This article delves into the Economic Substance Regulations (ESR) in the UAE, specifically for Banking Businesses. We’ll explore the core income-generating activities (CIGAs) of banking businesses under ESR, decision-making expectations, and reporting requirements.

What is a Banking Business under UAE’s ESR?

The ESR defines a “Banking Business” as an activity that involves:

  • Accepting deposits (checkable, fixed-term, or on notice) that can be withdrawn or repaid.
  • Utilizing these deposits, at the licensee’s risk, for:
    • Granting loans, advances, overdrafts, guarantees, and similar facilities.
    • Making investments.

Generally, Banking Businesses in the UAE hold licenses as “Commercial Banks” or similar categories that permit deposit acceptance.

Not Considered Banking Businesses Under ESR:

  • Banking groups solely offering advisory, arranging, and other services to their clients.
  • Businesses engaged in:
    • Foreign currency exchange and money remittance.
    • Sale and purchase of domestic/foreign stocks, bonds, currencies, and commodities.
    • Money market transactions.

These activities fall outside the scope of a Banking Business for ESR purposes.

Core Income-Generating Activities (CIGAs) for Banking Businesses

The ESR Regulations outline the following CIGAs for Banking Businesses:

  • Raising Funds and Risk Management:
    • Managing risks like credit, currency, and interest rate risks.
    • Ensuring the licensee’s capital base remains strong and controlling funding costs.

These activities, including key functions and decision-making, are expected to be performed within the UAE.

  • Taking Hedging Positions:
    • The licensee mitigates risks by taking opposing or offsetting positions.
    • Demonstrating that related activities and decision-making occur in the UAE is crucial.
  • Providing Loans and Other Financial Services:
    • Offering credit or other financial services to clients.
    • Lending or investing customer deposits and available funds.
  • Management and Reporting:
    • Managing capital and preparing reports for investors or regulatory authorities.

Banking businesses are subject to strict regulations and reporting requirements. The licensee is expected to perform and oversee reporting functions and activities within the UAE.

Key Takeaways for ESR Compliance in Banking Businesses

  • Understand the core income-generating activities (CIGAs) of banking businesses under ESR.
  • Ensure key functions and decision-making related to CIGAs happen within the UAE.
  • Maintain robust reporting capabilities to meet regulatory and investor requirements.

By understanding these aspects of ESR, Banking Businesses in the UAE can ensure a smooth compliance process. Consulting with qualified ESR professionals like ProAct is highly recommended for comprehensive guidance and navigating specific situations.

Ref: The-UAE-Economic-Substance-Regulations-Notification-Guidance.pdf (mof.gov.ae)