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Abu Dhabi's new digital bank licensing attracts regional, overseas interest

Abu Dhabi's new free zone licensing regime for digital banks has received "a significant level of interest" from the region, Asia, Europe and the U.S., according to regulators.

Abu Dhabi Global Market, a free zone in the capital of the United Arab Emirates, has courted financial technology players and announced its digital banking framework earlier this year, which focuses on "conventional banks seeking to establish digital banks, or branches of digital banks, as well as for firms with innovative value propositions."

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Regulators are optimistic that a new framework to offer digital banking licenses offer new opportunities and streamline services SMEs.

Source: ADGM

The regulators are confident that the regime could offer new opportunities and streamline services for small and medium-sized enterprises.

"It's generated a lot of interest. We're very happy with the volume of inquiries that we're seeing," said Fraser Brown, executive director of banking and insurance authorization at the Financial Services Regulatory Authority, the free zone's regulator.

Brown and Wai Lum Kwok, executive director of capital markets at the regulatory authority, said in an interview that the framework will allow digital banks to set up in the free zone. This will encourage collaboration between banks and financial technology companies, and promote financial inclusion and boost economic growth.

"Being a digital bank allows them a completely new way of building the technology stack, [and] means that banks can achieve better monitoring and regulatory compliance," said Kwok.

There is increased emphasis on fintech in the UAE, with domestic banks including Emirates NBD Bank PJSC and Mashreqbank PSC having set up "flanker" digital banks targeting younger consumers, both of which this year have also announced SME-focused neobanks.

Sector-based restrictions

The UAE Central Bank is widely seen as reluctant to grant licenses to digital banks. It has not issued any new commercial banks licenses in the last 15 years or so, said one Dubai-based banking lawyer. The last bank licenses issued to foreign investment banks were granted in 2008, he said.

The Dubai International Financial Centre, the country's largest financial free zone, has more than 60 bank branches, according to its register, but these are all branches or subsidiaries of foreign banks, and its regulator has not issued stand-alone licenses.

That makes the Abu Dhabi Global Market a viable route for a bank to receive a license, as well as established banks that want to set up a digital bank.

Free zone licenses come with several restrictions including a prohibition on dealing in "deposit taking from the state's markets" and "in the UAE dirham," as per a 2004 federal law. But there is no prohibition on having retail clients, including taking deposits from retail clients in other markets and lending to them, said Brown. However, the Financial Services Regulatory Authority decides on permitted business models on a case-by-case basis, he said.

"What we believe is that digital banks can establish here, set up banking arrangements onshore, and also attract business from the wider region," said Brown.

For a bank to receive a stand-alone license it must meet various requirements and have a minimum of $10 million paid-up capital — though capital requirements may be a lot higher, said Kwok. Supervision standards are "consistent with international standards," he said.

The free zone also offers other forms of licence for "firms looking to looking to deploy innovative solutions in the payment space," such as e-wallets, tokens and stored-value cards, with a lower regulatory and capital burden than a full digital banking licence.

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The UAE Central Bank is reluctant to offer new banking licenses, according to legal experts.

Source: UAE Central Bank

Overbanked, overcomplicated

While most analysts consider the UAE overbanked, stories in the startup and SME sectors are legion of the travails around obtaining a bank account. A 2018 report by the Dubai Chamber of Commerce that surveyed entrepreneurs found that opening a bank account can take up to three months in some cases.

Digital banking "can make a contribution in terms of its innovation and speed of decision making" in areas such as SME banking, said Brown.

Trade finance — traditionally document and paper based — is another area in which digital banks can make a contribution, said Kwok.

It was announced in September that Abu Dhabi Global Market had granted its first digital banking licence to the Anglo Gulf Trade Bank, a joint venture between the Mubadala Investment Co. PJSC, an Abu Dhabi wealth fund, and the U.K.-based Rowland family.

Deputy CEO Daniel Gould described the bank's goal as "to revolutionize and disrupt corporate banking en masse, not just in trade, but right across transactional banking services: Payments, [foreign exchange] and other treasury services," starting in the UAE.

With a lower cost-base, the Anglo Gulf Trade Bank will be able to profitably service smaller customers, said Gould. Still, due to the bank's smaller size, he says it will not be "true competition" for domestic lenders and will be looking at collaboration and syndication.

Digital impact

Brown said the Financial Services Regulatory Authority has seen "some interest from local UAE banks in exploring the idea of setting something up with us," but said it is "premature to say anything about the onshore banks" and whether they will apply for digital banking licenses.

They are also receiving interest from regional players, said Kwok, "to explore this regime to serve the wider GCC region."

Saudi banks could be among those taking interest in the new regime, said Brown. "We've spoken to many banks in the region and further afield."

On the key aspect of timelines for a banking licence, the Abu Dhabi Global Market notes an "applicant for a digital banking licence should not underestimate the time it will take to implement robust information technology systems."

Brown was reluctant to comment directly on how long an application process might take, saying that it would depend on the business itself and the draft business plan.