Credit Risk Management in the UAE: Challenges and Best Practices

The United Arab Emirates (UAE) has made significant strides in its financial sector, driven by economic diversification and strong regulations. However, managing credit risk remains a major challenge for banks and financial institutions. 

While the 2025 credit risk environment offers strong growth potential, financial institutions must also address cyber threats, geopolitical uncertainties, and evolving regulations. To mitigate these challenges and enhance transparency and resilience, the Central Bank of the UAE (CBUAE) has introduced new standards aligned with international best practices for banking regulation, aimed at strengthening financial stability and resilience. These standards include higher capital requirements, improved liquidity measures, and enhanced risk management practices.  

Ultimately, a forward-looking approach that leverages CBUAE regulations and AI is key to ensuring stability and profitability. 

This article explores: 

• The current state of credit risk in the UAE 
• Key challenges in credit risk management  
• Best practices for managing credit risk  
• How Cedar Rose helps businesses manage credit risk effectively  
  
  

The Current State of Credit Risk in the UAE

The macroeconomic environment in the UAE for 2025 is projected to support a stable credit risk scene, driven by a positive outlook for the oil and gas sector. With production expected to rise from 3.4 million BPD (barrels per day) in 2024 to 4.9 million BPD by 2033, sustained growth backed by substantial reserves, technological advancements, and strategic policies will bolster government revenues and stimulate economic activity. 

Strong loan growth is anticipated, reflecting business investment and consumer confidence, while real GDP is set to expand, supported by both hydrocarbon and non-hydrocarbon sectors. International agencies like Fitch, S&P Global, the IMF, and Coface all share a positive outlook, emphasising the UAE’s economic strength and diversification.  

The banking sector is also expected to remain strong, with sound profitability, liquidity, and capital buffers, along with improved asset quality and low non-performing loan levels. However, geopolitical tensions, oil price volatility, reliance on external deposits, and dependence on hydrocarbons and foreign labour pose risks. 

To strengthen financial resilience, the Central Bank of the UAE (CBUAE) introduced new Credit Risk Management Regulations and Standards back in November 2024. These measures enhance governance, standardise risk assessments, and tighten provisioning for non-performing loans.  

Key Challenges in Credit Risk Management  

Though the central bank’s developments support a stable financial system, challenges remain in effectively managing credit risk.  

The key challenges in credit risk management in the UAE include:  

1. Economic and Sector-Specific Volatility  
UAE banks are vulnerable to oil price fluctuations and global economic shifts impacting borrowers' ability to repay loans and overall credit. Cyclical volatility in the real estate sector and rising inflation also increase risks for lenders and retail borrowers. Potential drops in luxury property values and geopolitical issues add more risks across the sector, impacting the quality of bank assets. This requires banks to improve their stress tests, risk models, and portfolio diversification.  

2. Regulatory Complexity and Compliance 
Both banks and financial institutions face the challenge of adhering to evolving regulations such as Basel III, CBUAE loan classification mandates, and capital adequacy requirements. The UAE Central Bank's new credit risk rules also increase regulatory strain by mandating loan reclassification, stricter collateral valuations, and full provisioning for unsecured loans, impacting smaller banks' capital buffers. 

Increased compliance obligations from the Financial Action Task Force (FATF), particularly in AML and beneficial ownership transparency, further necessitate enhanced due diligence, customer verification, and stricter monitoring of cross-border transactions. Moreover, the expanding role of third-party providers and non-bank firms adds compliance risks, such as operational failures and contagion risks, requiring greater oversight. Furthermore, the rise of digital assets and DeFi demands stronger cryptocurrency risk assessment frameworks. 

3. Technological Disruptions, Cybersecurity, and Data Quality Issues 
The growth of fintech and online lending intensifies competition but also exposes banks to cyber threats like ransomware, phishing, and deepfake fraud. Deepfake fraud uses AI to create convincing fake media, enabling criminals to impersonate executives, bypass biometric security, and manipulate transactions. 

Given that the average cyberattack in the Middle East costs $8.7 million, banks face significant financial vulnerability. Moreover, data quality issues (e.g., inaccuracy, incompleteness) complicate AI use in credit risk models, potentially causing algorithmic bias and errors.  

4. Evolving Fraud Techniques and Operational Risks 
AI-generated synthetic identities, blending real and fake data, are increasingly used by fraudsters to create legitimate-looking profiles, build credit, and secure loans before defaulting. Account takeover (ATO) fraud, unauthorised account access, and authorised push payment (APP) fraud, where victims are tricked into sending money, are also rising.  

High UAE start-up activity, especially in Dubai, further raises B2B credit risk concerns due to potential cash flow issues and defaults. Traditional fraud detection is insufficient, requiring AI-powered fraud prevention, behavioural analytics, and real-time monitoring to combat these threats. 

Best Practices for Managing Credit Risk in the UAE 

For effective credit risk management in the UAE, financial institutions should implement the following best practices:  

• Strengthen Risk Governance and Compliance  
  Prioritise adherence to regulatory frameworks, including CBUAE's Credit Risk Management Standards (CRMS) and Basel III. Establish clear credit policies, define risk tolerance, and implement strong internal controls to enhance transparency and accountability. Conduct regular audits and stress tests to maintain financial stability and preparedness. Stay informed about regulatory developments and adapt credit policies to ensure ongoing compliance. 
  
  
• Enhance Credit Risk Assessment and Monitoring  
  Conduct thorough credit analysis by evaluating financial and non-financial factors, including repayment capacity and economic conditions. Utilise advanced risk models and AI-driven analytics to enhance risk prediction with scenario-based approaches. Implement risk-based pricing to align loan terms with borrower risk profiles, balancing credit accessibility and profitability. Strengthen data governance with accurate, centralised, and real-time data for informed lending decisions. Deploy real-time monitoring and early warning systems to identify potential defaults and financial distress signs. 
  
  
• Diversify Lending and Reduce Concentration Risks
  Mitigate credit concentration risks by avoiding excessive exposure to specific sectors, geographic regions, or borrower segments. Diversifying lending across various industries and markets helps to reduce vulnerability to economic downturns, especially in volatile sectors like real-estate. Reduce risk exposure further by leveraging alternative risk mitigation strategies, such as third-party guarantees, credit insurance, and upfront payments. 
  
  
• Strengthen Risk Mitigation and Control 
  Ensure legally sound loan agreements that clearly define repayment terms and collateral requirements. Manage collateral effectively through continuous valuation, monitoring, and proactive adjustments to mitigate credit risk. Utilise additional risk mitigation tools such as third-party guarantees, credit insurance, and upfront payments to reduce default exposure. Guarantee timely provisioning for loan losses in accordance with CBUAE governance requirements and loan classification systems, aligning with macroeconomic conditions and regulations. 
  
  
• Leverage Technology for Risk Monitoring and Compliance 
  Integrate AI-driven credit scoring models and automated workflows to enhance risk evaluation and streamline operations. Monitor loan portfolios to detect early signs of credit deterioration and enable proactive interventions. Conduct regular stress testing to assess financial vulnerabilities and refine mitigation strategies. Establish robust internal controls and compliance mechanisms to align with CBUAE regulations and reduce operational risks.
  
  

How Cedar Rose Helps Your Business Manage Credit Risk Effectively  

At Cedar Rose, we know that limited insights, market uncertainty, inefficient credit risk processes, and complex regulations can slow down your business growth.  
 
That’s why we equip your business with unparalleled access to a global database covering millions of companies, shareholders, and UBOs, all accessible through our comprehensive risk management platform, CRiS Intelligence. Our trusted credit risk reports empower businesses to monitor risk in real time, streamline assessments, ensure compliance, and make informed decisions across 250+ jurisdictions. 

With 25+ years of experience, a global clientele, and deep expertise in the Middle East and Africa, we identify and mitigate risks, delivering personalised business intelligence solutions tailored to your needs.

Contact us or request a demo to learn more. 

Sources: 

1. https://rulebook.centralbank.ae/en/rulebook/credit-risk-management-regulation
2. https://rulebook.centralbank.ae/en/rulebook/credit-risk-management-standards
3. https://www.zawya.com/en/press-release/companies-news/rising-cyber-threats-target-uaes-financial-sector-and-critical-infrastructure-in-2025-qqb6j12z
4. https://www.oilandgasmiddleeast.com/cloud/2025/01/09/K8qf3n3a-UAE-Banking-Sector-2025-Outlook.pdf
5.  https://www.coface.com/news-economy-and-insights/business-risk-dashboard/country-risk-files/united-arab-emirates