Despite the existence of a legally enforceable personal loan system, and many personal loan controls, there are many cases where the borrower is unable to repay the loan. Some, unfortunately, feel that there is no other resort but to leave the country without settling their debts.
Obtaining a Personal Loan
According to UAE legislation, individuals can apply for a personal loan through banks and financing companies approved to operate in the country.
As per the Central Bank of the United Arab Emirates, the following has been determined:
- Individuals may obtain a personal loan from banks or financing companies, and it is paid from the salary, end-of-service dues of the borrower, or from any other regular income derived from a known, verifiable source. The personal loan offered to the borrower may not be more than 20 times the value of the borrower’s salary or gross income.
- Banks and financing companies are to ensure that this limit is not exceeded, and the repayments may not exceed 50% of the borrower’s gross salary or from any other regular income derived from a known, verifiable source. The maximum loan repayment period is 48 months.
- In the event that the period of the loan or banking facility extends passed the retirement age of the borrower, banks and financing companies must reduce the loan or bank facilities to only 30% of the borrower’s income or pension. Banks and financing companies can obtain from the customer only the number of post-dated checks that cover the installments and not exceeding 120% of the value of the loan or the debit balance.
- The bank or financing company must calculate the amount of interest it receives on the loan, as well as announce the interest rates on loans, and set the rate on the diminishing balance of the loan on an annual basis. Banks and financing companies are prohibited from taking blank signed checks in exchange for granting loans.
The Penalty for Returned Cheques in the UAE
The United Arab Emirates follows flexible financial policies in granting loans, but at the same time, these policies include severe penalties in the event of fraud, bad faith, or failure to pay such loans.
The legal penalty for evasion or failure to pay the value of loan installments may be imprisonment for a period ranging from one month to 3 years, and a fine of up to AED1000. The fine is not obligatory in all cases, but it is provided for in the law.
Certain banks require the customer to sign cheques as a guarantee for the payment of the loan amount.
In November 2017, Law No. (1) of 2017 was promulgated whereby the Dubai government took the initiative to suspend the imprisonment penalty on a bounced cheque where the value does not exceed AED 200,000, and substituted it with a fine ranging from AED2,000 to AED10,000 depending on the value of the returned cheque. This law provides the public prosecutor with the authority to impose a criminal fine in cases of misdemeanors instead of referring the matter to court.
Initiatives of the Emirate of Dubai
In light of the exceptional circumstances created by the Corona pandemic, and under the directives of His Highness Sheikh Mohammed bin Rashid Al Maktoum, the banking sector in the Emirate of Dubai launched an initiative in March 2020 for the period of April to the end of June 2020, whereby the following leniencies were granted:
- Grace periods of up to three months without interest or fees for retail loan holders who have been required to take unpaid leave.
- Giving credit card users the opportunity to benefit from installment programs for school tuition payments and food purchases without interest or fees for a period of up to six months.
- Deferment of loan installments for three months without interest or fees.
- Reducing the minimum monthly balance required for a business account to 10,000 dirhams and exempting it from its fees for a period of three months.
Fleeing the Country is not a Solution
The consequences for such a defaulter can be dire as there are implementation and debt collection agreements between the UAE and all Arab countries (including some foreign countries) whereby fugitives in criminal cases may be extradited back to the UAE to face criminal charges.
Banks and financial institutions can also resort to obtaining the services of a debt collection agency, which will in turn pursue the defaulting person to his/her new place of residence in order to collect the debts owed.
The following consequences may result in the event that the defaulting person escapes with the bank’s funds abroad:
- Legal and judicial prosecution by means of debt collection companies and law firms that communicate with banks in the fugitive’s country, as well as investigation and pursuit by INTERPOL.
- The fugitive borrower will not be able to return to the UAE.
- The fugitive borrower’s name may be blacklisted, making it difficult for him to obtain any loan facilities from other banks.
- The implementation of travel bans against the fugitive.
- Banks and financial institutions may obtain court orders to seize the fugitive’s assets either in the UAE or abroad.
- Fines and imprisonment.
End of Prison Sentences for Defaulters
Notwithstanding the aforesaid, the UAE Cabinet has recently issued Federal Law No. 19 of 2019 on Insolvency which is aimed at protecting defaulting borrowers from imprisonment and prosecution, effectively decriminalizing defaulting in respect of debt repayments.
The new law ends the threat of a prison sentence for borrowers who are unable to fulfill their debt obligations and gives borrowers who do not have a realistic way to repay their debts a legal haven to settle their financial obligations to their creditors.
However, this does not mean that the insolvency law offers an easy hassle-free way of avoiding your obligations. It is important to remember that the borrower’s credit record will still reflect disputes related to his/her debts, which will in turn limit their chances of qualifying for loans or credit facilities in the future. As such, borrowers must still behave responsibly when applying for loans or credit.
