Economic Substance Regulations (ESR) – Banking Business

In Reference to Economic Substance Regulations (ESR), ‘Banking Business’ means the business of accepting deposits of money which can be withdrawn or are repayable on demand/fixed period or on notice through cheque, or otherwise and using such deposits, at the risk of the Licensee, for:

  • Making/giving of loans, advances, overdrafts, guarantees and similar facilities; or
  • Making of investments.

Licensees undertaking a Banking Business in the UAE would generally be licensed as a “Commercial Bank”, or an equivalent licensing category that allows for the acceptance of deposits.

A Licensee that is part of a banking group and only provides advisory, arranging and other services to clients of the banking group would generally not be considered to conduct a Banking Business. UAE businesses engaged in exchanging foreign currency and remitting money, and financial intermediaries in the sale and purchase of domestic and foreign stocks and bonds, currencies and commodities and money market transactions, are not considered a Banking Business for purposes of the ESR Regulations.

What are the Core Income Generating Activities of banking Business?

The ESR Regulations mention the following CIGAs for a Banking Business:

  • Raising funds: Managing risk including credit, currency and interest risk. A Banking Business risk management activities would be aimed at ensuring the capital base of the Licensee is not eroded and to control the cost of funds. The key functions and related decision-making in respect of these activities are expected to be performed in the UAE.
  • Taking hedging positions: The Licensee mitigates risks by taking opposing or offsetting positions and must be able to demonstrate that the related activities and decisions making take place in the UAE.
  • Providing loans: Credit or other financial services to customers, to lend or otherwise invest its customer deposits and other available funds.
  • Management & reporting: Managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business. The banking sector is highly regulated, and involves various reporting to regulators and investors. The Licensee is expected to perform and oversee its reporting related functions and activities in the UAE.

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