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 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.