Banks in the UAE are taking advantage of the country’s strict debt laws to avoid conducting due diligence on loan applicants, according to one of the UAE’s most prominent lawyers.
“The banks are using the government and the police as debt collectors,” Dr Habib Al Mulla, founder and executive chairman of the Dubai-based Habib Al Mulla Company, told Arabian Business in an interview.
“Rather than doing due diligence on the borrower, rather than taking tangible guarantees, they are simply relying on the issue of bounced cheques,” he continued.
“You apply for a credit card, and instead of taking appropriate measures and checking whether you’re paying your bills properly, or whether you have a good credit history, they give you a credit limit.”
He also said that the government is unlikely to decriminalise the offence of bouncing a cheque, as banks in the UAE have become used to the “artificial guarantee” the cheque fraud law brings, and would suffer significant losses if it was repealed.
According to Al Mulla, the jailing of individuals who bounce cheques is costing the government a “huge” sum; however, the law is unlikely to change soon due to the fragility of UAE banks’ balance sheets.
“It won’t change – there are forces behind this issue,” he said. “I think the value of post-dated cheques in the market is so huge that if a decision comes that says bounced cheques are not a criminal action any more, there will be huge losses for the banks.
“They would sustain losses because they built their whole credit and risk system on the issue of bounced cheques, not on the credibility and worth of the customer. It is a decision to spare the banking industry from a very heavy shock.”
Al Mulla added that while the law was “a good way of getting money back from the banks”, it is harming the UAE’s competitiveness on the international stage.
“It is not best practice, and when you talk about the UAE’s competitiveness, you cannot talk about best practice in one area and not decide to stick to our own rules in other areas,” he said.
Last week the head of HSBC UAE sparked outrage when he told Arabian Business that jailing debtors remains an effective way for banks to retrieve bad loans.
“It has worked for us. People immediately get people to come and bail them out, and get the money in... [Historically] it did work. In most cases it did work,” said Abdulfattah Sharaf.
His comments were criticised by academics including Roy Batchelor, Professor of Banking and Finance at London’s Cass Business school, who said the imprisonment of debtors who default on payments in the Gulf “sounds morally wrong”.
“I can see it is very convenient for a bank to say ‘I will lend to anyone and it is their problem if they default.’ But in the rest of the world it is the banks’ responsibility to try to assess the credit worthiness of individuals,” he said.
"But this [jail for defaulters] gives the banks even less incentive to do due diligence on their borrowers, whereas in the rest of the world banks are being beaten up so they are ultra-prudent when it comes to lending on a personal level.”
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