The government of the UAE knows that it needs to diversify its economy away from a total dependence on oil revenues. Central to this awareness is the attention it’s now giving to the Emirates’ financial services sector. As global oil prices have maintained a downward trend in the past few months, that focus has only increased.

So, what are the challenges facing this emerging financial market? At Holborn Assets we believe that these challenges fall into a number of categories, from impending regulatory reforms through to the dynamic external economic outlook.

Regulatory reforms

Clearly effective, transparent regulation is fundamental to the effective running of any financial services sector, but it’s still early days in many ways for the UAE. New regulations are on their way however, not least the complex package of changes required by the Basel IV regulations that emerged after the financial crash. The changes are a proposed standard on capital reserves for banks, introduced to mitigate against the risk of any future crash – broadly speaking, they will require more stringent capital requirements and greater financial disclosure. The way that individual institutions implement these will be critical to their success.

The process of preparing for these changes is valuable, forcing financial services businesses to consider how they operate and how they prepare for the future. All of this adds up to a more stable and transparent regulatory outlook for the sector.

Here’s what KPMG say in a recent report on financial services in UAE. “The UAE is a developing banking market with operators and customers at varying levels of complexity and maturity,” says Emilio Pera, Partner, Head of Financial Services. “Tighter liquidity – some of it caused by external forces – has stressed a number of financial institutions. It is to the credit of the regulator and the leading financial institutions that the sector has emerged relatively unscathed from the experience.”

[KPMG: UAE banking perspectives 2017]

Economic environment

In addition to the changing regulatory landscape for financial services in UAE, two tax changes are also challenging businesses. Banks will face increased pressure on their bottom lines from the introduction of VAT early next year, as well as the challenge of adopting common reporting standards (CRS).

“VAT is likely to be an irrecoverable cost, negatively affecting margins for the banking sector,” says KPMG’s Umair Hameed. “It is therefore imperative that the impact of VAT on UAE banks is clearly understood.”

CRS meanwhile is a set of measures intended to counter tax evasion and increase transparency, and will almost certainly have cost implications for UAE financial services businesses.

The big picture

Looking at the broader economic challenges facing the financial services sector in UAE, it’s clear that low oil prices and a financial industry facing continuing tight liquidity – when cash is tied up in non-liquid assets – will hamper growth.

However, forward-thinking companies within the sector are already seeking out new and innovative ways to overcome these challenges – not least by developing more agile, customer-focused business strategies for the coming years.

Doing this within the new regulatory framework, and with the necessary technological safeguards in place to protect against expected external threats such as cyber attacks, will be key to their success.