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Thriving Amidst Change: Evolving Trends in Finance Law across the Middle East

The Middle East stands as a global crossroads of culture, commerce, and finance. As this region continues to flourish economically, it becomes imperative to delve into the intricate web of regulations and frameworks governing its financial landscape. In this thought leadership article, we explore the nuances of finance law in the Middle East, shedding light on its key trends and components and their implications for businesses, investors, and legal practitioners.

The financial services sector in the Middle East and GCC region is undergoing a significant transformation, embracing digitalization and inclusivity. Recent data reveals that Gulf IPOs have attracted a substantial capital of over $18 billion. With high oil prices and increased investor demand, half of the listing proceeds in Europe, the Middle East, and Africa originate from the GCC states. This positive trend is supported by the development of dynamic ecosystems in the region, such as Dubai International Financial Centre (DIFC), which nurtures the development of the IPO market from its roots.

The Middle East boasts a young population, with approximately 60% under the age of 25, digitally connected to the global tech-enabled community. This demographic, combined with entrepreneurial startups and advanced software solutions, is driving growth and attracting new talent to the financial market. The adoption of innovative technologies facilitates faster interactions with financial institutions and encourages capital movement. Cryptocurrencies and central bank digital coins are gaining prominence, with disruptive fintech players like STC Pay and UrPay securing market share. Collaborative initiatives such as Project Aber, led by IBM in partnership with the UAE and Saudi Arabia, aim to streamline payments using a single regional currency. As these tools integrate further into the global financial system, AI and predictive analytics enhance responsiveness to market fluctuations and opportunities.

The current anticipated trends in the Middle Eastern market include the increasing dominance of cryptocurrencies and the growing importance of ESG agenda. Following a highly active IPO market in 2022, the region traditionally reliant on oil and gas reserves for its wealth, has shown an increasing commitment to reducing emissions and supporting renewable energy sources. With its abundant sunshine, the region holds great potential for solar energy development. While progress in transitioning away from fossil fuels faces external challenges, the demand for lower-carbon fuels is expected to drive a decline in oil-fired power by nearly 30% by 2030.

In November and December 2023, the UAE will host the 28th Conference of the Parties (COP28), where global attention will be focused on sustainability and climate change issues. Recognizing the urgency of these matters, the DIFC has taken a proactive approach by establishing the Dubai Sustainable Finance Working Group. This pioneering group aims to position Dubai as the leading city in the region for sustainable finance.

The Evolving Regulatory Landscape

Finance law in the Middle East has undergone significant transformations in recent years, however there is still a significant room for development to create an environment for innovation, efficient financial market, and enhanced consumer experience in the GCC region. . For instance, Sharia is considered as a source of law in UAE while it forms the law in Saudi Arabia. In addition, some GCC countries lack specific legislation for the sector while others have excessive barriers to entry of foreign investments in their domestic markets. All these plus the uncertainty in terms of rights and obligations limit the pace of innovation in a market where penetration in the use of financial and other technologies is still in its infancy. It has to be appreciated that regulatory bodies across the region have been proactive in adapting to new challenges, enacting legislation that strikes a balance between attracting foreign investment and maintaining financial and cultural stability, as well as supplementing existing legislation or creating new legislation to address disruptive technology in financial services. Some of these include Large Value Payment Systems regulations, Security Tokens and cryptocurrency regulations. While such legislations will add certain financial and compliance obligations on the players in the financial industry, they are necessary to create stability and confidence.

Islamic Finance: A Cornerstone of the Region

A distinctive feature of finance law in the Middle East is the prevalence of Islamic finance principles. With the majority of the population adhering to Islamic beliefs, Shariah-compliant finance has gained substantial traction. Contracts such as Murabaha, Musharakah, and Sukuk have become integral to financing structures, adhering to the prohibition of interest (riba) and promoting risk-sharing and ethical investment practices. Islamic finance principles require that income or investment in any product or asset must meet specific criteria to be considered halal. There has been a discussion among Muslim scholars about whether rules established centuries ago can be applied to a technologically advanced digital financial marketplace. The market practice shows that the answer is yes, Shariah principles can be applied to modern cryptocurrency analysis and digital currencies. These principles are based on social justice, accountability, and ethics, which are applicable to all financial transactions. The use of smart contracts and blockchain technology ensures increased security and automation. This not only reduces administrative complexities, confusion, and errors but also increases the likelihood of banks accepting these contractual relationships. Recently, various cryptocurrency agencies, like OneGram in Dubai, have emerged across the Muslim world. These agencies are technology companies that have been certified for compliance with Shariah principles.

Foreign Investment and Market Access

Middle Eastern nations have recognized the importance of attracting foreign investment to stimulate economic growth. In pursuit of this goal, many countries have established Free Trade Zones and economic diversification initiatives. These Free Trade Zones can cater to different industries, such as logistics, industrial, IT, etc. The number of trade zones have been growing steadily in the region, especially throughout GCC countries (e.g. Saudi Arabia, UAE, Kuwait and Oman). Navigating the regulatory landscape for foreign investors requires a keen understanding of national ownership restrictions, tax incentives, and capital repatriation policies. Investors are usually required to adhere to licensing requirements and face limitations on foreign ownership, with certain sectors still closed to foreign investment. Some countries have specific rules for screening foreign direct investment, which may overlap with general licensing procedures, such as in Saudi Arabia. On the other hand, certain jurisdictions, like Jordan, do not have specific FDI rules in place.

Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

The Middle East's strategic geopolitical position makes it susceptible to money laundering and the financing of terrorism. To counter these threats, regional governments have adopted stringent AML and CFT measures aligned with international standards set by the Financial Action Task Force (FATF). Businesses operating in the region must adhere to thorough due diligence procedures and reporting obligations to ensure compliance.

In terms of Gulf countries, the Basel AML Index global risk map indicates that Saudi Arabia, the UAE, and Bahrain have medium risk levels as of 2021, scoring 5.12, 5.91, and 4.50 respectively. While there is still room for improvement, these countries are not beyond hope.

The recent introduction of new anti-money laundering guidelines by the Central Bank of the UAE ], which also address the financing of terrorism, is just one example of the positive steps being taken in the Gulf region. This growing momentum towards a more secure and appealing industry raises the question of whether it will be enough to attract increased investment.

Data Privacy and Cybersecurity

As the digital transformation sweeps across the Middle East, finance law has also had to address the challenges of data privacy and cybersecurity. Robust data protection laws and regulations are being implemented to safeguard sensitive financial information and uphold the rights of individuals. Businesses operating in the region must prioritize data security measures to prevent breaches and ensure compliance with evolving legal frameworks.

As of 2023 new data privacy laws have been implemented in most countries within the GCC region to closely monitor and regulate the use of personal data, e.g. the United Arab Emirates, Qatar, Saudi Arabia, Bahrain, Oman. Additionally, the Dubai International Finance Centre (DIFC) in the UAE has its own data privacy law under Law of 2020.

These new regulations align the regional laws of the GCC countries with international standards, joining more than 130 other jurisdictions that have comprehensive privacy laws to protect individuals from the misuse of their personal data by organizations that receive or utilize such data. Strict penalties are imposed for data misuse or breaches of the law, with fines of up to US$800,000.

It is important to note that these regulations have extraterritorial reach, meaning they apply to any organization that engages in data processing activities related to individuals in the GCC, regardless of where the organization is based. In this regard, these regulations share similarities with the European Union's General Data Protection Regulation (GDPR).

Finance law in the Middle East is a dynamic and multifaceted domain that continues to evolve in response to the region's economic growth and global connectivity. From Islamic finance principles that underpin transactions to the complexities of cross-border investments, staying abreast of the regulatory landscape is paramount for businesses, investors, and legal practitioners alike. As the Middle East embraces innovation and international collaboration, an intricate understanding of finance law will serve as an essential compass for navigating its thriving financial markets.

Article by Helena Haykin (Partner) – 29 November 2023


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