Demystifying Middle East regulatory systems

By Jody Glenn Waugh and Ashish Banga, Al Tamimi & Company
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The Middle East can, for some, represent an unknown quantity and the prospect of conducting business in the region is a daunting one. The reality is quite the opposite. Although there are peculiarities that exist in the Middle East, especially when considering financing transactions, the region has a well developed legal and regulatory system providing an environment where international and local financial institutions thrive, and unique financing structures are developed and implemented to meet customer demands.

Civil law region

All Arab states are civil law countries and, with the exception of Lebanon, prescribe in their constitutions Islam as the religion of the state. With the exception of Jordan, all to a greater or lesser degree prescribe Shari’a as “a” or “the” source of legislation.

Jody Glenn Waugh Al Tamimi & Company 银行金融部门合伙人 Partner, Banking & Finance Department Al Tamimi & Company
Jody Glenn Waugh
Al Tamimi & Company
Partner, Banking & Finance Department
Al Tamimi & Company

While civil law jurisdictions are nothing new, it is not uncommon for questions to be raised around the applicability of Shari’a law, or the jurisdiction of Shari’a courts in the Middle East in the context of financing transactions. While we do not propose to answer this question in detail in this article, it is sufficient to say that for financing transactions the (codified) civil and commercial laws of the relevant jurisdiction will be applied. In relation to Shari’a courts, in the UAE and many other Arab states the jurisdiction of such courts is limited to inheritance, divorce and child custody matters. All commercial matters fall within the ambit of the commercial courts. Such courts are permitted to refer to Shari’a principles, however this would typically be in the absence of clear legislation and/or established customary business practices.

Conventional versus Islamic

Subject to a few exceptions, both conventional and Islamic finance offerings are available in the Middle East. However it is Shari’a-compliant financing that has thrived in the Middle East in recent years, largely due to growing demand. At present there is also considerable liquidity held by Islamic institutions in the region, making it common for those seeking funding to consult with both conventional and Islamic banks. On high-value financing, it is now market standard to see multi-tranche syndications including both conventional and Islamic participants. It is also common for those seeking funding from the region to consider Shari’a-compliant structures to maximize possible funding sources.

Shari’a-compliant financing has therefore emerged as mainstream in the Middle East financial sector, with many of the conventional banks opting to have Shari’a-compliant offerings – i.e. through Islamic windows or subsidiaries – to ensure they remain competitive and able to reach the entire market. In its most basic form Islamic finance can be explained as asset-based finance – the most notable characteristics being the prohibition of interest and speculative contracts.

Another significant distinguishing factor is risk sharing. Under Shari’a-compliant structures financiers and finance takers usually are in a position where they share business risk, unlike conventional borrowing where often all possible risk is borne by the borrowing party.

Regulatory framework

The regulatory framework in the Middle East is continually evolving, in part to keep pace with the rapidly expanding financial sector and in part to align with global standards. Throughout the region there are two distinct regulatory approaches –either a single integrated regulator or, the more popular, split between the respective central bank and capital/financial markets.

Ashish Banga Al Tamimi & Company 律师 Associate Al Tamimi & Company
Ashish Banga
Al Tamimi & Company
Al Tamimi & Company

The UAE Central Bank is responsible for regulating the banking and financial activities within the United Arab Emirates, while the Securities and Commodities Authority, which was initially established to regulate publicly listed companies and the two securities exchanges of the Emirates, now also oversees custody, securities brokerage, funds, financial consultancy, research and investment management activities. There is also the Dubai International Financial Services Authority and Financial Services Regulatory Authority regulating the financial activities within Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market, respectively, the two financial free zones of the country.

The two principal regulatory authorities that dominate Kuwait’s regulatory landscape with respect to financial matters are the Central Bank of Kuwait (CBK) and the Capital Markets Authority (CMA). The CBK is responsible for a vast array of financial activities such as licensing and regulation of conventional and Islamic banks including branches of foreign banks, while the CMA overlooks, among other things, the marketing, offer and sale of securities, including merger and acquisition activities.

The Qatari financial markets are built on the pillars of Qatar Central Bank and the Qatar Financial Markets Authority, which are primarily responsible for the operation and licensing of banks within Qatar, and dealing of securities, respectively. Very similar to the DIFC, Qatar has its financial free zone, Qatar Financial Centre, under which activities are regulated by Qatar Financial Centre Regulatory Authority.

The other two very similar regulatory structures are that of Saudi Arabia and Oman. Each has its own central bank for regulation and licensing of banking activities, and capital market authority for regulating the securities business.

On the opposite side is Bahrain with its single integrated regulator, the Central Bank of Bahrain, which is responsible for all financial activities within Bahrain. This approach is also followed in Egypt through the Egyptian Financial Supervisory Authority, the integrated government agency that regulates the financial service industry in Egypt (following consolidation).


The common thread that runs through all of these regulatory landscapes is the licensing aspect, which is similar across the region, with mostly dual licensing authorities – i.e. the respective central banks of each jurisdiction – responsible for licensing of banking and financial activities, and a securities or capital markets regulator overlooking the securities market of respective jurisdictions including brokerage, custodian, asset management and investment funds activities. The general rule is that anyone looking to conduct these activities in the region should be locally licensed by the relevant regulator. Having said that, in practice cross-border lending and the provision of financial services is common and to a certain extent a tolerated practice within the Middle East (subject to certain exceptions) provided it does not amount to ‘conducting business’ in the respective jurisdictions.

Jody Glenn Waugh is a partner and Ashish Banga is an associate in the banking & finance department of Al Tamimi & Company


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