The Central Bank plans to introduce the direct debit payment system to the UAE by June 15

But bankers warned that the UAE must press ahead with plans for a credit bureau if the direct debits are to fully replace security cheques carrying criminal liabilities for bounced payments.

All of the UAE's banks and finance companies are to adopt the service, which allows borrowers to fund repayments from their bank account when instalments are due."The facility is designed to eliminate the need to sign several post-dated cheques for instalments upon obtaining a loan," said the Central Bank in a statement. "The benefit for account holders is that they can plan their expenses more efficiently."

The system, which covers mortgages, personal loans and credit cards, is part of a federal government strategy that involves "adopting technology to enhance electronic systems and improve services to banking customers in the UAE", the statement added.

"Given our focus as a regulator we believe it is necessary to have a prudent, stronger and stable economy. Our current intention is to establish a more convenient retail banking system that will create more stable and progressive economic development," the Central Bank said.
In November that the Central Bank was in the midst of trials of its direct debit system to address the 1.4 million cheques that failed at the point of use during last year, representing one in every five used.
The invalid payments were worth Dh46.8 billion (US$12.74bn), according to the Central Bank's data, and although the data do not differentiate between cheques that fail for technical reasons and those that bounce, banks and ATM vendors say there are no major issues with the UAE's cheque-clearing technology.

Bouncing a cheque is a criminal offence, although a presidential decree in October immunised UAE nationals from serving jail time for writing a bad cheque. Since then, more than 1,000 Emirati defaulters have been released from prison.

The implementation of direct debits would be a step in the right direction towards an end of cheque use, but the creation of a credit bureau is still needed, said Ala'a Eraiqat, the chief executive of Abu Dhabi Commercial Bank, at the bank's annual general meeting last week.
"It's an operational change, and it definitely brings more efficiency. But will it replace the use of cheques when you sign a loan? Not yet."
The new system would reduce risks in the processing of payments for loan and mortgage instalments, but would not alter the need for better assessment of credit risk, Mr Eraiqat added.

"You can have a much smoother execution," he said."However, the credit bureau will be the real mark in the evolution of lending."
At present, banks use cheques as a method of securing payments as they have no means of assessing a borrower's creditworthiness.
A consensus has emerged during the past year that the UAE's reliance on criminal penalties to ensure discipline among borrowers is in need of overhaul.
The UAE Banks Federation has been discussing how to proceed with decriminalisation of bounced cheques with the Central Bank, although it has warned that an alternative should be found to ensure that banks are still willing to lend.
Bankers say they expect the long-delayed Federal Credit Bureau to become operational at some point during the third

UAE Central Bank caps mortgages at 50% of property value for expatsand 70% for Emiratis

In a move apparently aimed at eliminating speculators from the real estate market, the UAE’s Central Bank has decided to direct banks in the country to cap mortgage lending for expatriates at 50 per cent of the property’s value.
According to banking and real estate sources, mortgages for expatriates are being limited to 50 per cent of the property’s value for their first property, and 40 per cent for the second unit.
For UAE nationals, the rate will be slashed to 70 per cent for the first property and 60 per cent for the second unit.
A number of banks that  they were yet to analyse the circular from the UAE Central Bank and were therefore not in a position to comment on the move.
It said the new rules would be enforced at the start of 2013, adding that the Central Bank gave no reason for the decision.
Nevertheless, the Central Bank has been locked in a drive to bolster the country’s financial sector following the 2008 global fiscal distress and regional debt default crises that jolted many local banks.
In May 2011, the Central Bank enforced new rules on retail lending, capping personal loans at 20 times a borrower’s monthly salary and stipulating that the loan must be repaid within 48 months.
Those regulations covered all retail loans including personal, auto, housing loans and credit credits, and were aimed at controlling lending activity and excessive charges by banks following public complaints about a surge in bank fees.
According to Central Bank statistics, however, mortgage lending has not seen a major spike in recent months. The latest available data for August 2012 shows that real estate loans issued by UAE banks stood at Dh162.6 billion, marginally lower than the Dh163.2 billion registered at the end of 2010.
This means that, in effect, mortgages have stagnated at this level for 18 months. The Central Bank’s move, in such a scenario, is being looked at as a proactive one rather than a reactive one, aimed at ensuring that the country’s banks’ non-performing loans do not see a repeat of the spike that they saw after the 2008/09 global economic slowdown.
Banks in the country have seen specific provisions for NPLs surge by over 47 per cent since the end of 2010 – from Dh44.3bn at the end of December 2010 to Dh65.3 in October 2012.
Before this directive was issued, there was no official cap on the percentage of mortgage lending and each bank was free to decide the loan-to-value ratio that they offered.
Under the new guidelines, however, UAE nationals seeking mortgages must pay 30 per cent of the property value as a first instalment for the first unit and 40 per cent for the other units, ‘Emarat Al Youm’ daily said, citing the Central Bank circular to banks.
The new rules are expected to directly impact speculators, who might be targeting a resurgent property market in the UAE in general and Dubai in particular.
These new rules will make ‘flipping’ of properties much more difficult and ensure that a property bubble is not created.
The report said the new rules stipulated that banks would pay a maximum 70 per cent for the first property and 60 per cent for the remaining units for each Emirati customer.
“This means that banks must pay a maximum 60 per cent of the property value for expatriates receiving a mortgage loan,” the report said.
The new rules come amidst a steady recovery in the real estate sector in the second largest Arab economy, with the shares of most property firms rising in 2012.
The UAE has said it is considering joining Saudi Arabia, the largest Arab economy, in enacting a mortgage law to regulate the real estate sector, which was severely jolted in the wake of the 2008 global fiscal distress.

UAE Central Bank issues New loan rules

The Central Bank has finally issued unified forms for all types of bank loans, ending years of controversy over such contracts and persistent complaints by borrowers, a Dubai-based newspaper said on Wednesday.

The three key forms cover personal loans, car financing and overdraft and they are all binding to all the 51 banks and other financing firms operating in the second largest Arab economy, the Arabic language daily Emirat Alyoum said.

Banks can claim immediate payment on loans if:

1. The debtor is terminated for any reason from his/her work.
2. Transfer of the monthly salary of the borrower or any part of it to another party without the written consent of the bank.
3. Breach of commitments or obligations which have been included in the contract of the loan.
4. Failing to pay three consecutive installments or six non-consecutive 
5. in addition to the invalidity of customer data.
6. Borrower leaves country permanently.
7. Death of borrower.

Bank has the right to obtain an insurance policy on the life of the debtor in case of disability and should be paid by the borrower himself. Bank can use revenue of policy to pay out the loan, to keep the interest or any other amounts due on the shoulders of the borrower or his heirs.

Interests and Commissions

Banks will have the right to calculate interests and commissions on average daily balance of amounts withdrawn and outstanding on the loan from the date of withdrawal based on the number of actual days elapsed and on the basis that a year is 365 days.

These interests are added to the loan balance so that it should be paid with the monthly instalments.

Commissions and fees and expenses incurred on the loan, according to UAE Central Bank regulations, may be amended from time to time.

Car loans

Bank should be informed of specifications of the vehicle and the value of payment in addition to the interest rate.

Insurance company must be approved by the bank.

In case of failure of the borrower to renew insurance policy, renewal fees will be added to the loan.

The forms, which will be enforced shortly, have been prepared following many rounds of negotiations and consultations between the Central Bank and the Emirates Banks Association, which groups all banks in the UAE.

The new contracts authorise banks to ask borrowers to ensure all borrowings are covered by a life insurance or a disability insurance policy, in some cases to guarantee the loans would be paid back as the lender could use its value to regain the rest of its funds.

The paper said the forms must include all details about the size of the loan, maturity, and interest rates while borrowers must submit a letter from the employer committing him to have his salary and end of service benefits transferred to that bank during the loan term.

It said the Central Bank defined seven cases in which the loan period should suspended and payment must be made immediately, including termination of services of the borrower, transfer of the salary to another bank without prior approval of the bank, violation of any loan terms by the borrower, defaulting on payment of three successive installments or six non-successive installments, presenting false data by the borrower, death of the borrower and the client’s departure from the UAE permanently.

As for overdraft, the new contract allows banks to cancel or reduce such facilities any time they deem necessary and to ask borrowers to pay back at a date determined by the lender provided the borrower is given 30-day notice.

According to the paper, the three loan forms clearly define the relationship between borrowers and lenders. One term stresses that the bank must not open an account and agree to give a loan before the borrower submits all the documents requested by the bank. Another term authorizes banks to close the account of borrowers in case they give cheques that bounce.

The forms also permit banks to provide all necessary information about the borrowers and their accounts to courts or other competent departments.