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Framework for Regulating 'Buy Now Pay Later' Services Introduced by UAE Central Bank

Updated: Jan 13

What has happened?

In the current age of e-commerce and online shopping, consumers are constantly seeking new ways to simplify and enhance their shopping experience. One popular trend in consumer financing is the remarkable growth of Buy Now Pay Later (BNPL) services. This financing option allows consumers to purchase goods and services with deferred payment or through instalment plans. While there are benefits for both consumers and businesses, short-term financing solutions can also present significant risks.

In response to these risks and the increasing demand for BNPL services and other alternative forms of credit, the Central Bank of the UAE (CBUAE) has recently introduced the newly amended Finance Companies Regulation (the Regulation). In this article we take a closer look at new Regulation and what it means for companies currently operating in this space.

What is BNPL?

BNPL services have experienced significant growth recently, with notable examples like Tabby, Tamara, and Klarna gaining prominence in the Middle East and Europe. As more consumers face cost-of-living challenges, they are turning to deferred payment options and instalment plans for their purchases. One of the main benefits of this financing method is the ability for consumers to buy goods and services without immediate financial strain. It allows them to make significant purchases, especially for costly items such as electronics and luxury goods, without having to pay a sizable upfront cost. Additionally, many BNPL services offer lower interest rates and fees compared to traditional credit cards, making them an appealing option for those seeking to save on their purchases.

However, despite their apparent benefits, BNPL services also come with significant risks. Consumers may be lured into overspending or taking on excessive debt, leading to serious financial consequences. Furthermore, missed payments or defaulting on instalment plans can severely impact the borrower's credit score and create a cycle of debt that is challenging to overcome.

Finance Companies Regulation

In response to the increased demand for BNPL services and other alternative forms of credit, the CBUAE has recently introduced the revised Finance Companies Regulation. The Regulation aims to bolster consumer protection and enforce stringent regulatory standards for companies offering these services.

Under the updated framework, entities can provide short-term credit either as agents of licensed banks or finance companies, subject to CBUAE approval. Alternatively, they can engage in this activity by obtaining a license as a "Restricted License Finance Company" from CBUAE.

Each license shall be granted for an initial period of three years and shall be renewable for the same period unless otherwise required by the CBUAE.

Unlicensed entities presently involved in any form of short-term credit activity and seeking to continue must either apply to the CBUAE for a license as a Restricted License Finance Company or establish a partnership with a licensed finance company or bank.

Enhanced oversight and consumer protections

The Regulation also mandates that finance companies must provide consumers with clear and transparent disclosures, including comprehensive details on all associated fees and charges. Moreover, these companies must comply with stringent KYC and AML obligations, maintain minimum capital requirements, and undergo regular financial audits and risk assessments to ensure compliance with the Regulation.

Through the introduction of the Regulation, the CBUAE aims to ensure that licensed finance companies in the UAE: a) operate with transparent and well-defined organizational structures and operations;

b) are prudently managed within a framework of permissible activities; and

c) poses the necessary financial resources and internal risk management systems.

Our View

The newly amended Finance Companies Regulation marks a significant step forward. It aims to enhance protections for consumers and ensure that businesses operating within the rapidly growing BNPL sector adhere to stringent standards. It also offers much needed guidance and establishes a collaborative framework for BNPL providers to flourish while operating under the CBUAE's oversight. To view the provisions of the Finance Companies Regulation on CBUAE’s website, click here.

For more information contact Jamie Tredgold, Managing Principal.

This material is provided for general information only. It does not constitute legal or other professional advice.

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