UAE Central Bank Introduces Regulatory Framework for Buy-Now, Pay-Later Providers

On September 29, 2023, the UAE Central Bank (CBUAE) introduced the new Finance Companies Regulation, which repealed the Finance Companies Regulation issued in 2018 and formally recognized "buy-now, pay-later" (BNPL) schemes as a form of consumer Short-Term Credit. This landmark development signifies the CBUAE's proactive approach towards regulating the BNPL sector in the UAE, seeking to ensure responsible financial practices for consumers.

Market Trends

The introduction of the Finance Companies Regulation marks a positive step towards establishing a robust regulatory framework for the previously unregulated BNPL space in the UAE. The Regulation's emphasis on consumer protection, coupled with its focus on promoting a stable and well-regulated financial sector, underscores the commitment of the UAE regulatory authorities to balance innovation with safeguarding consumer interests. Other regulators in the region, such as the Saudi Central Bank, have also issued new rules to regulate this sector.

The BNPL market has recently experienced significant growth in the Middle East. BNPL products have gained significant traction with consumers, who are increasingly adopting this payment method for various online and offline purchases.

The surge in customer demand has led to the rapid growth of BNPL companies in the Middle East, who have increasing requirements for external funding to enable them to meet customer demand and continue to expand their BNPL businesses. This has created new opportunities for investment in the region using novel ways for businesses to monetize the receivables arising from BNPL products. Further customer demand coupled with the introduction of regulation in this space creates attractive funding opportunities for investors. BNPL companies have already taken advantage of such funding opportunities through receivables-backed financing in the UAE and Saudi Arabia.

White & Case has been at the forefront of this evolving landscape, providing structuring and transaction advice in warehouse securitizations of BNPL receivables in Saudi Arabia.

Defining Short-Term Credit and BNPL

The Finance Companies Regulation defines Short-Term Credit as any credit granted to a borrower for a period of not more than twelve (12) months, for the express purpose of purchasing specified, identifiable goods or services, without interest being charged, a lien being placed against collateral, or a security deposit being required from the borrower. This definition encompasses the core characteristics of BNPL products, which typically involve interest-free installments over a short duration for online and in-store purchases by consumers.

Regulating BNPL Providers

In line with the Finance Companies Regulation's focus on consumer protection and financial stability, only licensed entities are permitted to provide Short-Term Credit, including BNPL products. These entities can either be:

• Agents of licensed banks or finance companies; or
• Restricted Licence Finance Companies, which are specifically authorized to grant Short-Term Credit by the CBUAE.

The license for a Restricted Licence Finance Company is granted for an initial period of three years and is renewable for subsequent three-year periods, unless otherwise determined by the CBUAE.

Consumer Protection Provisions

The Finance Companies Regulation outlines several measures to safeguard consumer interests in the BNPL space, including (among others):

• Credit Limits: The maximum total Short-Term Credit extended to a borrower by a Restricted Licence Finance Company or agent must not exceed either AED 20,000 or the borrower's verified net income for three months, whichever is lower. This limit ensures that BNPL products remain accessible for smaller purchases while preventing excessive debt accumulation.
• Fee Restrictions: The total Fees (which include charges, penalties, and commissions) charged to a borrower must not exceed 30% of the original credit amount.
• Credit Assessments: If a borrower's total credit limit exceeds AED 5,000, BNPL providers must review the borrower's Credit Report, which is a comprehensive assessment of their creditworthiness based on historical data. This provision seeks to ensure that lenders perform a thorough assessment of the borrower's creditworthiness before extending BNPL credit.
• Transparency and Disclosure: BNPL providers must disclose the terms and conditions of their products, including fees, consequences of late payment and available provisions for hardship assistance in order to assist borrowers with making informed decisions about their BNPL purchases.

Enhancing Financial Stability

Beyond consumer protection, the Finance Companies Regulation aims to foster a robust and well-regulated financial sector in the UAE by:

• Establishing Clear Guidelines: The regulation provides clear guidelines for BNPL providers, seeking to ensure transparency and preventing exploitative practices.
• Enhancing Regulatory Oversight: The CBUAE will closely monitor BNPL activities to ensure compliance with the regulation and protection of consumers.
• Promoting Responsible Lending: The regulation encourages BNPL providers to adopt responsible lending practices, minimizing the risk of over-indebtedness among consumers.

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