INTRODUCTION
Supply chain finance (SCF) has emerged as a pivotal financial tool in the global trade ecosystem, fundamentally transforming how businesses manage liquidity and optimise working capital. The United Arab Emirates (UAE), positioning itself as a leading financial hub globally, has witnessed remarkable growth in its SCF market, driven by strategic regulatory developments and increasing market demand.
As businesses increasingly seek sophisticated financial solutions to bridge the trade finance gap and enhance operational efficiency, SCF presents a compelling proposition for both suppliers and buyers across various industries.
This article examines the legal and regulatory landscape of SCF within the UAE, analysing the distinct frameworks applicable across mainland UAE and its prominent financial free zones of DIFC and ADGM. The analysis encompasses recent legislative developments, regulatory requirements, and practical considerations for entities seeking to establish or expand SCF operations within the jurisdiction.
Supply Chain Finance and Its Techniques
SCF is defined as the use of financing and risk-mitigation practices and techniques to optimize the management of the working capital and liquidity invested in supply-chain processes and transactions.1 SCF encompasses financial solutions that optimise cash flow by enabling buyers to extend payment terms and arrange for cash flow, whereas suppliers receive early payment opportunities. Under this arrangement, banks and financial institutions provide immediate payments to suppliers, with credit risk assessment based on the buyer's commercial and financial strength, rather than the supplier's financial capacity. Parties to SCF transactions consist of buyers and sellers, which are trading and collaborating with each other along the supply chain. As required, these parties work with finance providers under tri-partite arrangements to raise finance using various SCF techniques and other forms of finance. The parties, and especially 'anchor' parties on account of their financial strength, often have objectives to improve supply chain stability, liquidity, financial performance, risk management, and balance sheet efficiency.
Types of SCF:
- Invoice Discounting: Suppliers receive immediate payment from financial institutions against verified invoices at predetermined discount rates, maintaining confidentiality whilst retaining responsibility for debt collection and customer relationship management.
- Reverse Factoring: Anchor clients (typically large, creditworthy buyers) collaborate with financial institutions to facilitate early supplier payments. The buyer confirms invoice validity to the financial institution, which offers early payment to suppliers at competitive rates based on the buyer's creditworthiness.
- Dynamic Discounting: Suppliers offer variable discounts in exchange for early payment, with discount rates fluctuating based on payment timing and market conditions, benefiting both buyers and suppliers.
- Factoring: Financial institutions purchase trade accounts receivables from suppliers at a discount.
MARKET TRENDS
The UAE's SCF market demonstrates remarkable growth trajectory and increasing sophistication. According to a report by Horizon, in 2023, the UAE's reverse factoring market generated revenue of USD 13.01 billion, with projections indicating growth to USD 26.1 billion by 2030, representing a compound annual growth rate of 10.5% from 2024 to 2030. 2 The trade finance gap, measuring the disparity between demand and supply for trade finance facilities, has expanded significantly in recent years, with the Asian Development Bank reporting that the global trade finance gap grew to a record $2.5 trillion in 2022 from $1.7 trillion two years earlier.3 This widening gap creates substantial opportunities for SCF providers to address unmet financing needs, highlighting the macroeconomic significance of SCF development in supporting regional trade and economic growth.
REGULATORY INITIATIVES
Building on the market's growth potential, the Central Bank of the UAE (CBUAE) has implemented targeted measures to establish the UAE as a regional trade finance hub and enhance cross-border interoperability for trade finance. A key initiative includes Project Aperta4, developed with the Bank for International Settlements Innovation Hub to connect open finance infrastructures across multiple jurisdictions. The project specifically addresses trade finance obstacles by facilitating access to letters of credit, trade credit insurance and supply chain financing through open finance infrastructures. Further, in 2023, the CBUAE launched the Financial Infrastructure Transformation Programme (FITP) 5 as part of its wider strategy to accelerate the digital transformation of financial services, with completion targeted for 2026. As part of the FITP, the CBUAE is rolling out digital payment infrastructure to improve cross-border payment efficiency and better support SCF operations. Key milestones under the programme include the formal launch of open finance, the approval of a new licensing system for stablecoins, the introduction of the domestic card scheme 'Jaywan' and the CBUAE's first cross-border payment using its central bank digital currency, the digital dirham, via the blockchain-based 'mBridge' platform in collaboration with China. Most significantly, the CBUAE enacted the UAE Factoring Law in December 2021, creating the first federal law specifically addressing factoring and assignment of receivables, which was built upon the UAE Movables Security Law, 2020. These legislative and technological initiatives demonstrate the CBUAE's systematic approach to creating a comprehensive legal and digital infrastructure supporting modern SCF operations.
The evolution in UAE's SCF market as well as regulatory frameworks, reflects a shift from traditional bank-dominated SCF provision, towards platform-based business models that can accommodate multiple funders participating in programmes. This shift reduces systemic risk by eliminating single points of failure, building upon SCF's historical record of low default rates and high resilience during economic downturns.
REGULATORY FRAMEWORK IN UAE
The regulatory framework governing SCF in the UAE has evolved considerably, particularly with the introduction of comprehensive legislation that provides legal clarity and operational certainty for market participants.
I. Mainland UAE
Primary Legislative Framework
The regulatory landscape governing SCF in mainland UAE centres on Federal Decree-Law No. 16 of 2021, effective from 8 December 2021 (the UAE Factoring Law), which provides a comprehensive legal framework for the assignment and sale of receivables. This legislation operates in conjunction with Federal Law No. 5 of 1985 (the Civil Code), which establishes foundational principles for debt assignment.
Article 1106 of the Civil Code defines assignment as the legal transfer of debt obligations from one party to another, providing the conceptual foundation for factoring transactions. The UAE Factoring Law builds upon this foundation to create a sophisticated regulatory framework specifically addressing modern SCF practices.
The UAE Factoring Law introduces a structured and comprehensive legal framework for receivables financing, aiming to enhance certainty and commercial viability for both traditional and modern factoring arrangements. It defines factoring broadly to include the assignment of both current and future receivables, with or without recourse, offering flexibility to accommodate various financing models including supply chain finance. A key element of the framework is the requirement to register assignments in the UAE Movables Security Register, which serves as a public record and determines the enforceability of assignments against third parties. This registration system is essential for establishing clear priority rights and mitigating the risk of competing claims over the same receivables. The law also addresses important operational issues, such as the extent to which transferors can provide guarantees regarding debtor payment. While the legislation aims to limit guarantees that shift credit risk back to the assignor, it still leaves room for interpretation, particularly in structuring recourse arrangements in a compliant manner. Enforcement rights are clearly laid out, allowing assignees to either rely on contractual remedies or invoke broader enforcement tools available under the UAE Movables Security Law. Finally, factoring is positioned as a regulated financial activity in the UAE, with licensing requirements ensuring that only authorized entities can engage in this business, and the law mandates that entities must obtain a license from the CBUAE to conduct factoring activities. This requirement ensures appropriate regulatory supervision whilst maintaining market integrity and consumer protection.
Notably, the relationship between the UAE Factoring Law and the CBUAE's Finance Companies Regulation (FCR) creates important considerations for prospective market participants. The FCR establishes licensing requirements for finance companies operating in the UAE to provide credit facilities. Article 1.3(c) of the FCR explicitly excludes factoring and lease financing from the regulation's scope, suggesting these activities are not automatically covered under standard finance company licences. As mentioned above, Article 25 of the UAE Factoring Law mandates that factoring can only be conducted by entities licensed by the CBUAE. From a regulatory perspective, SCF is typically treated as a credit activity, traditionally undertaken by banks and entities holding credit licences. As such, without an underlying credit licence (bank or finance company licence) or a partnership model as mentioned below, SCF providers cannot provide the requisite SCF services. In light of the interplay between the UAE Factoring Law and FCR, applicants must approach the CBUAE for either a finance company license along with a factoring permission, or a pure factoring license in partnership with an existing finance company.
However, not all entities seek a license right-away, considering the capital requirements involved. An alternative business model that has emerged is a partnership model between banks/finance companies and technology companies to provide digitised SCF solutions, connecting companies requiring finance with banks or investors providing funding through digital platforms. This approach enables faster access to credit while allowing non-bank entities to operate without requiring their own credit licences. From a regulatory perspective, entities must obtain a No Objection Certificate (NOC) from the CBUAE under Article 8 of the 'Outsourcing Standards for Banks'(in case of banks), or Article 15 of the Finance Companies Regulation (in case of finance companies), prior to such partnerships involving outsourcing of the regulated entity's functions. This framework enables technology entities to provide digital solutions and faster credit access whilst banks or finance companies provide the underlying credit facilities.
While the mainland framework governs SCF in the UAE's onshore jurisdiction, businesses operating in the country's financial free zones are subject to distinct regulatory regimes. These include the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), which are each regulated by the Dubai Financial Services Authority (DFSA) and Financial Services Regulatory Authority (FSRA) respectively. The following sections examine the treatment of SCF under these regimes.
II. Dubai International Financial Centre (DIFC)
The DFSA regulates SCF activities within the DIFC through its comprehensive rulebook, which defines "Providing Credit" as extending credit facilities to borrowers or potential borrowers. This definition includes various SCF arrangements where firms extend monetary value to parties who will repay subsequently, whether through loans, advances, or other financing arrangements.
- Licensing and Capital Requirements: Firms engaging in credit provision must obtain authorisation as Category 2 firms and maintain minimum base capital of USD 2 million. The actual capital requirement represents the highest of three measures: the Base Capital Requirement, the Risk-Based Capital Requirement (covering credit, market, and operational risk exposures), and the Expenditure-Based Capital Minimum (calculated as 13/52 of the firm's annual fixed expenditure).
- Operational Restrictions and Requirements: DIFC firms face specific operational restrictions, including prohibition from extending credit in UAE Dirhams (AED) and restriction of credit provision to business-purpose lending. These limitations confine SCF activities to corporate or institutional clients, or individuals qualifying as business borrowers, which aligns well with typical SCF client profiles including suppliers, merchants, and SMEs seeking receivables finance.
III. Abu Dhabi Global Market (ADGM)
The FSRA governs SCF activities within ADGM through a framework similar in principle to the DIFC's regime, whilst incorporating distinct regulatory nuances. SCF offerings in ADGM are generally treated as "Providing Credit," requiring appropriate Financial Services Permissions (FSP).
- Regulatory Definitions and Requirements: The FSRA defines "Providing Credit" as entering into credit facilities with persons in their capacity as borrowers or potential borrowers. SCF companies directly providing financing must obtain FSP as Category 2 firms, with base capital requirements of USD 2 million.
- Business Restrictions: The FSRA restricts credit provision to business customers exclusively. Authorised Persons may provide credit to Retail Clients only when such clients are Undertakings and the credit serves business purposes, ensuring appropriate market focus and risk management.
SCF business models vary significantly, with some firms engaging in direct lending, while others operate as intermediaries arranging credit between parties. In the latter case, where no capital is deployed, entities typically fall under the regulatory classification of "Arranging Credit," which is treated as a lower-risk activity and generally licensed under Category 4 in both the DIFC and ADGM. However, a DIFC- or ADGM-based SCF firm may need to consider the potential application of federal laws, particularly in relation to the enforceability and priority of receivables assignments. Additionally, firms should remain mindful that conducting regulated activities outside the financial free zone may give rise to regulatory considerations under the mainland licensing framework.
CONCLUSION
Across the UAE, the regulatory landscape for SCF is both robust and well-calibrated to support a range of business models. In mainland UAE, the interplay between the UAE Factoring Law and the FCR creates a defined legal and licensing structure for receivables finance and credit provision, while also accommodating partnership-based digital models. In the DIFC and ADGM, activities are regulated under common law systems and are categorised according to the nature of the credit activity, whether the firm provides or arranges credit, with corresponding licensing and capital requirements. Entities contemplating market entry should engage experienced advisors to develop strategies that align with applicable frameworks whilst maximising commercial opportunities in this rapidly developing sector.
Footnotes
1. GSCFF (Global Supply Chain Finance Forum), 'Standard Definitions for Techniques of Supply Chain Finance' (2016), accessible here.
2. Grand View Research, Horizon Outlook: Reverse Factoring Market - UAE, accessible here.
3. Asian Development Bank, 'Global Trade Finance Gap Expands to $2.5 Trillion in 2022' (2023), accessible here.
4. CBUAE Press Release, October 18 2024, accessible here.
5. CBUAE Press Release, February 12 2023, accessible here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
