank of Baroda (India) 367 17,722 1.1

Barclays Bank (UK) �193 16,715 1Bank Melli Iran (Iran) 528 12,027 0.8Arab Bank (Jordan) 188 10,805 0.7

Habib Bank AG Zurich (Switzerland) 153 9,996 0.6Royal Bank of Scotland (Scotland) 120 6,484 0.4

Total market 17,600 1,609,259 100.0

Sources: Emirates Bank Association; Central Bank of the UAE.

Foreign banks can offer full-fledged banking services by establishing a branch with a licence from the Central Bank of the UAE. Branches are considered separate entities from their parent bank and are run independently, although the parent bank remains fully responsible for their liabilities. Foreign banks

Foreign banks



established within the Dubai International Financial Centre (DIFC, a free zone focusing on financial services) can be wholly owned by their parent company, although these banks may not carry out business activities in the UAE outside of the free zone.

Federal law restricts foreign banks to no more than eight branches each. According to figures from the central bank, there were 28 foreign banks operating in the country, with a total of 83 branches between them as of end-October 2011. Both foreign and local banks are subject to a 20% tax in the emirates of Abu Dhabi, Dubai and Sharjah. According to central bank regulations, the tax is restricted to the taxable income earned in that particular emirate.

The top five foreign banks represented 14.5% of banking assets at end-2010 (latest available data). These were the British banks Hongkong Shanghai Banking Corp (HSBC, 6.0%) and Standard Chartered (4.8%), along with US-based Citibank (1.3%), Bank Saderat Iran (1.3%) and India-based Bank of Baroda (1.1%). HSBC offers retail banking, as well as long-term lending, insurance and investment-management services. Standard Chartered offers various lines of banking services, including Islamic finance, wholesale banking and specialised services for small and medium-sized enterprises.

In January 2010 Barclays (UK) won the UAE�s first foreclosure case in court, paving the way for lenders to take more aggressive action when borrowers cannot make their payments. Barclays also became the first lender to sell a repossessed property at an auction held by the Dubai Land Department in May 2011; according to media reports in April that year, around 200 foreclosure cases were being processed by Dubai Courts. Banks in the UAE typically restructure mortgages for defaulting homeowners rather than repossess properties, opting to offer payment breaks or reductions to monthly instalments of home loans, in a bid to cut their losses on bad property assets.

The central bank has been adamant about enforcing UN sanctions against Iran, which were passed in June 2010. The authority has curtailed the financial activities of Iranian banks that have been blacklisted by the US government, including those of Bank Saderat Iran and Bank Melli�the fourth and seventh largest foreign banks (by assets) in the UAE at end-2010. Relations with 17 Iranian banks operating in the UAE were severed by the end of that year, and banks since have been required to submit monthly notices on remittances to Iran. The Dubai Financial Services Authority (DFSA, the bank regulator for the DIFC) has also increased scrutiny over dealings with Iran. In August 2010 it froze the assets of Persia International Bank, a trade financing bank. Though the institution was considered only a minor player in the UAE market, it was 60% owned by Bank Mellat, an Iranian state-owned bank that appeared on the US blacklist, along with Bank Melli and Bank Saderat Iran.

The Middle East arms of global players HSBC and Citibank returned to profit in 2010, on the back of increased stability in the regional economy and an improvement in the regional credit environment. In addition, a reduction in unsecured lending, which led to significantly lower impairment provisions in



the UAE, was credited for the turnaround. By the end of the year, HSBC and Citibank recorded Dh1,125m and Dh489m in pre-tax profits, respectively.

Top ten brokerage firms Ranked by value of trades in December 2011�Dh m

Firm Trade volume (units m) Trade value * Market share (%)EFG-Hermes Brokerage (Egypt) 182 272 7.3ADIF 171 226 6.1

Emirates NBD Securities 157 206 5.5Direct Broker for Financial

Services 155 204 5.5

Arqaam Securities 118 184 4.9

Al Ramz Securities 135 164 4.4Dubai Islamic Financial Services 122 164 4.4

Mashreq Securities 129 160 4.3Shuaa Securities 115 157 4.2

Al Dar Shares & Bonds 98 156 4.2Total market 2,830 3,736 100.0

* Figures represent the gross value of trades bought and sold in December 2011.

Source: Dubai Financial Market.

Various banks offer brokerage services, including the largest (by assets), Bank Emirates NBD, which offers both brokerage and underwriting services. Brokerage and investment banking activities also take place in the Dubai International Finance Centre (DIFC, a free zone focusing on financial services). In the DIFC, foreign banks face no limitations on ownership (in contrast to the 49% limit they face elsewhere in the UAE), although services from banks within the zone cannot extend beyond it.

In December 2011 the top five brokerage firms on the Dubai Financial Market (DFM) represented 29.2% of monthly trading value. The leading brokerage firm by share of trade value was EFG-Hermes Brokerage (7.3%), which is a branch of the Egyptian investment bank. Other top brokerages included ADIF (6.1%), Emirates NBD Securities (5.5%), Direct Broker for Financial Services (5.5%) and Arqaam Securities (4.9%). In 2010 the much-anticipated acquisition took place of Nasdaq Dubai (the primary market, located in the DIFC) by the Dubai Financial Market (the country�s secondary market).

Al Futtaim HC Securities, which had ranked in 14th position based on share of trade value in December 2011, closed its UAE operations early in January 2012. The company blamed the closing on a slump in stock trading and volumes on the DFM. The number of �active and functioning� brokerages in the country dropped by 42% to 57 brokerages during the three years to end-2011, according to the Securities & Commodities Authority. In October 2011 HSBC Holdings announced it would stop offering brokerage services to retail investors in the UAE and would focus on institutional clients.

SHUAA Capital, one of the Arab world�s largest investment banks and ranked ninth in the UAE, based on trade value, in December 2011, was also hit hard by the 2008�09 global financial crisis, as impairments related to troubled assets erased profits. In 2008 SHUAA posted a net loss of US$258m. In the following year it delisted from the Kuwait Stock Exchange and lost its long-time CEO, Iyad

Investment banks and brokerages



Duwaji, but it survived a meeting in which shareholders were offered the opportunity to dissolve the company. In early 2011 the bank unveiled a host of cost-savings initiatives, including significant job cuts; however, in November 2011, the bank reported a third-quarter loss of US$43m, which it blamed on asset revaluations and a slump in core business volumes.

For medium- or long-term industrial finance, local companies (which generally may have no more than 49% foreign participation) can approach the Emirates Industrial Bank (EIB), a specialised institution established by the UAE government in 1982. The EIB provides credit for industrial projects, with the aim of minimising the economy�s reliance on oil exports. In 2010 it approved Dh65.8m worth of loans for 12 projects (out of 24 studied). However, overall lending has contracted considerably in the wake of the 2009 Dubai debt crisis, with loan disbursements totalling Dh201.4m in 2010, down from Dh331m in 2009 and Dh447.8m in 2008. Of the Dh4.9bn worth of loans approved in the period 1983�09, according to the latest available breakdown, 23% of funds were committed to projects dealing with non-metallic mineral products, followed by basic metals (16%), plastic and rubber (15%), and food and beverages (13.4%). About 16% was approved for miscellaneous projects falling outside those categories.

In October 2011 the UAE Ministry of Finance announced the establishment of a development bank to promote economic growth in the country and to finance housing and infrastructure projects. Emirates Development Bank (EDB), which is scheduled to launch with Dh10bn in capital, will assist citizens who wish to build property, establish a business, or engage in agricultural or craft-related projects. The new entity will also provide financial services for small and medium-sized businesses and will offer financial and economic consultation and feasibility studies as well. The EDB was proposed initially in November 2008 when the UAE government announced it would merge Islamic finance houses Tamweel and Amlak, with the intention of folding them into the Real Estate Bank, a minor state-owned entity, in order to create the country�s largest real-estate finance institution. In turn, this was to be combined with the Emirates Industrial Bank to form the EDB. Ultimately, UAE lenders were impacted severely by the 2008�09 global financial crisis and the collapse of Dubai�s real-estate sector. Tamweel eventually became majority owned by Dubai Islamic Bank in September 2010. The EDB�s exact launch date remained undetermined at end-2011.

Sovereign wealth funds (SWFs) traditionally have been another source of development funding. However, since the onset of the 2008�09 global financial crisis and Dubai�s much-publicised debt troubles, the majority of investment in domestic projects arrives through the Abu Dhabi Investment Council (ADIC) and the Mubadala Development Company�the second of these two entities is an arm of the Abu Dhabi government that targets development financing.

According to the Sovereign Wealth Fund Institute (a US-based organisation), ADIC is said to receive around 30% of any budget surplus in the emirate and has taken substantial stakes in local banks, including National Bank of Abu

Development and postal banks



Dhabi, Union National Bank, Abu Dhabi National Insurance Company and Abu Dhabi Aviation Company.

Mubadala�s most high-profile unit in the UAE is Masdar, which is focused on renewable energy solutions and clean technologies. The unit is building the world�s first entirely carbon-neutral city, Masdar City, which will be constructed on 6 sq km near Abu Dhabi International Airport. It was launched in April 2006 with an initial budget of more than US$20bn, most of which was provided by the SWF. The project has since hit difficulties in the wake of the recent global financial downturn, and in early 2011 officials slashed the project�s budget by almost 15% while pushing back its scheduled completion date to 2025�30. At its launch, officials originally had set this for 2015.

Through subsidiaries and joint ventures, Mubadala has also partnered with a host of international firms to form strategic alliances across the energy, manufacturing, healthcare, aerospace and technology sectors, among others. High-profile partnerships include those with General Electric and EADS, parent company of Airbus.

Emirates Post (EmPost) is the national courier company, which began delivering and collecting mail from private homes for the first time in January 2012. Customers living in villas in Dubai or Abu Dhabi can have a personal box fitted to their compound wall, where mail will be delivered and collected as often as six times a week. Customers living in apartment blocks, meanwhile, can have mail delivered to a personal PO Box in the lobby or basement of their block. EmPost also offers other services, including bill payment, and allows customers to buy National Bonds through the postal network, thanks to a March 2010 partnership with the National Bonds Scheme, a sharia-compliant retail savings programme. In addition, EmPost had processed passport and visa services for Indian immigrants as part of an agreement with the Indian Embassy; however, this agreement ended in December 2010. Although EmPost expressed an interest in renewing the contract, the Indian Embassy confirmed in April 2011 that it had hired a private company, BLS International Services, to process passports and visas in the UAE.

In the UAE there are no taxes levied on capital gains, investment income, interest income, or inheritance. For this reason, the country itself is used as an �offshore� banking safe-haven by international financial institutions, such as UK-based banks Hongkong Shanghai Banking Corp (HSBC) and Barclays. There are also no exchange controls, allowing clients to freely access savings and investment services from around the world.

The country has a strong regulatory regime that protects the confidentiality of investors. For example, there are no public records of directors and shareholders, and no tax information is held on exchange agreements with other countries. UAE residents (locals and foreigners) can access the major offshore centres in Jersey, Hong Kong and Singapore through local and international institutions, such as Emirates NBD and HSBC.

The Dubai International Financial Centre (DIFC, a free zone specialised in finance) operates as an off-shore centre. Established in 2004, it is not regulated

Offshore banks



by the Central Bank of the UAE, but by the Dubai Financial Services Authority (DFSA), an independent supervisory body. The DSFA was set up to attract foreign banks and support regional capital markets. Banks licensed in the DIFC are not permitted to compete with the UAE retail banking sector and can only operate within the free zone. Since the DIFC is designed principally as a hub for high-net-worth clients, banks licensed in the zone only open accounts with a minimum deposit of US$1m.

Top ten insurance companies (life and non-life) Ranked by gross premiums as of end-2010�US$ th

Insurer Pre-tax profits Gross premiumsMarket share

(%)SALAMA Islamic Arab Insurance 22,422 541,719 9.2Abu Dhabi National Insurance

Company 38,775

482,014 8.2Arab Orient Insurance Company 52,203 307,193 5.2International General Insurance

Company Holdings 17,196

179,333 3.0Al Buhaira National Insurance

Company 11,867

177,151 3.0Emirates Insurance Company 29,426 171,491 2.9Dubai Islamic Insurance &

Reinsurance Company 5,767

166,402 2.8Al Ain Ahlia Insurance Company 16,810 161,663 2.7Al Sagr National Insurance

Company 8,183

121,459 2.1Al Dhafra Insurance Company 14,559 76,991 1.3Total market n/a 5,900,000 100

Sources: Datamoniter, Isis.

Low premium levels in the UAE�s insurance industry are a result of a lack of compulsory requirements and of consumer awareness. Moreover, the provision of pension and healthcare services by the government to UAE nationals (particularly via the availability of universal healthcare) has curtailed demand for private coverage. Expatriates, who comprise the majority of the country�s population, are a more attractive target for international insurers with regard to health insurance and annuity services. While there are a small number of public hospitals that will offer emergency treatment to foreign patients, expatriates are expected to arrange their own private medical insurance.

According to the most recent figures from Datamonitor, a business information and market research resource, total gross premiums in the UAE�s insurance industry amounted to US$5.9bn at end-2010. Non-life insurers accounted for the greatest share of this market, representing 84.1% of total gross premiums, while life insurers accounted for the remaining 15.9%. The top five insurers based on gross premiums at end-2010 were SALAMA Islamic Arab Insurance, with a 9.2% market share; Abu Dhabi National Insurance Company, 8.2%; Arab Orient Insurance Company, 5.2%; International General Insurance Company Holdings, 3.0%; and Al Buhaira National Insurance Company, 3.0%. All are non-life insurers.

Insurance companies



The Insurance Authority (IA) was founded only recently in 2007. Prior to its establishment, regulatory oversight of the insurance industry was fragmented across various bodies. These included local ministries, intermediaries licensed by the Central Bank of the UAE, and the Dubai Financial Services Authority (DFSA, the regulatory body of the Dubai International Financial Centre�DIFC�the country�s financial-services free zone).

In 2010 it was reported that the IA intended to consolidate insurance supervision on a federal level, and in early 2011 it announced that it had signed a deal with the DFSA to formalise information-sharing arrangements between the two bodies. The IA also said in April 2011 that all branches of foreign insurance companies operating in the UAE must publish the details of their final accounts in local newspapers. The reports must include the company�s financial position, income statement, independent auditor�s report, and clarifications on the financial statement. However, subsequent media reports have suggested that the IA is to be dissolved, and that its tasks and responsibilities will be handed over to the central bank. As of end-2011 the IA had not been disbanded, and there was no sign of the new regulations that initially were anticipated by the end of the year.

A moratorium on the granting of new insurance licences in the UAE has been in place since December 2008, and forthcoming regulatory reforms are expected to include directives on the accounting policies of insurance companies, regulations concerning insurance agents, reinsurance standards instructions, and new laws on solvency margins. In 2009 the UAE cabinet issued a resolution that set minimum subscribed or paid-up capital requirements of US$27m to establish an insurance firm and US$68m to establish a re-insurance firm. The resolution also required that at least 75% of a company�s capital be owned by a national from the UAE or Gulf Co-operation Council (a regional bloc including Bahrain, Kuwait, Oman, Saudi Arabia, and the UAE). The resolution applies to all national and foreign insurance companies licensed to operate in the UAE, except for those located in free zones.

In November 2009 the IA announced that insurance companies and brokers must enforce anti-money-laundering regulations and hire an Emirati compliance officer. This came following a 2009 crackdown on the insurance brokerage industry, which saw 74 firms close for failing to comply with a 2006 rule that mandated a capital requirement of Dh1m, along with a bank guarantee of Dh1m, for the broker�s main office, and Dh500,000 for each branch.

In Abu Dhabi medical insurance coverage is mandatory for all residents, and Dubai had been expected to offer similar services. In January 2009 the emirate�s government said it would introduce universal health coverage, requiring every employer to pay a set fee to the government for each employee. However, implementation was delayed because of the effect of the 2008�09 economic downturn on companies� finances. In October 2011 the Dubai Health Authority (DHA) announced that it officially had postponed the implementation of compulsory health insurance requirements for local employers for two more years, on account of the economic challenges facing the local labour market.



Most independent insurers in the UAE are small operations, by the standards of markets outside the Middle East, and are often listed affiliates of local industrial conglomerates. Meanwhile, units of both local and international banks offer comprehensive insurance services, including savings, investment, life, motor, travel and sharia-compliant policies.

Sharia-compliant insurance, or takaful, is a vehicle that allows members to contribute money into a pooling system in order to guarantee each other against loss, damage or destruction. It differs from conventional insurance in that it avoids interest-taking. Takaful shows particular promise in the UAE, as was reflected in 2010 when the IA for the first time launched regulations for Islamic insurers distinct from the laws governing conventional insurers. The laws are wide-reaching and provide guidance on the day-to-day operations of takaful operators and on the structure of takaful policies. They also prohibit conventional insurers from offering takaful products. Strict corporate governance requirements ensure sharia compliance among takaful operators.

The Abu Dhabi Retirement Pensions and Benefits Fund was founded by the Abu Dhabi government in 2000 to manage contributions, pensions and end-of-service benefits for UAE nationals in the emirate who work in either the public or private sector. Special arrangements are in place for nationals working in the army or the Abu Dhabi Police, including a promotion of one rank at retirement and pensions equivalent to the salary of an officer who had been at that rank for two years.

For other emirates, retired nationals who worked in public and private sectors receive benefits from the General Pensions and Social Security Authority (GPSSA). In 2010 the GPSSA established three business units for investment, risk assessment and internal auditing. The business units are mandated to develop investment plans, execute pension and retirement compensation for UAE nationals, and legislate for the extension of insurance benefits to UAE citizens working in the Gulf Cooperation Council (GCC, a regional economic bloc comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE).

Expatriates face a special predicament, since they are not eligible for public pension benefits in the UAE. In many cases, they also do not qualify for complete benefits from their home country, since public pensions typically measure pay-out based on the number of years working in that country. However, the Dubai Department of Economic Development (DED) confirmed in November 2011 that it is consulting on building a pensions framework catered to expatriates. A pension scheme would replace the current system, under which expatriates in the UAE who have completed one or more years of service are paid a lump-sum gratuity by their employer when they leave the company. Employers may be asked to contribute around 8% of an employee�s basic salary to a pensions system; employees may also be required to pay into the scheme, although no contribution level had yet been set. As of end-2011, no more details were available.

Pension funds



Top ten mutual funds Funds that invest in the UAE, ranked by net asset value (NAV) per unit

Mutual fund NAV (Dh)Daman Second Emirates Funda 109.1Daman Islamic Funda, b 94.8Daman Speculator Funda 79.1

Invest AD-UAE Total Return Fundc 56.2Al Dana Murabaha Fundb, d 10.4

NBAD UAE Trading Funde 10.3Al Dana UAE Fixed Income Opportunity Fundf 10.0NBAD UAE Islamic Fundb, e 6.76

Al Itihad Fundg 5.19Emirates Gateway Fundh 4.8

(a) As of December 31st 2011. (b) Sharia-compliant. (c) As of January 22nd 2012. (d) As of May 12th 2011. (e) As of January 19th 2012. (f) As of February 1st 2009. (g) As of January 12th 2012. (h) As of January 17th 2012.

Source: Zawya.

The supply of asset-management services in the UAE has ballooned over the past decade, as an increase in wealth and a parallel increase in potential demand has prompted existing onshore financial institutions�almost all the major banks, for example�to develop new offerings. New entrants also have come to the market through the creation of onshore asset-management firms and local bases for global players. They additionally have been lured by the operation of the Dubai International Financial Centre (DIFC, the country�s financial services free zone) and its promise of regulations in compliance with international standards by the Dubai Financial Services Authority (DFSA).

Some of the leading global asset-management firms that have been licensed by the DFSA are Barclays Global Investors (UK), Deutsche Bank (Germany), JPMorgan (US), Merrill Lynch (US) and UBS (Switzerland). The latest addition came in March 2011 when US-based I2BF, an asset-management group specialising in environmentally sustainable technology, announced it had been granted a licence to begin operating from the DIFC. Several local banks also have chosen to establish stand-alone asset-management ventures within the DIFC. As an example, EIS Asset Management, a subsidiary of the UAE�s biggest bank by assets at end-2010 (Emirates NBD), has held operations in the zone since August 2006. The DIFC professes a goal of hosting the widest possible range of collective investment schemes�listing among these mutual funds, exchange-traded funds and sharia-compliant funds�thus eliminating the need for local and regional high-net-worth individuals to venture outside the region for these products.

At end-2011 there were 16 mutual funds listed on the Dubai Financial Market (DFM) and nine on the Abu Dhabi Securities Exchange (ADX), two of the country�s major exchanges. These funds are managed by local players, including National Bank of Abu Dhabi, Al Mal Capital, SHUAA Capital and Mashreqbank, and larger international institutions, such as EFG-Hermes, based in Egypt.

Mutual funds and asset-management firms



Islamic mutual funds are active on both bourses and adhere to sharia restrictions on stock picking. These funds avoid investing in companies that derive revenues primarily from sources forbidden by Islam, such as alcohol or gambling. They also avoid investing in bonds and conventional financial firms (such as banks and insurance companies), owing to Islamic laws against interest-taking.

The establishment of a mutual fund outside the DIFC must be approved by the Central Bank of the UAE through a bank or a financial investment company licensed by the central bank. It also must have a minimum size of Dh10m. A fund prospectus must be published in both Arabic and English.

Close-ended funds require a licence from the Emirates Securities and Commodities Authority (SCA), the governing body for all listed securities and commodities on the exchanges. Once licensed, an application for listing on the DFM or ADX can be submitted. Open-ended funds require only an application directly to the appropriate bourse.

Sovereign wealth funds (SWFs, investment arms of the government) are a major source of private equity (PE) and venture capital (VC) in the UAE. Legal restrictions for SWFs are not apparent; these are opaque organisations that may be tasked with overseas investment as opposed to domestic spending. The opacity of SWF operations and the lack of transparency at many government-linked firms complicate assessment of the extent to which SWFs drive local PE and VC activity.

The Sovereign Wealth Fund Institute (a US-based organisation) ranks the Abu Dhabi Investment Authority (ADIA) as the biggest SWF in the world, with assets estimated at US$627bn at end-2011. Launched in 1976, ADIA is funded mostly through oil revenues. According to its website, the SWF began investing in private equity in 1989. Though ADIA does not disclose its private equity assets, it lists its target asset allocation for private equity as 2�8% of the SWF�s entire portfolio.

Private PE and VC firms also exist, though there is no official ranking available to accurately illustrate the breadth of the industry. Examples of these firms that are active in the UAE market include Al Masah Capital, a PE firm incorporated in the Cayman Islands, and CERT Innovations, a local VC firm. In September 2010 Al Masah Capital was licensed by the Dubai Financial Services Authority to operate in the Dubai International Financial Centre (DIFC, the UAE�s financial free zone). Its fund aims to raise US$500m to invest in the region�s healthcare, education and oil sectors. In early 2011 the company was seeking investors, targeting high-net-worth individuals and SWFs. CERT Innovations was launched in 2006; it focuses on investments in technology, healthcare and education.

A small handful of financial institutions in the UAE offer factoring services aimed at small and medium-sized enterprises undertaking trade finance transactions and trade receivables. These offer domestic factoring with or without recourse, export factoring, import factoring, and collection on services.

Factoring firms

Venture-capital and private-equity firms



There are no distinct regulations for financial leasing in the UAE, and banks and other financial institutions offer facilities either in conventional form or in ijarah, a form of Islamic finance that permits banks to make a profit without earning interest.

Financial leasing is expected to grow as demand for simple and asset-based financial products increases, but the practice presently accounts for only a small element of banks� financing activities. Moreover, the cancellation of real-estate and construction projects in Dubai and Abu Dhabi has continued to dampen demand for lease financing in 2011.

Under ijarah, banks take ownership of the asset in return for a monthly payment that covers the cost of the bank�s capital outlay. The institution allows the customer to use the asset for a set period, at which point the customer owns it outright.

The practice is also offered as an Islamic alternative to a conventional mortgage, whereby the bank buys the house and becomes its legal owner. Over the pre-agreed period, the customer pays a monthly fee, which covers a charge for rent and also a charge that purchases a small stake in the house itself. Once the final payment is made, after 25 years for example, the customer owns the property outright. Leasing firms specialise in aircraft leasing, ship leasing and fleet management.

Other than units of large banks, there are no other significant financial institutions such as finance companies, money-market brokers or savings circles operating in the UAE.

Islamic finance, which requires financial products from mortgages to savings accounts to be structured in compliance with sharia law under the Quran, is quickly gaining currency even among non-Muslims. Dealings in interest, liquor, pork, gambling or pornography are prohibited, and Muslims are required to contribute a percentage of their wealth to economically deprived sections of Muslim society. Popular forms of Islamic finance are present in insurance (takaful), easing (ijarah), and bonds (sukuk). According to latest data available from Ernst & Young, Islamic banking assets in the Middle East and North Africa (MENA) region increased to US$416bn in 2010, representing a five-year annual growth of 20%, compared with a growth rate of conventional banking assets of less than 9% for the same period. Moreover, Ernst & Young expects the MENA Islamic banking industry to more than double to US$990bn by 2015, as new geographies open up to Islamic banking.

Still no movement on exchange merger speculation

The 2010 merger of the Dubai Financial Market (DFM) and Nasdaq Dubai (see Securities markets) reignited speculation that further consolidation could include a union of the DFM and the Abu Dhabi Securities Exchange (ADX), in a bid to arrest sliding volumes and shrinking profits. The DFM�s executive chairman, Essa Kazim, has suggested that that such a move would carry the benefits of boosting liquidity and achieving economies of scale. Similarly, the chief executive of Nasdaq Dubai, Abdul Wahed al-Fahim, has offered his support, noting that both bourses could retain their separate identities, while merging back-office operations and allowing investors to trade in a single liquidity pool. In February 2011 the head of the Emirates Securities and Commodities Authority (SCA), the governing body for all the stock exchanges, securities and commodities listed in the UAE that lay beyond the Dubai International Financial Centre (DIFC)

Financial leasing companies

Other institutions



free zone, confirmed that senior figures from both exchanges had conducted discussions over a potential merger. He said that the regulatory body was waiting to hear from both markets as to a possible plan of action and added that the SCA would continue to support both exchanges, regardless of whether they decided to merge. As of end-2011 there was no update on the progress of any merger talks between the DFM and ADX. The completion of the merger remains all but guaranteed, as both bourses suffered from declining turnover and trading value in 2011. The DFM registered a trading value of Dh32.1bn in 2011, down from Dh69.7bn in 2010 and Dh173.5bn in 2009; its trading volume stood at 25.2bn shares, down from 38.4bn in 2010 and 110.7bn in 2009. On the ADX, trading value recorded Dh24.9bn in 2011, down from Dh34.6bn in 2010 and Dh70.2bn in 2009; its trading volume stood at 15.9bn shares, down from 17.6bn in 2010 and 37.6bn in 2009.

Monetary and currency policies/regulations

Following the unification of the seven emirates in 1972, the Central Bank of the UAE�then known as the UAE Currency Board�was established by Union Law No. 2, of 1973. Initially, its chief responsibility was to issue the newly established national currency, the dirham, which was pegged to the US dollar. Under the Union Law No. 10, of 1980, the Currency Board became known as the Central Bank of the UAE and was granted supervisory authority over financial institutions. It also became responsible for maintaining the currency�s stability and offering recommendations to the government on monetary policy. Although the central bank remains the ultimate regulator of banks, investment banks, and finance companies, those institutions located in the Dubai International Financial Centre (a finance-specific free zone) are supervised by the Dubai Financial Services Authority. The central bank operates as an arm of the government and is not an independent institution.

The central bank executes monetary policy under the authority of the federal government. Its approach centres principally on maintaining the dirham�s peg against the US dollar. The weakening of the dollar in 2010 raised questions on the peg�s effectiveness, which prompted the central bank to appoint a panel of international experts to advise its future policymaking.

The UAE initially was expected to join its peers in the Persian Gulf to form a regional currency union, but these plans were scuttled in May 2009 when the UAE withdrew from the initiative. The UAE government gave no reason for its decision, although the news came weeks after Abu Dhabi was overlooked as host city for a new regional central bank in favour of Riyadh, Saudi Arabia.

The Emirates Interbank Offered Rate (EIBOR), the interest rate charged by banks for interbank transactions, is intended to be used as a benchmark for lending rates. A lower EIBOR corresponds to greater liquidity in the banking system. Banks are not required to set their lending rates within a certain spread above the EIBOR, but they have kept borrowing costs high, despite substantial rate decreases in the past five years.

The Central Bank of the UAE publishes the EIBOR every three months. Over the past five years, the three-month, six-month and 12-month EIBORs have fluctuated largely in tandem with one another. The most volatility took place in 2007�08, when the three-month EIBOR fell to 2.13% at end-June 2008, from 5.53% at end-January 2007, then rose again quickly to 4.79% at end-October 2008. Since then, the rate has dropped significantly, hitting 2.14% at end-2010

Overview

Base lending rates



and 1.52% at end-2011. Six- and 12-month EIBOR followed similar movements. The six-month rate dropped to 1.71% at end-2011, compared with a rate of 2.38% at end-2010. Meanwhile, the 12-month rate declined to 1.97% at end-2011, compared with a rate of 2.59% at end-2010.

Base interest rates(Dec 2006 to Dec 2011; %; month-end)

Source: Bloomberg.

0.0

1.0

2.0

3.0

4.0

5.0

6.0EIBOR 12-monthEIBOR 6-monthEIBOR 3-month

DOAJAF11

DOAJAF10

DOAJAF09

DOAJAF08

DOAJAF07

D2006

The Central Bank of the UAE executes monetary policy under the authority of the federal government. Its approach centres principally on maintaining the dirham�s peg against the US dollar. Fluctuations in the dollar have raised questions over the peg�s effectiveness as a stabilising mechanism�a concern that in October 2010 prompted the central bank to appoint a panel of international experts to advise its future policymaking. The Economist Intelligence Unit (EIU) expects the authority to remain committed to the existing system, however, as the peg has enjoyed decades of notable success.

Official estimates from the National Bureau of Statistics indicate that prices rose by 1.05% in the 10 months to end-October 2011. As commodity prices stabilise and infrastructure development is pursued at a slower pace, the EIU expects inflation to have averaged just 1.6% in 2011. In addition, low house prices will keep inflation at a manageable level. The official basket used by the UAE government is representative of prices faced by the local Emirati population�who benefit from extensive subsidies�rather than the expatriate community, who make up almost 90% of the labour force. In March 2011 officials said the basket of goods would be updated to give less weight to property and more value to electronics and other goods, in order to reflect changes in spending patterns and in the overall economy since the onset of the 2008�09 global financial crisis.

The UAE dirham is pegged to the US dollar at Dh3.67:US$1. The country adopted the peg soon after its creation in 1973. Fluctuations in the dollar have raised questions about the peg�s effectiveness, which the Central Bank of the UAE addressed in October 2010 by appointing a panel of international experts to provide recommendations for future monetary policymaking. All the same, the Economist Intelligence Unit expects the central bank to remain committed to the existing system, as the peg has provided stability for decades.

Monetary policy

Currency



In May 2009 the UAE surprised its Gulf peers by announcing its withdrawal from plans to create a regional monetary union. The UAE�along with Bahrain, Kuwait, Oman, Qatar and Saudi Arabia�constitutes the Gulf Co-operation Council (GCC, a regional economic bloc). Since its establishment in 1981, the GCC has made the creation of a monetary union a key objective in its aim for regional economic integration. GCC members made significant progress toward this goal by introducing a Common External Tariff system on imports to the region in 2003 and by forming a Common Market in 2008, which lifted restrictions on investment and labour mobility. All GCC national currencies are pegged to the US dollar, with the exception of the Kuwaiti dinar, which ended its currency peg in 2007. The UAE�s May 2009 withdrawal from the monetary union cast doubt on the project�s ultimate implementation, particularly since it had been postponed twice previously�in 2002 and again in 2005. The UAE government gave no clear reason for its exit, although the news came weeks after Abu Dhabi was overlooked as the host city for a new regional central bank in favour of Riyadh, Saudi Arabia.

Monthly close value of the dirham versus the dollar, euro and pound(Dec 2006 to Dec 2011)

Source: Bloomberg.

3.0

4.0

5.0

6.0

7.0

8.0Dh:£1Dh:€1Dh:US$1

DOAJAF11

DOAJAF10

DOAJAF09

DOAJAF08

DOAJAF07

D2006

There are no restrictions on borrowing from abroad by resident or non-resident companies or individuals, and no restrictions apply to the remittance of foreign loans.

Tax consequences. There are no tax consequences specific to loan inflows and repayment.

There are no restrictions on the repatriation of capital. No restrictions apply on foreign ownership or on the remittance of dividends and profits from within the UAE�s free zones. Outside of the designated free zones, foreign ownership is limited to 49%, requiring a UAE national to hold a majority share. Foreign firms must therefore designate a UAE national as a sponsor or partner in order to conduct business outside of a free zone, and all profits or dividends must be shared with the sponsor. No restrictions apply to the repatriation of royalties and fees.

Tax consequences. There are no taxes applicable to the repatriation and remittance of capital. However, special conditions may apply for joint venture projects established with the government, and in the oil and banking industries.

Loan inflows and repayment

Repatriation and remittance of capital



There are no regulations regarding foreign exchange obtained from exports, and there are no restrictions on import payments. Moreover, no restrictions apply to leading and lagging payments. Because of religious and social custom, the importation of a relatively small number of items is prohibited.

Short-term instruments/regulations

In the wake of the 2009 Dubai debt crisis, the uncertainty surrounding the UAE�s economy has left the country short of confidence. It has curbed the risk appetite of investors, causing their interest to shift towards short-term investments and low-risk assets (such as gold, government bonds and cash). It has also shaken the country�s credit market, as banks tighten lending in an effort to reduce their exposure to bad loans. Most banks have raised margins in an attempt to repair damage from non-performing loan provisions. Although firms and individuals still have access to overdraft and loan facilities, their access remains restricted by costs that are higher than those in most other markets around the world.

As banking and telecommunications technologies have become more developed, the market has matured, and the country�s traditional reliance on cash and cheques has shifted decisively in favour of more sophisticated cash-management tools. Electronic banking services are widely available, allowing customers to complete account enquiries, obtain duplicate statements, transfer funds and issue pay orders, among other services.

Electronic banking-service units�customer-service centres that act as quasi-bank branches�are also available. They offer ATM services and computer kiosks on which customers can perform basic transactions, such as receiving bank statements and depositing cash and cheques. The units also market the bank to potential new clients. However, these units may not open accounts, accept direct deposits, nor may they grant credit facilities or carry out any other banking activities. Banks may employ banking service advisors to work in the units, but staff are forbidden from conducting banking activities that are beyond the remit of the unit. In recent years these electronic banking service units have expanded their presence rapidly in the country, growing in number from 24 at end-2006 to 50 at end-October 2011. ATMs are even more widely available. According to the Central Bank of the UAE, at end-September 2011 (latest data available) there were 4,053 ATMs in the country, up from 3,758 at end-2009.

In their efforts to draw online customers, banks in the UAE offer incentives and an array of electronic services, such as free transfers and outward remittances, short message service (SMS) banking, cheque-book requests and loan instalment deferrals. Some also allow e-customers to make payments on utilities bills and school fees at no extra charge.

Most international and local banks offer debit cards with basic accounts, although some have yet to roll out this facility to all customers. Chip-and-PIN technology (through magnetic stripes on smartcards) is used increasingly to counter identity theft and credit card fraud. In February 2009 the central bank

Restrictions on trade-related payments

Overview

Cash management



issued a statement urging banks to adopt this technology; this issue was spotlighted after a wave of fraudulent use was reported in 2008.

In order to spur lending and reduce the banks� uncertainty over potential bad loans, the emirate and federal governments have introduced legislation requiring that banks increase transparency and the sharing of credit information. In July 2010 the government of Dubai passed a law requiring banks in the emirate to share information with Emcredit, a private credit bureau launched by Dubai�s Department of Economic Development in 2003. In early 2011 a federal law passed requiring banks across the UAE to supply credit information about their customers to a central database that would become a federal credit bureau. The bureau still had not opened at end-2011, although officials announced in September 2011 that its organisational structure had been approved by the Ministry of Finance.

The Central Bank of the UAE owns and operates the country�s main settlement systems, which are supervised by the Payment Systems Oversight Unit (established in April 2009 with the aim of ensuring compliance with the regulations of the Swiss-based Bank for International Settlements). These payment systems include the following:

• UAE Funds Transfer System (UAEFTS). The UAE Central Bank Notice No. 1406/2009 allows for bulk payment to be settled through the UAEFTS, which was launched initially in 2001 and enhanced in March 2009 to handle low-value transactions. According to the central bank, the UAEFTS is the central bank�s real-time gross settlement system and processes up to 8,000 transactions a day at a total value of Dh10bn. Members of the UAEFTS include 53 commercial banks, 21 government ministries, five money exchanges and two non-banking institutions. According to the latest available central bank data, the system processed 1,145,892 transactions in the first eight months of 2011, with a value of Dh5.5trn. Prior to the upgrades made to the system in 2009, settlement was done largely on a manual basis, with cheques delivered to the settlement department via courier service.

• Image Cheque Clearing System (ICCS). The ICCS first was introduced in July 2008 and offers same-day settlement. According to the central bank, ICCS processes 97,000 transactions daily, valued at Dh3.8bn. According to the latest available central bank data, ICCS was presented with 18,874,123 cheques worth Dh769bn in the first eight months of 2011, of which 1,045,993 were returned�a rate of 5.54%.

• UAESwitch. Launched in 1996, this system (the UAE inter-bank switch) allows customers to use ATMs throughout the country. UAESwitch is linked with GCCNET, a system that connects ATM networks throughout the Gulf region and allows for local-currency settlement. According to the central bank, UAESwitch processes more than 1m balance inquiries per month, in addition to 4m cash withdrawals, worth Dh6bn.

• Wages Protection System (WPS). Launched in September 2009, this system ensures the prompt payment of wages by transferring salaries through select financial institutions that are authorised and regulated by the government. The

Payment clearing systems



WPS largely benefits workers whose salaries do not meet the minimum requirements for opening a bank account.

Cross-border payments are becoming increasingly important to UAE firms. This was confirmed by the HSBC International Business Survey, published in June 2010, which found that approximately 90% of companies in the UAE operate internationally, compared with the global average of 76%. In addition, the UAE�s majority expatriate population uses cross-border payments to remit money back to their home countries.

Cross-border payments can be made through a variety of channels, although banks, remittance houses and payment processing companies such as PayPal will charge a transaction fee. A range of banks, as well as money-transfer providers, now offer instant remittance, which credits funds immediately.

The Central Bank of the UAE introduced the International Bank Account Numbers (IBAN) system for all bank customers in the UAE from November 2011. The move is designed to minimise the risk of transaction errors in cross-border transactions, and brings the UAE in line with Gulf neighbours Saudi Arabia and Kuwait, which already use the system. IBAN, which was originally developed by European banks to simplify cross-border transactions, is a standardised numbering system in which all customers are given a specific IBAN code in addition to their bank account number. The central bank announced that after consultation with major banks in the country, it had decided to keep the length of the IBAN at 23 digits; these include a two-letter alphabetic code �AE� for all accounts in the UAE, a two-digit cheque code, a three-digit bank code, and a 16-digit account number.

The rapid growth in banking services in 2005�08 was accompanied by risk-management deficiencies, which have become clearer and more worrying in the wake of the 2009 Dubai debt crisis. As of early 2012, personal lending has moderated, as banks have become increasingly wary of lending and as consumers have grown sceptical of their future earning potential.

Local banks� risk-management and credit-checking procedures are generally underdeveloped for a market of the UAE�s size and regional importance, with a recent reluctance to lend operating as a default position rather than as a discretionary policy. In its latest Article IV consultations, released in March 2011, the IMF warned that the Central Bank of the UAE must continue to monitor bank liquidity and stand ready to relieve potential pressures, as the re-pricing of risk in the region could lead to a sudden reversal of deposit inflows to the banking sector. Dubai banks in particular face pressures from their exposure to government-related entities and real estate in the emirate, as do Islamic financial houses, which typically have a larger exposure to real estate than their conventional peers. Among other recommendations, the IMF suggested that the central bank link its approval of dividend contributions to the results of bank stress tests. This would ensure that banks can handle roll-over risk related to debt restructuring in Dubai in the absence further government support.

Receivables management



In May 2011 the central bank capped personal loans at 20 times a borrower�s salary or monthly income, with a repayment period set at 48 months. It also restricted overall instalments for all loans�including personal, car and housing loans, as well as credit cards�to 50% of a borrower�s gross salary and any regular income, in addition to limiting fees for several consumer banking transactions.

The general approach of banks to both consumer and corporate borrowers experiencing repayment problems has been in the first instance to seek some accommodation rather than resorting immediately to punitive measures, which generally involve incarceration. Debtors can go to jail for relatively small arrears, such as a bounced cheque, and the absence of bankruptcy legislation has resulted in the police effectively acting as debt collectors. In 2009 a trend emerged of expatriates fleeing the country without settling their outstanding debts. As a sign of this phenomenon, various media accounts reported that leased cars were being left abandoned at international airports.

A Datamonitor survey released in July 2010 found that more than one-fifth of UAE expats were unable to meet loan or credit-card payments; the level of defaults for UAE nationals was only slightly lower. As a result, an entire service industry has sprung up to chase major defaulters as well as delinquent account holders. The collapse of the UAE real-estate market in particular has resulted in high levels of debt among both expats and UAE nationals, and developers have filed foreclosure cases against residents who are unable to meet their payments on properties. In January 2010 Barclays of the UK won the country�s first foreclosure case in court, and in May 2011 became the first lender to sell a first repossessed property at an auction held by the Dubai Land Department. According to media reports in April 2011, around 200 foreclosure cases were being processed by Dubai Courts. In Abu Dhabi, meanwhile, one of the emirate�s largest developers, Eshraq Properties, revealed in December 2011 that it is owed almost Dh500m in overdue payments.

A variety of services are available from UAE-based collection agencies, which aim to recover bad debts before they reach the write-off stage. Services include local tracing; so-called soft and hard collection; and personal loan, credit-card and auto-loan collection. The majority of debt collection agencies also have strategic alliances with external channel partners, allowing for greater information-sharing.

In early January 2011 a federal law was passed requiring banks in the UAE to supply credit information about their customers to a central database. It is hoped the new credit bureau, which had yet to open as of end-2011, will spur lending in the country and reduce banks� uncertainty over bad loans (see Cash management).

Despite the introduction of the Image-based Cheque Clearing System (ICCS) in 2008 (see Payment clearing systems), it was not until November 2009 that UAE banks were able to offer same-day clearance. As long as cheques are submitted before a stipulated time of day, they are validated and credited to the customer�s account that same day. This means that banks are now unable to keep the money in float, a common practice under the old system, in which

Payables management



cheques could take up to four days to process. According to the central bank, the new system enables electronic clearing of cheques regardless of where they are presented in the UAE. Cheques submitted on Thursday afternoon, however, are in danger of delayed payment, since Friday is the Islamic holy day.

Zero-balance accounts are permitted in the UAE and are offered by a number of local and international banks as a convenient way to handle disbursement activity. Many banks target non-resident Indians (NRIs), with the promise that no fee will be levied when the balance is zero. The NRI population presents an attractive market for banks owing to their large presence in the country.

Foreign exchange (forex) brokers in the UAE offer a range of online trading platforms in all major currencies, and 24-hour trading. Nevertheless, forex trading on the spot market is not yet a significant component of the UAE�s financial-services sector, despite the country�s convenient location between the major money markets of Asia and the West.

Tax consequences. None.

The Dubai Gold and Commodities Exchange (DGCX) is the UAE�s commodities derivatives market. Regulated by the Emirates Securities and Commodities Authority (SCA), the DGCX guarantees settlement and reduced counterparty risk, and charges a single fee for all participants. All participants also pay the same margin, regardless of whether they are commercial or non-commercial entities. The DGCX offers a range of futures contracts in areas such as Gold, Silver, Light Sweet and Brent Crude, Fuel Oil and Steel Rebar futures. It is also the only exchange in the region to offer currency futures contracts. In June 2010 the Australian dollar, the Canadian dollar and the Swiss franc joined the euro, the British pound, the Indian rupee and the Japanese yen, all paired to the US dollar.

According to the DGCX�s annual statement for 2011, overall trading volumes reached a record high of 4m contracts during the year, up 111% from 2010. Trading value rose to US$185.1bn, up 78% from US$104.2bn in 2010. The volume of currency futures traded on the exchange reached 3.6m contracts, up 177% from 2010. A bulk of the volume, amounting to 3.2m contracts (a rise of 566% from 2010), resulted from trading in Indian rupees.

Tax consequences. There are no tax consequences specific to trading in futures and forward contracts.

The Dubai Gold and Commodities Exchange (DGCX), the UAE�s commodities derivatives market, offers a US-style Gold Options contract, which can be exercised on any business day up to the expiration date. The contract was launched in 2007 and is based on the DGCX Gold Futures contract. The DGCX also launched Indian rupee options for trading in September 2011. The DGCX is the only exchange outside India to offer trading in both futures and options in the Indian rupee.

Currency spot market

Futures and forward contracts

Options



Tax consequences. There are no tax consequences specific to trading in options contracts.

In 2008 the Central Bank of the UAE introduced dirham-US dollar swap facilities to banks. Swaps are available to banks for periods of one week, two months, three months, six months, nine months and 12 months.

Both local and international banks offer interest-rate swaps as part of treasury services, allowing customers to hedge exchange rate and interest rate risk arising because of interest rate fluctuations on loans or deposits.

Tax consequences. There are no tax consequences specific to swap agreements.

Exotics play no role on the regular markets; only plain-vanilla futures contracts are generally available. The Central Bank of the UAE has not published any information on the availability of exotics on an over-the-counter basis.

Tax consequences. There are no tax consequences specific to exotics.

According to the latest available data from the Central Bank of the UAE, outstanding personal loans for consumption purposes dropped by 2.9%, from Dh65.2bn at end-2010 to Dh64.4bn at end-June 2011. However, outstanding loans to residents for business purposes (as defined by the central bank), grew by 0.9%, to Dh183.6bn, during the period. Overall lending to the private sector dropped by 0.14%, to Dh580.4bn, in the first six months of 2011.

Tax consequences. There are no tax consequences specific to short-term bank loans.

The rates banks pay on time deposits are set at a spread below the Emirates Interbank Offered Rate (EIBOR). Time deposits can range from one week to 60 months, and are regulated by the Central Bank of the UAE, or the Duba Financial Services Authority (DFSA) in the case of institutions based in the Dubai International Financial Centre (DIFC, a free zone dedicated to financial services).

According to the latest available data from the central bank, at end-June 2011 UAE banks held Dh539bn in time deposits, up from Dh534.7bn at end-2010. Overall, time deposits are the most commonly used form of saving, accounting for 59.5% of total deposits at end-June 2011. Time deposits in foreign currency make up a sizeable share of the market, at 21.8% at end-June 2011, down from 23.7% at end-2010 and 24.7% at end-2009.

At end-2011 three-month bank deposits yields stood at 0.48%, well below the three-month EIBOR of 1.52% at the same period. Similarly, yields on one-year deposits were 1.00%, compared with the one-year EIBOR, which was 1.97%.

Tax consequences. There are no tax consequences specific to time deposits.

Certificates of deposit (CDs) are regulated by the Central Bank of the UAE, and are issued for the following maturities: one week, one month, two months, three months, six months, nine months, 12 months, two years, three years, four

Swaps

Exotics

Bank loans

Time deposits

Certificates of deposit



years and five years. CDs are available in dirhams, US dollars, and euros. The central bank acts as the custodian for all CDs issued, and at end-October 2011 it reported that banks held Dh80bn in CDs, down slightly from Dh81bn at end-October 2010.

On CDs with maturities between one week and 12 months, interest is paid at maturity and calculated based on the actual accrual days of a standard calendar year. On CDs with maturities between two and five years, interest is calculated based on 30-day months and paid semi-annually.

In October 2010 the central bank approved sharia-compliant CDs. Similar to other Islamic banking instruments, these CDs avoid interest accrual. Instead, the CDs come in the form of commodity murabaha, a type of sale where banks purchase commodities on the spot market and resell them to the central bank with deferred payment; the central bank then resells the commodities on the spot market. The CDs first were auctioned on November 10th 2010 and are available only through Islamic banks. The central bank eventually plans to roll out these CDs to the Islamic banking units of conventional banks, but it still had not specified a timeframe for doing this at end-2011. According to the central bank, there is no repo facility available for these CDs; no trading in the secondary market is permitted at non-par value.

In June 2011 the central bank announced that it would begin offering that month a collateralised murabaha facility to banks in the UAE. The facility, denominated in dirhams, accepts the central bank�s Islamic CDs as collateral and has been introduced to provide a source of liquidity to banks. Any bank wishing to use the facility is required to sign a Collateralised Murabaha Facility Agreement with the central bank.

Tax consequences. Interest gained from CDs is included in the calculation of taxable income.

Indicative investment yields–Bank deposits(Dec 2006 to Dec 2011; %; month-end)

Source: Bloomberg.

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1.0

2.0

3.0

4.0

5.0

6.0

1-year3-months1-month1-week

DOAJAF11

DOAJAF10

DOAJAF09

DOAJAF08

DOAJAF07

D2006

In December 2010 the UAE�s Federal National Council passed a public debt law that provided a legal framework for creating a government bond market at the national (rather than emirate) level. Shortly after the law�s passage, the minister of state for financial affairs, H. E. Obaid Humaid al-Tayer, indicated that debt issues may take place in late 2011 or early 2012, and in May 2011 he confirmed

Treasury bills



the establishment of a public debt-management office for developing debt-management strategies. The new legislation will limit government debt to 25% of the country�s gross domestic product, or US$200bn; however, as of end-2011 there had been no sign of issues.

The anticipated programme has had a mixed reception. On the one hand, bankers argue that it is long overdue and that it will create a platform and a benchmark against which domestic bond issuers can mark up their issues. Bankers also note that an active government debt market could function as a hedge for investors against the entry and exit of foreign institutional investors�that is, against their so-called �hot money� movements, which have led to volatility on local stockmarkets in the past. On the other hand, some analysts warn that the programme�s implementation will face significant difficulties, particularly because of the UAE�s federal structure, and that it likely will have a limited regulatory effect on investor behaviour. They observe that the seven emirates have varying debt profiles, which complicates the identification of a single benchmark for the country as a whole.

In June 2011 the Dubai government issued a 10-year Treasury bond worth US$500m. The bond, which was three times oversubscribed, includes a put option after five years and will yield 5.59%. It followed a US$1.25bn bond in September 2010, which was the first since Dubai�s debt woes effectively shuttered regional markets in 2009.

Abu Dhabi�s last bond issue was in 2009. Its first in nearly two years, the issue was oversubscribed more than two times and raised US$3bn in total. The issue was split in two, with one five-year tranche and one ten-year tranche, each worth US$1.5bn.

A form of government savings is available through National Bonds, a company partially owned by the parastatal Investment Corporation of Dubai. National Bonds manages bond certificates through the Mudaraba Fund, a sharia-compliant fund that invests in state-led initiatives and private projects. As an incentive to promote savings, it offers prize drawings on a weekly and monthly basis. According to the company, around 8.5% of UAE residents participate in the scheme, and hundreds of thousands of bondholders have received prizes worth more than US$250m since its launch in 2006.

Tax consequences. Gains from either the emirate bond issues or National Bonds Scheme are not taxed in the UAE, although buyers should be mindful of tax consequences arising in jurisdictions in which they are resident or domiciled for tax purposes.

Since 2007 banks have been permitted to enter into repurchase agreements (repos) with the Central Bank of the UAE to boost short-term liquidity. Repos are available for conventional certificates of deposit (CDs) for up to three months.

Tax consequences. There are no withholding taxes on interest.

The Commercial Transactions Law of 1993 governs the use of commercial paper. In September 2008 the Central Bank of the UAE issued Notice 4312/2008,

Repurchase agreements

Commercial paper



introducing a Dh50bn Liquidity Support Facility (LSF) to help spur lending in light of the global financial crisis that began late that year. Banks have been able to access the LSF by submitting promissory notes on the basis of their debt security holdings; an interest rate of 300 basis points above the central bank repo rate applies. Additional liquidity facilities for local banks were introduced in November 2009, days after state-owned conglomerate Dubai World announced that it would seek to restructure billions of US dollars worth of debt.

Tax consequences. There are no tax consequences specific to commercial paper.

The Central Bank of the UAE provides banks with loans and advances for up to seven days without collateral, and for up to six months against collateral. It also provides an overdraft facility to commercial banks that allows them to utilise their required reserves for up to seven days at no charge.

Local and international banks increasingly have offered overdraft facilities to individual customers and companies. Overdrafts offer customers a degree of protection against bouncing a cheque, which is considered a crime that can lead to imprisonment in the UAE. The conditions for using these facilities must be determined in advance with the bank.

Foreign firms often are asked to supply a letter of guarantee from their parent company. Overdraft facilities are renewable on an annual basis, and they can be made available in a range of currencies, depending on requirements. Rates are spread above the Emirate Interbank Offered Rate (EIBOR).

Tax consequences. There are no tax consequences specific to the use of overdraft facilities.

Banker�s acceptances are not commonly used in the UAE.

Tax consequences. There are no tax consequences specific to the use of banker�s acceptances.

Supplier credit had been commonly used in the construction and real-estate sectors until the Dubai debt crisis of 2009. This was done partly on the expectation that the government would cover any outstanding obligations of government-linked companies. Owing to the tightened credit environment that followed, the use of supplier credit has become rare, as banks chase after defaulted companies for payments on services rendered.

The most common terms of payment for supplier credit are 30 days, with a discount for cash payments.

Tax consequences. There are no tax consequences specific to supplier credit.

Intercompany borrowing is commonplace between affiliates and subsidiaries of family-owned conglomerates, as well as between government agencies. Affiliates and subsidiaries also borrow from their parent companies. Because of the opaque nature of the private and public sectors, however, it is difficult to accurately assess the extent of this practice in the UAE. All the same, a number

Overdrafts

Banker�s acceptances

Supplier Credit

Intercompany borrowing



of publicly listed firms, such as property giant Emaar, have made provisions in their financial statements for potential losses arising under inter-company loans.

Tax consequences. There are no tax consequences specific to intercompany borrowing.

As the share of non-oil economic activity increases, institutions such as Citibank (US) and HSBC (UK) are offering cheque or bill discounting to small and medium-sized enterprises in the UAE.

Tax consequences. There are no tax consequences specific to discounted trade bills.

Medium- and long-term instruments/regulations

In 2011 it was expected that the Ministry of Economy would unveil a wide range of new regulations in an effort to improve the UAE�s investment environment. However, none of these laws materialised, and their details remained sketchy at year-end. Many speculate that the new regulations will include revisions to several industry and company laws, including those governing competition, foreign investment, and arbitration. The authorities are expected to develop local debt markets, including one to help finance development projects and upgrade payment, securities clearance, and settlement systems.

The most dramatic development would be the possible merger of the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). According to media reports, leading figures of both bourses have indicated that a merger could help arrest sliding volumes and shrinking profits, and the executive chairman of the DFM confirmed that both bourses held discussions over a merger in February 2011. However, as of the end of that year, there were no further updates on a potential merger (see Corporate case study).

In the meantime, the UAE�s economic recovery continues to struggle amid a dearth of financing opportunities. Future growth will depend on access to long-term financing for infrastructure and mega-projects, such as those that thrust the debt (and its subsequent restructuring) of Dubai�s giant state-linked company, Dubai World, into the international spotlight. Long-term financing is also needed for infrastructure projects that are transforming the capital, Abu Dhabi. However, many of these projects were scaled back in 2011. The emirates� Tourism Development & Investment Company (TDIC) announced in July 2011 that its annual budget had been cut by Dh5.2bn (that is, by 28%) as part of a strategy to prolong its project delivery schedule amid a market downturn that has put heavy strain on developers and contractors across the UAE. The company�whose vast portfolio of projects includes hotels, golf courses, marina developments, cultural developments and hundreds of villas�completed roadshows for a potential bond issue in 2011; however, it ultimately delayed the sale, owing to adverse market conditions.

Discounting of trade bills

Overview



The UAE�s debt troubles have been exacerbated further by the flight of foreign investment from the country. This has especially been the case amid uncertainty over the future of government-linked firms following the debt restructuring of Dubai World.

As a consequence of these factors, it remains very difficult in early 2012 to assess trends in the UAE�s medium- and long-term financing market. Although quasi-governmental organisations are inching back into the bond and placement markets, private companies are still finding it difficult to raise funds for international expansion and for the consolidation of their balance sheets at home. Ultimately, it is unlikely that much will change until the highly anticipated legislative reforms are laid out in public.

The UAE has three stock exchanges: the Dubai Financial Market (DFM), the Abu Dhabi Securities Exchange (ADX), and Nasdaq Dubai (formerly Dubai International Financial Exchange). The DFM and ADX were established in 2000 and are licensed and regulated by the Emirates Securities and Commodities Authority (SCA); this is the governing body for all the stock exchanges, securities and commodities listed in the UAE that are not in the Dubai International Financial Centre (DIFC) free zone. In addition to SCA law, companies are beholden to the Commercial Companies Law of 1984, the Listing Resolution of 2000, the Disclosure Resolution of 2000, the Central Bank Resolution of 1994 (for banks and financial services firms) and the ADX Rules of 2006. There are no distinct listing requirements at the DFM, other than those outlined in the Listing Resolution.

Bourses plunged in 2011 under the weight of poorly performing real-estate and construction sectors, uncertainty in the banking sector, regional unrest, and the ongoing euro-zone debt crisis. Slumping trading value and volume on both bourses in 2011 have reinforced suspicions of a possible consolidation in the industry, although this had yet to materialise by year-end (see Corporate case study). According to Bloomberg, the DFM registered a market capitalisation of Dh105.7bn in 2011, down from Dh120.8bn in 2010 and Dh134.8bn in 2009; trading volume stood at 21.4bn shares, down from 36.0bn in 2010 and 106.3bn in 2009. On the ADX, total market capitalisation reached Dh260.9bn in 2011, down from Dh293.4bn in 2010 and Dh291.5bn in 2009; trading volume stood at 15.8bn shares, down from 17.5bn in 2010 and 37.3bn in 2009.

Month-end closings of the DFM and ADX have declined significantly over the past five years. Both exchanges reached recent end-month highs within the first six months of 2008�the DFM hit 5,960.16 at end-February, and the ADX topped at 5,037.85 at end-May. Following the onset of the global financial crisis later that year, both exchanges suffered immensely. At end-2008, the DFM closed at 1,636.29, down 72.4% from the same period in the previous year, and the ADX closed at 2,390.01, down 47.5% from the previous year. In the subsequent three years to end-2011, neither exchange fully recovered, and both continued to perform weakly despite modest gains in late 2009. At end-2011, the DFM closed at 1,353.39, down from 1,630.52 at end-2010. Meanwhile, the ADX closed at 2,402.28 at end-2011, down from 2,719.87 at end-2010.

Securities markets



The UAE�s international financial exchange, Nasdaq Dubai, is based in the DIFC and consequently is regulated by the Dubai Financial Services Authority (DFSA), an independent autonomous body. Nasdaq Dubai allows regional and DIFC-based companies to list on the exchange, and international issuers to apply for a secondary listing. All the same, it struggled to attract sustained foreign investor interest after its launch in September 2005, and these failures have persisted following the onset of financial crises within the UAE and global economies.

After years of sluggish trading volumes, Nasdaq Dubai was acquired by the DFM in July 2010. All clearing, settlement and custody functions for Nasdaq Dubai equities have migrated to the DFM�s systems. At the time of the move, DP World (a local port operator) was the only actively traded stock on Nasdaq Dubai. According to Bloomberg, the volume of equities traded on the Nasdaq Dubai exchange fell to 28.5bn at end-2011, from 46.0bn a year earlier and 78.5bn at end-2009.

According to Nasdaq Dubai, there are 18 regionally based brokers licensed in the UAE to trade on the market. This supplements another 12 brokers that have their headquarters outside the region, bringing the total to 30. Prominent international brokers include Citigroup (US), Deutsche Bank (Germany), JP Morgan Securities (US), and Merrill Lynch International (US). Unlike the DFM and ADX, Nasdaq Dubai lists derivatives as well as stocks, bonds, and sukuk (Islamic bonds).

Monthly close of the Dubai Financial Market and Abu Dhabi Exhange(Dec 2006 to Dec 2011)

Source: Bloomberg.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000Abu Dhabi Securities ExchangeDubai Financial Market

DOAJAF11

DOAJAF10

DOAJAF09

DOAJAF08

DOAJAF07

D2006

Foreign investors are permitted to participate in local capital markets through the Dubai Financial Market (DFM) and Abu Dhabi Exchange (ADX), although all transactions must be carried out by brokers with licences from the Central Bank of the UAE. Only accredited brokers are authorised to buy or sell shares on behalf of investors, and brokers must be either UAE citizens or part of a company registered in the UAE with at least 51% of its ownership held by a UAE national. There are no restrictions on brokers that are members of Nasdaq Dubai, which operates under the auspices of the Dubai Financial Services Authority.

At the DFM and ADX, foreigners are allowed to own up to 49% of publicly listed UAE companies; however, individual companies can specify a limit on

Portfolio investment



foreign ownership below 49%. They also may limit ownership to the nationals of other countries in the Gulf Cooperation Council (GCC, a regional economic bloc comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE). There are no restrictions on foreign ownership of shares on Nasdaq Dubai.

At end-2011 the UAE remained under �frontier market� status, according to US-based index provider MSCI. This classification generally applies to any country that does not qualify for �emerging market� or �developed market� status, but that remains ostensibly open and accessible to foreign investors and free of extreme economic and/or political instability. In its most recent appraisal, published in December 2011, MSCI announced that the UAE would remain under evaluation for potential reclassification and upgrade to �emerging market� status, as part of the 2012 Annual Market Classification Review. MSCI highlighted the success of the new delivery-versus-payment (DVP) system, whereby delivery and payment on securities occur simultaneously. However, significant concerns remain over the effectiveness of this new framework as a mechanism to fully safeguard investors� assets, particularly in the case of failed trades. As in earlier reviews, MSCI also questioned the common use of dual account structures; these have forced institutional investors to establish separate accounts for trading and holding shares in order to mitigate risk from local borrowers who have unlimited access to trading accounts. MSCI added that the introduction of regulations that allow securities borrowing and lending agreements, as well as security short selling, could be a way to enable investors to address these concerns.

Tax consequences. There is no taxation on portfolio-investment profits and capital gains in the UAE, although investors and issuers may be subject to tax implications in their home jurisdictions.

All trading of listed equities in the UAE takes place on computerised trading platforms. The Dubai Financial Market and Nasdaq Dubai trade on the former�s X-Stream trading platform; the Abu Dhabi Exchange runs on its Horizon system. Trading hours on all three bourses are from 10 am to 2 pm; these hours are effective Sundays to Thursdays, except on UAE public holidays.

Settlement time is T+2 at the DFM and Nasdaq Dubai; it is T+3 at the ADX.

Tax consequences. There is no taxation on portfolio-investment profits and capital gains in the UAE, although investors and issuers may be subject to tax implications in their home jurisdictions.

Corporate governance

The 2008�09 global financial crisis and Dubai�s subsequent debt troubles have exposed a number of gaping holes in the UAE�s regulatory framework. Although the government has been vocal in its support of strong corporate governance, a string of high-profile scandals has rocked investor confidence in the country�s ability to enforce international standards of best practice. Investor scepticism has been increased further by an absence of new regulation in 2011�surprisingly, the country�s regulatory environment has changed very little since the onset of the recent economic downturn. In May 2007 the Emirates Securities and Commodities Authority (SCA) introduced much-heralded corporate governance regulations and gave all joint stock companies until the end of April 2010 to fall in line with the new rules. The regulations are based largely on international standards and apply to companies and company directors listed on the Dubai Financial Market (DFM) and Abu Dhabi Exchange (ADX). Key requirements included that at least a third of the board of directors

Trading, clearing and settlement



must be independent, that the majority of directors must be non-executive, that board meetings must be held at least every two months, and that the board must form audit and remuneration committees in which the chairman of the board may not participate. There also are explicit requirements regarding the manner in which external auditors must be appointed. Furthermore, companies are obliged to submit an annual report to the SCA on their corporate governance practices, detailing any violations that have occurred during the financial year, explaining their occurrence, and outlining plans to avoid a reoccurrence. Information on the composition and remuneration of the board of directors is also mandatory. Companies listed on Nasdaq Dubai, which is regulated by the Dubai Financial Services Authority, are mandated to follow International Financial Reporting Standards (IFRS). Listed securities are also bound to independent laws that are based largely on English Common Law. These include the Markets Law, Offered Securities Rules, Listing Rules and Business Rules. Companies are required to follow international best-practice standards with regard to the composition of the board of directors, auditing and disclosures. There are also restrictions on individual shareholders who hold securities carrying more that 5% of the issuer�s total voting rights. In the event of an offence, the DFSA has the power to de-list or suspend securities, levy fines against companies and individuals, and ban individuals from operating within the Dubai International Financial Centre (DIFC, the financial free zone in which Nasdaq Dubai is based). The Dubai-based Hawkamah Institute for Corporate Governance, an autonomous international association, is dedicated to the advance of corporate governance reform in the Middle East and North Africa. It is headed by Nasser Saidi, chief economist at the DIFC, and publishes special reports and surveys in addition to distributing awards and holding conferences on corporate governance. In February 2011 Hawkamah, along with global index provider Standard & Poor�s, launched the first tradable index for Middle East and North African (MENA) equity markets. It ranks and tracks the performance, transparency and disclosure of regional companies on Environmental, Social and Corporate Governance (ESG) issues. The S&P/Hawkamah Pan Arab ESG Index includes the top 50 MENA companies, based on their performance on nearly 200 ESG metrics, compared with their regional peers. Upon launch, three UAE companies were highlighted among the top ten MENA companies by ESG weight. These were DP World, Emirates Integrated Telecommunications Company and National Bank of Abu Dhabi. In September 2011 Hawkamah unveiled a corporate governance code for small and medium-sized enterprises (SMEs) operating in Dubai; it did this in conjunction with Dubai SME, an agency of the Dubai government�s Department of Economic Development (DED) that is responsible for strengthening the SME sector. The code is intended to boost awareness among SMEs of the importance of corporate governance, so that companies are able to better manage risk, withstand periods of financial difficulty, and become more bankable and investable. Despite these efforts, however, there are concerns that UAE regulators have failed to adequately punish violators in the wake of the recent financial downturn. The most high-profile example is the government�s treatment of former DIFC governor, Omar bin Sulaiman. In March 2010 it was confirmed that Mr Sulaiman had been detained regarding financial irregularities involving US$13.6m in bonuses. He was subsequently found guilty of embezzling public funds and jailed, only to be released two months later, having allegedly repaid the money he stole. Although he was not reinstated to his post at the DIFC, there was widespread disappointment that such a senior figure within the UAE�s financial community could escape a long-term prison sentence even after a much-publicised conviction for fraud.

Any company wishing to list on the Dubai Financial Market (DFM) or Abu Dhabi Exchange (ADX) must first obtain a licence to list from the Emirates Securities and Commodities Authority (SCA) and then submit an application to the relevant market. All documents submitted must be in Arabic.

The Listing Resolution (which applies to both foreign and domestic issuers) stipulates that a prospective issuer must be registered with the UAE Ministry of Economy & Commerce; must have been incorporated at least two years prior to the application�s submission; and must have a paid-up capital of not less than Dh25m or 35% of subscribed share capital, whichever is higher. The prospective issuer also must publish its balance sheet and financial results in at least two Arabic-language daily newspapers before its securities can be admitted to trading.

Listing procedures



Foreign companies must comply with eligibility requirements including listing in a market in their home country, holding assets in excess of 20% of their paid-up capital, and appointing a representative in the UAE to register securities and distribute documentation relating to the company�s business.

The SCA charges an initial Dh2,000 registration and listing fee to be paid upon submission of the application; the minimum fee for a company�s ultimate registration with the authority is Dh25,000. If a company�s capital exceeds Dh50m, 0.0001% of the overage (up to a maximum of Dh100,000) is added to the fee.

Once an application is submitted to the SCA, it is examined and a decision based on the findings of technical and legal studies of that company is delivered within 45 days. The applicant is notified of the SCA decision within one week of it being made, and approval entitles the company to list its shares on the relevant market. The board of directors has discretionary authority to exempt any company from some of these eligibility requirements; it also can decline a listing application without explaining its decision.

At Nasdaq Dubai, which is regulated by the Dubai Financial Services Authority (DFSA), the Listing Rules detail general eligibility requirements for both the issuer and the securities. A minimum of 25% of the securities to be listed must be held in public hands and not be held by people affiliated with the company, the issuer must have a market capitalisation of at least US$50m at the time of listing, and Nasdaq Dubai must be assured that issuers are able to operate their business independently of a controlling shareholder, should there be one.

Applicants are required to consult with the Listing Authority, through a draft approval process, which usually takes around three weeks to be completed. The Authority will then review all submitted documents, before passing the application on to the DFSA for final approval. Approval is granted after 12 working days (seven under review at the Listing Authority and five under review at the DFSA), barring an objection from the DFSA. Listing fees include a US$5,000 application fee; an initial listing fee of US$70,000�250,000; and an annual fee ranging from US$20,000�50,000.

Tax consequences. There are no tax considerations specific to listing or other sales of new equities. However, investors and issuers may be subject to tax implications in their home jurisdictions.

Recent initial public offerings

The UAE�s initial public offering (IPO) market jerked back into life in 2011, after two-and-a-half years of inactivity on the country�s battered bourses. Three companies finally listed on the Abu Dhabi Securities Exchange (ADX), after a succession of planned IPOs had been scrapped because of unfavourable market conditions following the 2008�09 global financial downturn and the 2009 Dubai credit crisis. The first IPO of the year belonged to Abu Dhabi-based Insurance House, which went to market in late February 2011 and barely satisfied the capital requirements for listing. The company squeezed over the line with around Dh66m only hours before the deadline at the end of a two-week window�it later was revealed that there had been doubt within the company over whether the offering would close. The sum raised was equivalent to 55% of the company�s authorised share capital, a threshold that must be passed, according to UAE law.



More successful was the April 2011 IPO of sharia-compliant insurance provider National Takaful Company (Watania), which also is based in Abu Dhabi. Offering a 55% stake to the public valued at Dh82.5m, the company�s IPO received an overwhelming response and was oversubscribed by seven times. The company announced it would use this capital to drive long-term growth in the region�s nascent Islamic insurance sector. Also in the first half of 2011, Abu Dhabi-based real-estate developer Eshraq Properties sold 55% of its shares to raise Dh825m, the first time a property company had gone to market since the real-estate market collapsed in 2008. The May 2011 offering, which required that 25% of the value of each share was paid upon purchase, with the rest to be paid off over a period of two years, was fully covered. The company announced that funds raised through the oversubscribed offer were earmarked for financing future developments. Around 70% of Eshraq Properties� future projects are scheduled for the UAE and the remainder for Saudi Arabia. The company has said it plans to invest Dh2.3bn into property development before end-2014. Although IPO activity recovered in 2011, it hardly echoed the sales made in previous years. The November 2007 IPO of state-owned operator Dubai Ports (DP) World remains the largest in the history of the Middle East. Listing on Nasdaq Dubai (then the Dubai International Financial Exchange, or DIFX), it raised close to US$5bn with a 20% stake sale.

Underwritten offerings were once popular in the UAE. In 2007 a US$5bn Dubai Ports (DP) World offering even helped push Dubai-based investment bank Shuaa Capital up 11 places to 23rd position in equity offerings worldwide, according to Bloomberg�s global underwriter ranking. However, the dramatic slump in initial public offering (IPO) activity since 2008 has meant that there are few recent examples of IPO underwriting. When Abu Dhabi-based Insurance House went to market in February 2011, the underwriters, led by Mashreqbank, were Finance House, National Bank of Abu Dhabi and National Bank of Fujairah. In May 2011 Abu Dhabi-based investment firm Royal Capital acted as underwriter for the IPO of real-estate developer Eshraq Properties, a listing which raised Dh825m (see Recent initial public offerings).

Tax consequences. There are no tax considerations specific to underwritten offerings.

Companies in the UAE typically have shied away from rights issues in the wake of the 2008�09 global financial downturn and amid ongoing market uncertainty. In June 2011 oilfield-services provider Lamprell did use a rights issue to raise gross proceeds of US$225m. However, in March 2011 Dubai contractor Arabtec shelved plans for a rights issue and a US$150m convertible bond, citing unfavourable market conditions.

In June 2010 telecoms operator Emirates Integrated Telecommunications Company announced it had successfully completed a rights issue that raised around Dh1bn in capital. Roughly 571.4m new shares were offered to (and taken up by) qualifying shareholders on a pro rata basis, as the number of the company�s shares issued on the Dubai Financial Market increased to 4.6bn.

The issue was the first in the UAE in five years and the first in the country to be underwritten by controlling shareholders. It also was the first where the issuer prepared an international-style disclosure document, as opposed to relying on the standard Arabic-language newspaper announcements.

The Emirates Securities and Commodities Authority (SCA) requires that issuers in the UAE seek its approval to issue shares at a premium-to-par value, and it usually allows banks only to issue shares at a premium. However, Emirates Integrated Telecommunications Company was granted special dispensation

Underwritten offerings

Rights offerings



and a premium of Dh0.75 per share to par value, on the basis that the state-affiliated telecoms is a special case and is exempt from some of the provisions of the 1984 Commercial Companies Law.

Tax consequences. There are no tax considerations specific to rights offerings.

Large investors, particularly sovereign wealth funds (SWFs), participate in private placements in the UAE. In January 2011 the government of Abu Dhabi and the Mubadala SWF acquired assets totalling Dh19.2bn in a private placement. In November 2011 Mubadala privately placed a five-year bond worth �80m as part of its Global Medium-Term Notes (GMTN) programme; the bond carries a fixed-rate annual coupon of 4.15% and will mature in 2018.

In September 2011 National Bank of Abu Dhabi (NBAD) printed a 25-year private placement under its US$5bn Euro Medium-Term Note (EMTN) Programme. The US$20m private placement will be due in 2036 and represented the longest-tenor bond issue by a bank in the Gulf Cooperation Council (GCC, a regional economic bloc comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE). It also was the longest-tenor �Regulation S� bond (a US security offered to non-US residents and qualified institutional buyers) ever issued by any GCC entity.

Tax consequences. There are no special tax withholdings on private-equity placements. Taxes are collected on gains realised in gross income outside the Dubai International Financial Centre (the financial free zone).

In 2006 two companies listed Global Depositary Receipts (GDRs) on Nasdaq Dubai (then known as the Dubai International Financial Exchange, DIFX). Jordan-based multinational Hikma Pharmaceuticals and Indian-based manufacturing giant Man Industries each had listed previously in other markets. As of end-2011 no other GDRs had been listed since these. According to Bloomberg data, as of mid-January 2012, two firms in the UAE had current American Depositary Receipts (ADRs) listings on the UAE market�Dragon Oil and Lamprell.

As Nasdaq Dubai operates its own Central Securities Depository (CSD), firms may apply to provide custody services and, according to the bourse, financial institutions may do this whether or not they are members of the exchange. As of end-2011 custodians of Nasdaq Dubai are Citibank (US), Deutsche Securities and Services (Germany), EFG-Hermes (Egypt), HSBC Middle East (UK), SHUAA Capital and Standard Chartered (UK).

Tax consequences. There are no special taxes for this type of issuance.

UAE markets were unregulated until the establishment of the Dubai Financial Market (DFM) and Abu Dhabi Exchange (ADX) in 2000. Before then, there was significant over-the-counter (OTC) activity. Today, some private companies continue to conduct OTC activities, but the volume of trade is relatively minor, and there are no established local trading venues.

Tax consequences. Not applicable.

Private placements

GDRs/ADRs

Alternative markets



Banks are prohibited from taking private houses as security for loans or from taking personal guarantees as security when the loans are given to non-UAE nationals. However, in November 2010 Emirates Money, a subsidiary of Emirates NBD, launched a �Loans Against Gold� programme, which enables customers to borrow up to 80% of the value of any gold they deposit. The gold, which can be in the form of jewellery or bullion, must be worth a minimum of Dh30,000, and the tenure of the deposit must range from a minimum of six months to a maximum of 36 months. The initiative was launched in co-ordination with the Dubai Multi Commodities Centre and features special schemes for UAE nationals and UAE-based jewellers.

In September 2011 the same institution launched a �Loans Against Property� programme, offering UAE residents up to Dh3m against a fully owned property. The product is available to UAE nationals as well as expatriates and can be used in conjunction with freehold or leasehold properties in the UAE. Loans can be offset against various categories of property, including apartments, villas, shops, offices and warehouses. Repayment tenors can be up to 15 years, and customers also can opt for a facility to buy out existing loans.

Traditionally, UAE banks calculated credit terms using a floating base rate linked to the Emirates Interbank Offered Rate (EIBOR), plus a small margin. However, many have elected to use an internally set base rate resting above EIBOR, citing difficult economic circumstances that have sparked a rise in loan defaults and late payments. Emirates NBD, Standard Chartered (UK) and Mashreq Bank have all made the switch to internally set rates; this has come to the dismay of customers, many of whom have seen home loan repayments soar as a result.

The majority of banks in the UAE have maintained that they will provide, arrange, and syndicate long-term financing for major projects. However, in the wake of the 2008�09 global financial crisis, there has been a dearth of such deals, as Dubai�s debt restructuring has dominated regional lending. Though the market appeared to have returned for quasi-sovereign corporates by late 2011, it remained quiet for non-sovereign borrowers.

Tax consequences. Interest paid to foreign financial institutions is not subject to withholding tax.

Equipment leasing in nearly all forms is available via banks and vendors. Islamic finance houses, in particular, have a strong appetite for fixed-asset finance. Islamic leasing (ijara) is a common technique to obtain the equivalent of a medium-term bank loan when there is an underlying fixed asset, such as plant, equipment or inventory. Under this arrangement, the Islamic bank becomes the actual owner of a new factory for its start-up period, and the company running the factory gradually redeems its possession with lease payments.

Tax consequences. There are no direct taxes on leasing contracts.

Local and regional corporates have looked increasingly to raise local currency debt to fund large-scale projects, given the shortage of bank credit in the UAE since the onset of the 2008�09 global financial crisis. According to latest available data from Zawya, there were three corporate bond issues in the UAE during the first

Bank loans

Financial leasing

Corporate bond issues



six months of 2011. They represented 23% of total bond issues for this period, which totalled US$9.6bn.

In December 2011 Emaar Properties, the UAE�s biggest developer by market value, announced that it had signed a financing facility valued at US$1bn, secured by shopping malls including its flagship Dubai Mall. It noted that the two-tranche facility, which spans both Islamic and conventional funding, is split between a five-year tranche and an eight-year amortising loan. This will be used partially to repay Emaar�s existing US$300m facility taken out in 2010.

Also in December, government-owned Abu Dhabi National Energy Company, better known as TAQA, issued two bonds at five- and ten-year maturities to raise a total of US$1.5bn. The first senior notes were for US$750m, with an interest rate of 4.125% and due March 2017. The second were for US$750m at an interest rate of 5.875%, due December 2021. The firm has said it plans to spend the offering proceeds on general corporate purposes and on repaying debt according to its credit agreements.

Abu Dhabi-owned International Petroleum Investment Company (IPIC) successfully raised US$3.75bn in a multi-tranched capital markets offering in November 2011. It offered notes in three tranches: 5.5-year US$1.5bn notes at US Treasuries +262.5 basis points with a coupon rate of 3.750%; 10.5-year US$1.5bn notes at T+312.5 with a coupon rate of 5.5%; and 30-year US$750m notes at T+350 with a coupon rate of 6.875%. In June 2011 Dubai-owned Emirates Airline confirmed it had raised US$1bn by selling US-dollar bonds with a coupon rate of 5.125%, payable semi-annually.

Islamic bonds (sukuk) are increasingly prevalent in the UAE and are recognised as an accessible and inexpensive form of sharia-compliant finance. In November 2011 alone two UAE banks raised US$1bn, with Abu Dhabi Commercial Bank selling US$500m of five-year US dollar-denominated sukuk, and Abu Dhabi Islamic Bank issuing another US$500m of sukuk.

Private placements of notes are an accepted form of financing in the UAE, having been embraced by firms looking to raise capital for expansion during the economic boom of the early to mid-2000s. In September 2011 National Bank of Abu Dhabi (NBAD) issued a 25-year private placement under its US$5bn Euro Medium-Term Note (EMTN) Programme. The US$20m private placement will be due in 2036.

Institutions such as Abu Dhabi Investment House continue to offer opportunities in placements abroad to prospective investors in the UAE. In October 2010 the Dubai branch of India-based Axis Bank sold US$500m of senior unsecured notes in the private placement market.

Tax consequences. No withholding tax is levied on gains from private placement notes.

The structured finance market in the Middle East has begun to show some signs of activity, after a period of near stagnation following the 2008�09 global financial crisis. In July 2011 Dubai�s Department of Finance confirmed that it had successfully closed an US$800m six-year securitisation of future toll

Private placement of notes

Structured finance



receipts from its Salik electronic toll collection system. Citibank (US), Commercial Bank of Dubai, Emirates NBD and Dubai Islamic Bank were the mandated lead arrangers and book-runners for the financing, which includes a conventional and an Islamic tranche.

In mid-2010 Emirates NBD, the UAE�s largest bank by assets, sealed an auto loan securitisation deal raising US$250m in funds through notes issued in mid-July 2010 and closing the following month. The notes were denominated in Japanese yen, and the facility was guaranteed by the Japanese Bank for International Co-operation. Emirates NBD�s was the first public securitisation in the UAE for two years, the next most recent being a US$1.1bn Islamic bond (sukuk) issued by Sorouh Real Estate in August 2008 and, before that, an Islamic residential mortgage-backed security structured by Tamweel (a local real-estate developer) in 2007, valued at US$210m.

Tax consequences. There are no tax considerations specific to infrastructure financing.

Infrastructure financing is typically arranged through local, regional and international banks. Islamic project financing through the use of sukuk (Islamic bonds) has become increasingly common, particularly as conventional credit markets have been strained in the wake of the 2008�09 global financial crisis. (See Corporate bond issues.)

Tax consequences. There are no tax considerations specific to infrastructure financing.

Trade financing has become increasingly common in the UAE, and most local and international banks offer services to small and medium-sized enterprises, allowing them to trade with local and international markets. They will guarantee payments through letters of credit to sellers and will offer document against payment and document against acceptance services.

The latest biannual HSBC Trade Confidence Index (TCI) survey, conducted in the second half of 2011, indicated that banks continued to be the key providers for trade finance in the UAE.

Local carriers such as Emirates Airlines and Etihad Airways have benefited from loans and guarantees offered by North American and European countries to help finance aircraft purchases in developing countries. However, in late 2010 the OECD agreed to revise the rules concerning these government-backed export credits, prompting concerns over higher borrowing costs.

The Dubai Export Development Corporation (DEDC) is an autonomous organisation established in 2006 and funded by the Dubai government. It provides exporters looking to expand into foreign markets with trade information, branding advice, financial and legal advice, and trade representation. The DEDC is also responsible for the Export Credit Insurance Company of the Emirates (ECIE), which offers Trade Credit Insurance, also known as Accounts/Trade Receivables Insurance, protecting businesses against the failure of customers to pay debts.

Infrastructure financing

Trade financing and insurance



Demand for export credit has risen at a time of heightened instability in regional markets. However, the ECIE has warned that limited resources restrict the volume of financing it can provide. In April 2011 the organisation�s chief executive, Saed al-Awadi, appealed for other emirates to contribute funds to help strengthen its role nationally.

The ECIE offers short-term policies to companies in the UAE engaged in manufacturing, value-added trade and other export services; it covers exporters for the trade in goods or services that are sold on credit terms not exceeding 180 days. According to the ECIE, longer payment terms may be considered on a case-by-case basis. The seller is covered against buyer insolvency, non-payment of goods received by the buyer, transfer delays due to the imposition of foreign exchange controls in the buyer�s country, cancellation of the buyer�s import licence in the buyer�s country, and war or other disturbances in the buyer�s country. The ECIE covers a maximum of 90% of the credit limit approved on a buyer by the insurer.

A representative office of the Saudi-based Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) was opened in Dubai in June 2010. The ICIEC offers export credit and insurance for sharia-compliant trade. The use of countertrade agreements, which through bartering is compliant with Islamic finance, is expected to increase as Islamic financing instruments grow in number and sophistication. Smaller UAE firms can use it to expand their exports abroad, especially to countries in Eastern Europe and to other less-developed countries. The Saudi-based Islamic Development Bank and other Islamic financing institutions promote countertrade agreements on both the local and international levels.

The Kuwaiti-based Arab Investment & Export Credit Guarantee Corporation (referred to as Dhaman) offers export-credit guarantees against commercial and non-commercial risk. The programme covers trade between Arab countries in goods with at least 40% value-added from Arab countries. The terms of payment may not exceed 180 days for commercial and non-commercial risk coverage. Although UAE exporters and investors have access to guarantees from this facility, those from Saudi Arabia and Kuwait are the primary beneficiaries. In general, forfait finance is not available, though Dhaman may be able to arrange it. This form of trade finance may be arranged through the normal forfaiting centres in the UK and Switzerland.



Key contacts

• Abu Dhabi Securities Exchange (ADX), Al Ghaith Tower, Hamdan Street, PO Box 54500, Abu Dhabi, Tel: +971 2 627 7777; Fax: +971 2 612 8728; e-mail: [email protected]; Internet: www.adx.ae.

• Arab Investment & Export Credit Guarantee Corporation, PO Box 23568, Safat 13096, Kuwait; Tel: +965 2 495 9555/000; Fax: +965 2 495 9596/7; Internet: http://www.iaigc.net.

• Central Bank of the United Arab Emirates, PO Box 854, Abu Dhabi; Tel: +971 2 665 2220; Fax: +971 2 665 2504; Internet: http://www.centralbank.ae/en/index.php.

• Dubai Chamber of Commerce and Industry, PO Box 1457, Dubai, UAE; Tel: +971 4 228 0000; Fax: +971 4 202 8888; Internet: http://www.dubaichamber.ae.

• Dubai Financial Market (DFM), World Trade Centre, Dubai; Tel: +971 4 305 5555; Fax: +971 4 305 5566; Internet: www2.dfm.ae.

• Dubai Financial Services Authority (DFSA), Physical address: Level 13, West Wing, The Gate, DIFC; Postal address: PO Box 75850, Dubai, UAE; Tel: +971 (0)4 362 1500; Fax: +971 (0)4 362 0801; Internet: http://www.dfsa.ae.

• Dubai International Financial Centre (DIFC), The Gate, Level 14, PO Box 74777, Dubai, UAE; Tel: +971 4 362 2222; Fax: +971 4 362 2333; Internet: www.difc.ae.

• Emirates Insurance Association (EIA); Level 6, Aldhafra Insurance Building, Zayed First Street, Abu Dhabi; Postal address: PO Box 7755, Abu Dhabi, UAE; Internet: http://www.eia.ae.

• Hawkamah�Institute for Corporate Governance, Gate Village Building 2, 1st Level, PO Box 506767, Dubai, UAE; Tel: +971 4 362 2551; Fax: +971 4 362 2552; Internet: http://www.hawkamah.org.

• Insurance Authority (IA), Internet: http://www.ia.gov.ae/Web/default.aspx. • Ministry of Economy, Himdan St, Saman building (Head office), Abu Dhabi; Tel: +971 2 613 1111; Fax: +971 2 626 0000;

Internet: http://www.economy.gov.ae/English/Pages/default.aspx. • Nasdaq Dubai, Level 7, The Exchange Building (No. 5), Dubai International Financial Centre, PO Box 53536, Dubai,

United Arab Emirates (UAE); Tel: +971 4 305 5481; Fax: +971 4 453 4068; Internet: http://www.nasdaqdubai.com. • Securities and Commodities Authority (SCA), 13th Floor, Al Gaith Tower, Hamdan Street; PO Box 33733, Abu Dhabi,

UAE; Tel: +971 2 627 7888; Fax: +971 2 627 4600; Internet: http://www.sca.ae.

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