Navigating Private Credit In The Middle East

Introduction

The continued growth and diversification of the regional economies, coupled with significant advancements in the legal frameworks, have made the United Arab Emirates and the Kingdom of Saudi Arabia increasingly attractive destinations for private credit providers looking to deploy capital. Despite this growing interest, compared to the United States and Europe, the Middle East remains a relatively untapped market and offers significant opportunities for private credit providers

Careful navigation of the modernized legal frameworks can deliver robust financing structures and help overcome risk considerations which in the past may have acted as a barrier to entry for certain private credit providers. In this context, understanding the different legal frameworks, and the interplay between them, is key for designing optimum funding structures.

This guide provides a high-level overview of some of the key considerations for private credit providers looking to deploy capital in the UAE (both onshore and in the two financial free zones, DIFC and ADGM) or KSA.

Comparative overview of key considerations

"Onshore" UAE

Can a fund make a new loan to a borrower incorporated in this jurisdiction without a banking license?	All forms of lending ostensibly require a license from the UAE Central Bank. However, it is common for funds domiciled outside of the UAE to lend without a license where the lender complies with certain "tolerated practices." These tolerated practices entail implementing limitations in respect of how the lender deals with the borrower, to ensure a strict cross-border element, and require that any marketing be conducted on a discrete and limited basis to sophisticated borrowers only. These tolerated practices are not codified in law, but reliance on them is market practice. The position is more nuanced for funds domiciled in the onshore UAE and registered with the Securities and Commodities Authority (SCA) as a credit fund. Whilst there is no exemption from the Central Bank's prohibition on lending that applies to credit funds, managers may get comfortable that the SCA framework provides sufficient regulatory aircover.
Do taxes or other charges usually present a material issue to a fund lending directly to, or taking credit support from, a local company?	No. There are no withholding or stamp taxes. Interest on borrowings is generally tax deductible up to 30% of tax adjusted EBITDA. Real estate mortgage registration fees can be significant.
Can interest and remuneration be agreed freely between a fund and a borrower?	The parties are generally free to agree the interest rate and remuneration. However, the following limitations may apply in the context of any enforcement proceedings undertaken before the onshore courts: (a) the onshore courts may be reluctant to uphold provisions for the payment of interest where the rate exceeds 9% per annum or the court otherwise considers the rate to be unreasonable; and (b) the onshore courts are unlikely to uphold provisions requiring the payment of compound interest. Additional limitations may apply in cases where the fund is licensed by the UAE Central Bank.
Can a fund directly hold security?	This will depend on the type of secured asset. For instance, security over shares, real property and vehicles, as well as commercial mortgages over the tangible and intangible elements of a business, must be held by a bank or financial institution licensed by the UAE Central Bank. Security over other types of assets (such as security over movable assets granted pursuant to the UAE Movables Security Law and assignment of contractual rights) may be held by a non-licensed fund.
Can a local company provide credit support for the acquisition of its or its holding companies' shares?	There are prohibitions on joint stock companies and their subsidiaries from providing credit support for the acquisition of their own shares or the shares of their subsidiaries, subject to certain exceptions.
Are there corporate benefit or similar issues which potentially impair the granting of guarantees or security?	Corporate benefit need only be established in general terms. Any concerns in this respect can be mitigated by obtaining unanimous shareholder approval.
Is the enforcement regime relatively lender friendly?	Due to the absence of self-help remedies and reliance on court processes, "onshore" UAE has historically not been regarded as a lender-friendly jurisdiction when it comes to enforcement. However, recent changes to the law have introduced self-help remedies for the enforcement of certain types of security. These changes are generally regarded as helpful, but they remain largely untested. Structures providing for a swift enforcement through a single point of enforcement can be implemented using holding companies incorporated offshore or in DIFC or ADGM, with onshore security being taken primarily for defensive purposes.
Is there a well-developed and sufficiently tested insolvency regime in place?	The UAE Bankruptcy Law was first introduced in 2016 and most recently updated in 2023. While the updated UAE Bankruptcy Law remains in its relative infancy, the recent updates to the law are viewed as significant steps towards modernizing the UAE's approach to insolvency and bankruptcy. During 2024, the first three major restructurings were successfully implemented under the UAE Bankruptcy Law, with A&O Shearman advising on all three. These successful outcomes have instilled a degree of confidence in the UAE's bankruptcy processes that was not previously present.

Dubai International Financial Centre (DIFC)

Can a fund make a new loan to a borrower incorporated in this jurisdiction without a banking license?	All forms of lending ostensibly require a license from the Dubai Financial Services Authority (DFSA). However, a tolerated practice exists through which a loan from a lender domiciled outside of the DIFC, and which is originated pursuant to reverse solicitation or that is offered to persons who qualify as "Professional Clients" only, will ordinarily be held to fall outside the DFSA's regulatory perimeter. A DIFC-domiciled lender would need authorization from the DFSA for Providing Credit, unless it is registered as a Private Credit Fund.
Do taxes or other charges usually present a material issue to a fund lending directly to, or taking credit support from, a local company?	No. There are no withholding or stamp taxes. Real estate mortgage registration fees can be significant.
Can interest and remuneration be agreed freely between a fund and a borrower?	The parties are generally free to agree the interest rate and remuneration. However, if an interest rate is deemed excessively high, unreasonable or a penalty, it could potentially be challenged in the DIFC courts
Can a fund directly hold security?	Yes.
Can a local company provide credit support for the acquisition of its or its holding companies' shares?	There are prohibitions in relation to public companies. Subject to certain exceptions and conditions: (a) a public company and its subsidiaries are generally prohibited from providing credit support in relation to the acquisition of shares in itself; and (b) a public company is generally prohibited from providing credit support in relation to the acquisition of shares in its private holding company.
Are there corporate benefit or similar issues which potentially impair the granting of guarantees or security?	Yes. Any concerns in this respect can be mitigated by obtaining unanimous shareholder approval
Is the enforcement regime relatively lender friendly?	Yes. The DIFC operates under an independent legal system based on common law, separate from the onshore UAE's civil law system. This provides a level of predictability and transparency that is often favored by lenders. The DIFC also provides a comprehensive framework for the creation, perfection, and enforcement of security interests. This includes provisions for self-help remedies, which can be particularly advantageous for lenders seeking to enforce their security interests without lengthy court procedures. Structures providing for a swift enforcement through a single point of enforcement can be implemented using holding companies incorporated in the DIFC.
Is there a well-developed and sufficiently tested insolvency regime in place?	The DIFC has its own insolvency regime, which is largely based on the English insolvency law. The DIFC Insolvency Law provides for various insolvency and restructuring options, such as company voluntary arrangements, rehabilitation plans, administration, receivership, liquidation and schemes of arrangement. The DIFC Insolvency Law also incorporates the UNCITRAL Model Law on Cross-Border Insolvency, which facilitates the recognition and cooperation of foreign insolvency proceedings in the DIFC. The DIFC insolvency regime is relatively well developed. The DIFC courts have issued several judgments and orders in relation to insolvency and restructuring matters.

Abu Dhabi Global Markets (ADGM)

Can a fund make a new loan to a borrower incorporated in this jurisdiction without a banking license?	All forms of lending ostensibly require a license from the Financial Services Regulatory Authority (FSRA). There is some uncertainty as to whether a lender domiciled outside of the ADGM could make use of certain exemptions to these licensing requirements. However, it is common for funds domiciled outside of the ADGM to lend without a license where the lender complies with certain "tolerated practices." An ADGM-domiciled fund would need authorization from the FSRA, unless registered as a Private Credit Fund.
Do taxes or other charges usually present a material issue to a fund lending directly to, or taking credit support from, a local company?	No. There are no withholding or stamp taxes.
Can interest and remuneration be agreed freely between a fund and a borrower?	The parties are generally free to agree the interest rate and remuneration. However, if an interest rate is deemed excessively high, unreasonable or a penalty, it could potentially be challenged in the ADGM courts.
Can a fund directly hold security?	Yes
Can a local company provide credit support for the acquisition of its or its holding companies' shares?	There are prohibitions in relation to public companies. Subject to certain exceptions and conditions: (a) a public company and its subsidiaries are generally prohibited from providing credit support in relation to the acquisition of shares in itself; and (b) a public company is generally prohibited from providing credit support in relation to the acquisition of shares in its private holding company
Are there corporate benefit or similar issues which potentially impair the granting of guarantees or security?	Yes. Any concerns in this respect can be mitigated by obtaining unanimous shareholder approval.
Is the enforcement regime relatively lender friendly?	Yes. Like the DIFC, the ADGM operates under an independent legal system based on common law, separate from the onshore UAE's civil law system. This provides a level of predictability and transparency that is often favored by lenders. The ADGM also provides a framework for the creation, perfection and enforcement of security interests. This includes provisions for self-help remedies, which can be particularly advantageous for lenders seeking to enforce their security interests without lengthy court procedures. Structures providing for a swift enforcement through a single point of enforcement can be implemented using holding companies incorporated in the ADGM.
Is there a well-developed and sufficiently tested insolvency regime in place?	The ADGM has a well-developed insolvency regime in place, which is largely based on the English insolvency law and incorporates the UNCITRAL Model Law on Cross-Border Insolvency. The ADGM offers a range of insolvency and restructuring options, such as administration, deeds of company arrangement, schemes of arrangement, and liquidation. The ADGM insolvency regime was recently tested by the successful restructuring of NMC Healthcare Group, which was one of the largest and most complex restructurings in the region.

Kingdom of Saudi Arabia (KSA)

Can a fund make a new loan to a borrower incorporated in this jurisdiction without a banking license?	All forms of financing ostensibly require a license from the Saudi Arabian Monetary Authority (SAMA). However, a tolerated practice exists in relation to the provision of financing by overseas financiers on a cross-border basis to the extent that the financier does not: (a) carry out any deposit-taking activity in respect of KSA persons; or (b) undertake marketing of financing services within KSA
Do taxes or other charges usually present a material issue to a fund lending directly to, or taking credit support from, a local company?	Withholding tax of 5% is applicable on interest/cost of borrowing, but may be reduced to zero under applicable double tax treaties.
Can interest and remuneration be agreed freely between a fund and a borrower?	The parties are generally free to agree the commercial terms of the facility and the return owed to the financier. Penalties and compounding are not permissible. As the charging of interest is not permissible under Shari'ah law, transactions are structured using profit-sharing, leasing and other non-interest-based mechanisms which achieve very similar economic outcomes to conventional lending arrangements
Can a fund directly hold security?	This will depend on the type of secured asset. For instance, security over land must be held by a person licensed by SAMA. Security over other types of assets (such as security over bank accounts) may be held by a non-licensed fund. Where the primary route for enforcement is likely to be onshore in KSA, it is usually advisable to appoint a local security agent to hold the security
Can a local company provide credit support for the acquisition of its or its holding companies' shares?	Upstream guarantees and other forms of credit support are not prohibited per se, but there are corporate law challenges to be navigated with respect to particular transactions. There is little market precedent for credit support for the acquisition of a company's own shares.
Are there corporate benefit or similar issues which potentially impair the granting of guarantees or security?	Yes, corporate benefit and similar issues must be taken into account when considering upstream guarantees or security
Is the enforcement regime relatively lender friendly?	Due to limited self-help remedies, reliance on court processes and limited available court precedent, KSA is still viewed as a relatively challenging jurisdiction for financiers when it comes to enforcement. Structures providing for a swift enforcement through a single point of enforcement can be implemented using holding companies incorporated offshore, with onshore security being taken primarily for defensive purposes.
Is there a well-developed and sufficiently tested insolvency regime in place?	The insolvency regime of KSA is governed by the Saudi Bankruptcy Law of 2018. This law represents a significant reform in KSA's approach to insolvency, aiming to provide a structured and transparent framework for dealing with financial distress and insolvency situations. Whilst there have been several high-profile restructurings and liquidations under this law, there remains uncertainty and complexity in its application and interpretation which can impact its effectiveness and predictability. The available procedures do not afford financiers with the level of control to which they may be accustomed in more established jurisdictions.

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.