The “Buy Now, Pay Later” (BNPL) model has gained significant traction globally, offering consumers a convenient way to purchase goods and services with deferred payments. If you’re looking to establish a BNPL platform in the UAE, it is crucial to understand and comply with the regulatory framework set by the Central Bank of the UAE (CBUAE). This article outlines the essential requirements and measures necessary to operate a BNPL entity in the UAE.
Licensing Requirements
Obtaining a License
To operate a BNPL platform, you must apply for a license from the CBUAE. This process involves submitting detailed information about the business, including its ownership structure, management team, business model, and financial projections. The CBUAE will review the application to ensure the proposed entity meets all regulatory requirements.
Permitted Activities
A licensed BNPL platform can engage in the following financing activities:
- Retail finance, including personal loans, credit cards, vehicle loans and short-term credit
- Mortgage finance, including residential mortgages and commercial mortgages
- Wholesale finance, including loans to large corporate borrowers, small and medium-sized enterprises, micro- financing, finance and operating leasing and wage protection schemes
- Pre-paid cards
- Distribution of third-party products as an agent; provided that the Finance Company received approval from the relevant competent authority for the distribution of the third-party products concerned
It is important to note that these activities must comply with Islamic Sharia provisions if the entity operates as an Islamic Finance Company.
Capital Requirements
A BNPL entity must maintain a minimum capital base continuously to ensure financial stability and to absorb potential losses which will be the higher of:
- Aggregate Capital Funds of Twenty million Dirham (AED 20,000,000) or
- Aggregate Capital Funds equivalent to 5 per cent of the outstanding lending volume
Aggregate Capital Funds consist of the following items:
- Paid-up capital
- Reserves, excluding revaluation reserve and
- Retained earnings
The following items must be deducted from Aggregate Capital Funds:
- Accumulated losses and
- Goodwill
Operational and Compliance Measures
Corporate Governance
The governance framework of the BNPL platform must align with the principles set by the CBUAE. This includes having a robust board of directors, clear organisational structure and defined roles and responsibilities to ensure effective oversight and management of the entity.
Internal Policies and Procedures
BNPL entities must develop comprehensive internal policies and procedures that cover:
- Extension of credit
- Risk management, assessment, handling, monitoring and disclosure
- Information technology and security
- Compliance with relevant laws, regulations and instructions
- Remuneration and incentives of senior management and board members
- Outsourcing of business activities
These policies should be regularly reviewed and updated to align with regulatory changes and business needs.
Risk Management and Internal Controls
Implement a robust risk management framework to identify, assess and mitigate various risks associated with BNPL operations. This includes credit risk, operational risk and liquidity risk. The entity must also have internal controls in place to ensure compliance with regulatory requirements and to prevent fraud and misconduct.
Liquidity Requirements
BNPL platforms must maintain sufficient liquid assets to meet short-term obligations and withstand liquidity stress. The CBUAE requires finance companies to hold an amount equivalent to 10% of their aggregate liabilities in liquid assets.
Credit Exposure Restrictions
BNPL entities must limit the credit exposure to a single borrower or a group of related entities to a maximum of 7% of the entity’s aggregate capital funds. The total large credit exposures must not exceed 100% of the aggregate capital funds of the finance company.
Consumer Protection
Ensure transparent and fair treatment of consumers. This includes clear disclosure of terms and conditions, interest rates, fees and charges associated with the BNPL service. The platform must also have a robust dispute and complaints management system to address consumer disputes promptly and effectively.
Regulatory Reporting and External Audit
Regularly submit financial statements and other required reports to the CBUAE to demonstrate ongoing compliance with regulatory requirements. These include:
- Monthly Credit Information Reporting
- Annual Financial Statements
- Publication of Annual Accounts
- Annual Board and Shareholding Reports
- Supervisory Return Forms
Additionally, the BNPL platform must undergo an annual external audit to ensure the accuracy and reliability of financial information.
Transparency and Disclosures
Maintain high standards of transparency in all operations. This includes timely and accurate disclosure of financial performance, governance practices, and any material changes in the business to stakeholders and regulatory authorities.
Conclusion
Establishing a BNPL platform in the UAE involves navigating a complex regulatory landscape. By adhering to the licensing requirements, implementing robust governance and risk management practices, and ensuring consumer protection, you can build a compliant and sustainable BNPL business.
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