A lot happens in 40 years.
It can be a struggle for the average person to keep up with change, let alone those who are tasked to build the legislation required to keep up with rapid economic growth. When it comes to investment, falling behind can be costly.
One of the UAE’s most highly regarded lawyers, Essam Al Tamimi, is quite rightly petitioning for a modern investment law, as he tells Arabian Business in this edition. The current central bank legislation dates back to 1979, only eight years after the country was founded.
While Al Tamimi says it has served the country’s complex banking and finance sector well, much has changed since the 1970s.
“[Central bank laws] have done a wonderful job in protecting the currency and fiscal structure but banking has changed since then, new ideas have evolved and there are areas where the law needs fixing,” says Al Tamimi, one of the few lawyers whose opinions are coveted by UAE legislators.
New ideas have certainly evolved. In 1979, banks had very little computer software, let alone online banking, and smartphone apps that are changing everything from customer relationships to business models but also placing increasing pressure on security systems.
Customer expectations have also evolved amid dramatic demographic and social change over the decades. Banks were blamed for helping to fuel the country’s 2009 debt epidemic, which for retail customers abated for a few years but is again at risky levels.
Government-related entities were responsible for much of the 2009-10 exposure and the central bank has since responded with a new requirement for each bank to limit its exposure to local governments and government-related enterprises to 100 percent of its capital. However, in May, banks’ exposure to the public sector as a percentage of capital stood at a high 128 percent, according to the Bank of America Merrill Lynch.
New regulations have flowed since the crisis but the fact they are only imposed by circulars from boards of directors, rather than through formal legislation, leaves holes in investor certainty and transparency.
Al Tamimi says he has been working on a draft investment law and general revisions to the central banking legislation for about three years. But authorities are reluctant, fearful of damaging business.
“It is my opinion that the authorities are being very cautious in trying to bring in the law at the right time to protect the local economy,” he says.
“The law should encourage foreign investment while not killing local industry, and this is a very fine balance to strike.”
Caution can be a great thing. But as small and medium sized enterprises (SMEs) gradually encroach on the public sector’s economic contribution to the country, investor confidence will require greater security and transparency.
Not only are they already finding it difficult to obtain loans, the head of the UAE Banks Federation, Abdul Aziz Al Ghurair, revealed last month that an increasing number of SME owners are fleeing the country with unpaid debt worth a total of $1.4bn.
The new Commercial Companies Law, enacted on July 1, should make it easier for firms to set up and trade in the UAE, but investment security remains crucial, too.
Without dual sound regulatory systems, investors are bound to shy away. The UAE’s investment legislation is far from unattractive, but what is the point in being good if you can be great?