A change in UAE law at the beginning of 2023 has created some uncertainty over whether unsecured financings remain permitted under UAE law.

On 2 January 2023, UAE Federal Law No. 50 of 2022 (the New Commercial Code) came into force, replacing Federal Law No. 18 of 1993 (the Old Commercial Code) as the key statutory framework regulating dealings between commercial counterparties in the UAE. Among the changes introduced by the New Commercial Code are new stipulations about guarantees and security. Article 409(2) of the New Commercial Code requires that "banks must have sufficient securities or guarantees against loans they provide". By contrast, Article 409(2) of the Old Commercial Code provided that "loans may be guaranteed with securities and according to such conditions as agreed". 

Also on 2 January 2023, Federal Law No. 23 of 2022 came into force, bringing into effect a number of changes to Federal Law No. 14 of 2018. These include a new Article 121, which requires licensed financial institutions to obtain "sufficient guarantees for all types of facilities provided to natural clients and private sole proprietorships, in accordance with the client's income or the guarantee, if any, and the size of the required facilities, as determined by the Central Bank".

While Article 121 of the updated Banking Law only applies to facilities provided to "natural clients and private sole proprietorships", the New Commercial Code also applies to financings with corporate borrowers. 

So, are unsecured financings still permitted under UAE law? Unsecured financings have been commonplace in the UAE market for many years and it seems unlikely that prohibiting them entirely is the intention. It seems more likely that these recent changes in law indicate a policy drive for more responsible lending practices. Financiers that have lent without sufficient security may find it harder to enforce their contractual rights through the UAE courts and may also face sanction from regulators. However, until further guidance is provided, the precise practical implications of this change in law remain unclear. 

We have been busy assisting clients navigate this uncertainty over recent months. If you have any queries on the above or require assistance from our Banking and Finance team, please contact us. You may also wish to read this more detailed article on this topic, which we published earlier this year.