The UAE Central Bank (CBUAE) has issued amended regulations for finance companies to regulate the growing ‘Buy Now, Pay Later’ (BNPL) schemes. The move is in alignment with global shifts in consumer financial trends and the growing popularity of credit products and services. The regulation will also extend to other short-term credit facilities, according to WAM.
Beneficiary entities
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. Entities can also carry out this activity upon being licensed by the Central Bank as restricted license finance companies.
Moreover, unlicensed entities that engage in any form of short-term credit activity and intend to continue carrying out such activities must apply to CBUAE to obtain a approval as a licensed finance company. They can also apply as a partner with a licensed finance company or bank.
The Finance Companies Regulation defines short-term credit as any credit granted for a period not exceeding 12 months. Credit is used to purchase goods or services without collecting interest. It is also used without placing a lien against guarantees or a security deposit required from the borrower.
BNPL business model
The BNPL’s business model allows consumers to make online purchases instantly and spread out their payments in interest-free installments. This model has boomed since the start of the COVID-19 pandemic, driven by millennials and Generation Z.
Global BNPL transaction values are expected to grow to $576 billion by 2026, up from $120 billion in 2021. That is according to data analytics firm GlobalData.
Moreover, BNPL accounted for 2.3 percent of the global e-commerce market in 2021. That is about $2 out of every $100 spent on a transaction.
Regulatory conditions
CBUAE stated that the regulations aim to protect customers of finance companies. It added that they aim to enhance the general stability of the financial sector.
In addition, CBUAE said that the maximum total short-term credit provided to a borrower by a restricted financing company or agent must not exceed AED20,000 ($5,446). Borrowers are also restricted to their total verified net income for three months, whichever is less.
Additionally, the maximum credit granted to the borrower should be based on the results of affordability assessments conducted. It takes into account the ability to repay, which reduces the risk of over-indebtedness, according to CBUAE.
Moreover, restricted license finance companies or agents should not charge interest on short-term credit.
Read: Rise of shop now, pay later schemes in the Middle East
Additional terms
Total fees, including late payment fees charged on any short-term credit, should not exceed 30 percent of the original credit amount.
Additionally, borrowers’ assets, including movable and immovable property, may not be used to secure any short-term credit they extend.
Finally, the regulator must also request borrowers’ credit information from a credit information agency before extending credit of more than AED5,000.
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