The UAE Central Bank has issued the newly amended Finance Companies Regulation as it seeks to monitor companies that offer short-term credit and buy-now-pay-later products and services in the Emirates.
Under the new framework, entities operating as agents of licensed banks or finance companies can provide short-term credit following approval by the banking regulator, it said in a statement on Wednesday.
“Entities can also carry out this activity upon being licensed by the Central Bank as restricted licence finance companies,” it said.
“Unlicensed entities, which carry on any form of short-term credit activity and intend to continue to carry on these activities, must either apply to the central bank to be licensed as a restricted licence finance company or partner with a licensed finance company or a bank.”
Short-term credit refers to any credit that is granted to a borrower for a period of not more than 12 months for the purposes of purchasing goods or services without interest being charged, a lien being placed against collateral or a security deposit being required from the borrower, according to the Central Bank’s website.
The BNPL business model, which allows consumers to make online purchases instantly and spread their payments out over interest-free instalments, has boomed since the onset of the coronavirus pandemic, driven by millennials and Generation Z.
Global BNPL transaction values are projected to grow to $576 billion by 2026, up from $120 billion in 2021, according to data analytics company GlobalData.
BNPL accounted for 2.3 per cent of the global e-commerce market in 2021 or about $2 out of every $100 spent towards a transaction, the report said.
Under the new regulation, restricted licence finance companies are not permitted to contract with agents to offer short-term credit. Agents must partner with either a finance company or a bank before offering short-term credit, according to the central bank website.
“The regulation is aimed at protecting the customers of finance companies and restricted licence finance companies and enhancing the overall stability of the financial sector,” the Central Bank said.
The maximum total short-term credit extended to a borrower by a restricted licence finance company or agent must not exceed Dh20,000 ($5,446) or the total of three months’ verified net income of the borrower, whichever is lower, it added.
The maximum credit granted to a borrower should be based on the results of affordability assessments conducted, given due consideration to the repayment ability, reducing the risk of over-indebtedness, according to the central bank.
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