Capital Markets and Portfolio Investment

The UAE government is focused on building infrastructure to create an environment conducive to economic growth and outside investment.  It is also collaborating with its partners in the GCC to support ventures in the region. UAE government efforts to create such an environment for investments resulted in: i) no taxes or restrictions on the repatriation of capital; ii) free movement of labor and low barriers to entry (effective tariffs are five percent for most goods); and iii) an emphasis on diversifying the economy away from oil, which offers a broad array of investment options for FDI.  Drivers for the economy include real estate, tourism, manufacturing, and financial services.

The UAE has three stock markets:  Abu Dhabi Securities Exchange, Dubai Financial Market, and NASDAQ Dubai.  The regulatory body, the Securities and Commodities Authority (SCA), classifies brokerages into two groups:  “those which engage in trading only while the clearance and settlement operations are conducted through clearance members” and “those which engage in trading clearance and settlement operations for their clients.”  Under the regulations, trading brokerages require paid-up capital of USD 820,000, whereas trading and clearance brokerages need USD 2.7 million. Bank guarantees required for brokerages to trade on the bourses are USD 367,000.

The UAE issued investment funds regulations in September 2012, known as the “twin peak” regulatory framework designed to govern the marketing of investment funds established outside the UAE to domestic investors and the establishment of local funds domiciled inside the UAE.  This regulation gave the SCA, rather than the Central Bank, authority over the licensing, regulation and oversight of the marketing of investment funds. The marketing of a foreign fund (including “offshore” UAE-based funds, such as those domiciled in the DIFC) requires the appointment of a locally licensed placement agent.  Other restrictions contained in the regulations, such as limitations on funds investing more than 15 percent in any one underlying issuer, have led fund managers to question whether the UAE is seeking to attract international or regionally focused investment funds to be domiciled in the country. The UAE government has also encouraged certain high-profile projects to be undertaken via a public joint stock company in order to allow the issue of shares to the public.  Further, the UAE government requires any company carrying out banking, insurance, or investment services for a third party to be a public joint stock company.

The UAE has no restrictions on the making of payments and transfers for current international transactions, according to the IMF, except for those restrictions for security reasons that have been notified by authorities.  There are no restrictions on the transfer of funds into or out of the UAE, and currencies are traded freely at market-dictated rates.

Credit is generally allocated on market terms, and foreign investors can access local credit markets.  Interest rates are usually very close to those in the United States considering the local currency is pegged to the dollar.  There have been complaints that GREs crowd out private sector borrowers.

Money and Banking System

The UAE has a robust banking sector, with 49 banks, 27 of which are foreign institutions.  In January 2019, three UAE banks, Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank merged to create a bank with assets of USD 114 billion.

Non-performing loans comprised 6.4 percent of total loans in 2017, according to figures from the World Bank.  The Central Bank of the UAE recorded total sector assets of USD 733 billion as of December 2017.

There are some restrictions on foreigners’ ability to establish a current bank account, and legal residents and Emiratis can access loans under more favorable terms than non-residents.

Foreign Exchange and Remittances

Foreign Exchange Policies

According to the IMF, the UAE has no limitations on the making of payments and transfers for current international transactions, except for restrictions related to security reasons that have been notified by authorities.  Currencies are traded freely at market-determined prices. The UAE dirham has been pegged to the dollar since 2002. The mid-point between the official buying and selling rate for the dirham (AED or Dhs) is fixed at AED 3.6725 per USD 1.

Remittance Policies

The Central Bank of the UAE initiated the creation of the Foreign Exchange & Remittance Group (FERG), made up of various exchange companies, which is registered with the Dubai Chamber of Commerce & Industry.  Unlike their counterparts across the world that deal mainly in money exchange, exchange companies in the UAE are the primary channels for transferring large volumes of remittances through official channels. According to migration and remittance data from the World Bank, in 2017 the UAE had migrant remittance outflows of USD 44.4 billion.  The Central Bank reported migrant remittances totaling USD 46.1 billion in 2018. Exchange companies are important partners in the UAE government’s electronic salary transfer system, called the Wages Protection System, designed to ensure workers are paid according to the terms of their employment. They also handle various ancillary services ranging from credit card payments, to national bonds, and traveler’s checks.

Sovereign Wealth Funds

Abu Dhabi is home to two sovereign wealth funds—the Abu Dhabi Investment Authority (ADIA), and Mubadala Investment Company—with estimated total assets of approximately USD 1 trillion.  Each Abu Dhabi fund comprises a chair and board members appointed by the Ruler of Abu Dhabi. President Khalifa Bin Zayed Al Nahyan is the chair of ADIA and Abu Dhabi Crown Prince Mohammed Bin Zayed Al Nahyan is the chair of Mubadala.  Emirates Investment Authority, the UAE’s federal sovereign wealth fund, is modest by comparison with estimated assets of about USD 15 billion. The Investment Corporation of Dubai (ICD) is Dubai’s primary sovereign wealth fund, with an estimated USD 234 billion in assets according to ICD’s June 2018 financial report.

UAE funds vary in their approaches to managing investments.  ADIA generally does not actively seek to manage or take an operational role in the public companies in which it invests, while Mubadala tends to take a more active role in particular sectors, including oil and gas, aerospace, infrastructure, and early-stage venture capital.  ADIA exercises its voting rights as a shareholder in certain circumstances to protect its interests, or to oppose motions that may be detrimental to shareholders as a body. According to ADIA, the fund carries out its investment program independently and without reference to the government of Abu Dhabi.

ADIA in 2008 agreed to act alongside the IMF as co-chair of the International Working Group of sovereign wealth funds, which eventually became the International Forum of Sovereign Wealth Funds (IFSWF).  Comprising representatives from 31 countries, the IFSWF was created to demonstrate that sovereign wealth funds had robust internal frameworks and governance practices, and that their investments were made only on an economic and financial basis.