Banking in the UAE

The current state of global banking

The global economy is showing signs of significant instability. Exacerbated by a succession of global crises such as the Covid-19 pandemic, Russia’s invasion of Ukraine, supply chain fractures and rising inflation, the knock-on effect is being felt acutely across the global banking industry.

The recent collapse of three US banks after a plunge in the value of cryptocurrencies and the subsequent buy out of Credit Suisse by UBS has sent shockwaves through other global markets and prompted six of the world’s biggest central banks to inject cash flow to avert any further damage to the banking system. These high-profile failures have prompted many to speculate on the possibility of a wider global banking crash and how it may affect other markets.

UAE banking well protected

Against this backdrop of global banking volatility, banks in the UAE are faring remarkably well and not only have they weathered the storm, they have also strengthened their taxation and banking practices to add to their appeal to inward investment.

The country’s top ten largest listed banks are showing increased profitability, greater returns on equity and assets and strong capital positioning. This is largely due to the operating model most banks use in the UAE. They tend to exercise greater caution with lending and a higher degree of regulatory oversight which has helped to keep them protected against the issues that affected SVB, Silvergate and Signature Bank in New York.

Banks in the MENA region also tend to be more reluctant to invest in perceived riskier lending such as small and medium enterprise or mortgage finance and instead are much more conservative in their approach, focusing mainly on the public sector and larger, more established clients. This conservative approach has meant that the GCC region is much less vulnerable to risks that have affected banks across the US and Europe.

OECD grey listing

The UAE, however, is no stranger to economic strain and regulatory challenges. Its banking system underwent considerable scrutiny from the Organisation for Economic Co-operation and Development (OECD) in 2018 when it was placed on the OECD’s grey list over concerns about its tax transparency and exchange of information standards. It has since implemented a series of reforms including signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the introduction of new legislation such as the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS).

These measures demonstrate its commitment to collaborating with the OECD on improving its taxation practices and facilitating further trade agreements with other countries. This and the more recent introduction of corporate tax have been key to strengthening the regulatory framework for financial institutions and helping to create a much more stable and predictable business environment. The corporate tax regime has also been an important stepping stone towards reducing reliance on oil and gas revenues and increased funding for new government projects.

These reforms have underlined the resilience of the economy and banking industry in the UAE and its capacity to modernise and adapt which have been key to sustaining its appeal to foreign investors.

Banking in the UAE

There are now 57 banking institutions in the UAE, consisting of 20 national banks, 28 foreign banks and 7 other special status organisations. Among these, there are four main types of banks: Commercial banks, investment banks, industrial banks and Islamic banks.

As well as personal, corporate and investment banking options, there are also a large number of offshore banks represented. These offer low to zero tax rates and other financial incentives and provide a wide range of services to the UAE’s burgeoning HNWI population such as wealth management, asset protection, succession planning and company formation.

Consolidation and innovation

A succession of high-profile bank mergers has been another development that has had a huge effect on the UAE banking landscape. These mergers were driven by various factors, including a desire to create larger and more competitive banks, to achieve cost savings and operational efficiencies, and to expand the banks’ customer base and product offerings.

One of the largest of these was the creation of First Abu Dhabi Bank, after a merger between National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). The merger created the largest bank in the UAE, with assets of over $200 billion and a market share of around 25% in terms of total assets.

Another that had a significant impact was the acquisition of Noor Bank by Dubai Islamic Bank in 2020, resulting in the formation of the largest Islamic bank in the UAE with assets of over $75 billion.

This greater consolidation and strength of the banking sector in the UAE has translated into more competitive rates for clients and a more comprehensive range of investment and wealth management solutions.

The UAE has also embraced the emergence of new technologies such as digital banking and virtual assets with the establishment of new digital banks like Naqd and WIO and the launch of HAYVN, an Abu Dhabi-based virtual asset trading platform.

This growing availability of remote banking services and greater exposure to new digital asset classes is making banking much easier for international clients and drawing in a new generation of wealth clients who are showing a greater interest for new technologies and socially responsible investments.

The growth of digital banking and virtual asset services

Retail and commercial banking in the UAE can be challenging for foreign investors to navigate. The lengthy application process involved, minimum capital requirements and proof of residency can often be a barrier that prevents some from establishing a business presence in the country. However, digital banking has gone some way towards easing these difficulties. Some banks in the UAE now allow non-residents to open a corporate account and digital banking services have made it markedly easier for individuals to manage their financial affairs from outside the UAE more quickly and efficiently. 

As awareness and interest for emerging technologies grows, banks have also begun providing support in areas such as fintech, ESG assets and cryptocurrency and blockchain technology.

ADGM based Hayvyn and Binance both have platforms which enable cryptocurrency to be converted to fiat.

Abu Dhabi Commercial Bank (ADCB), Emirates NBD, and Mashreq Bank, have all started offering banking services to cryptocurrency businesses and Abu Dhabi-based crypto exchange BitOasis partnered with Mashreq Bank to offer its users a secure way to buy and sell cryptocurrencies using their bank accounts.

In addition to providing services to established cryptocurrency businesses, some UAE banks are also supporting blockchain startups. For instance, Emirates NBD launched a blockchain-based platform to support startups and SMEs, and ADCB partnered with blockchain-based trade finance platform Contour to streamline trade finance operations.  Another more recent merger involving Wio, the region’s first platform bank, and First Abu Dhabi Bank (FAB), has enabled Wio to offer its business customers cash and cheque facilities throughout FAB’s widespread ATM and CDM network  and to enhance its digital banking solutions.

With a growing awareness of the importance of sustainability and environmental protection, many banks in the UAE have also begun introducing green financing products to support sustainable and environmentally friendly projects. These include loans and financing options for renewable energy projects, energy-efficient buildings, and other environmentally friendly initiatives.

Concluding thoughts

Current events in the banking industry have raised concerns over good corporate governance and effective management of financial institutions, and while banks in the UAE are not immune to the challenges faced in other parts of the world, recent regulatory and taxation reforms as well as a strong culture of innovation have reinforced the country’s stability and provided the impetus for further economic growth and investment.