By Andrew White
EXCLUSIVE: Top UAE lawyer says banks using debt laws to dodge due diligence checks.
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become used to the “artificial guarantee” the cheque fraud law brings, and would suffer significant losses if it was repealed.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.”For all the latest UAE news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
We should close our bank accounts with HSBC ,, and today i will do it & creat Group in Facebook under the title of NO HSBC till the CEO of HSBC regert his statement
I am also going to close my account with HSBC.
I have closed my personal account with HSBC and will now close my business accounts. They also have poor customer service that reflects the attitudes of the management.
The UAE was for over 2 decades the "Land of Opportinities" and it turned down to be by now the "Land of Liability". The exuberant prospecrity was unleached by ruling authorities. Nowadays, the UAE Nationals are frustrated from their dual losses in real-estate and stock market. The Investors are discontented by the YOY regression of net profit. The Expats are crippled by loans and credit cards defaults. If these three categories are all affected, what could revive the market?
Itâ€™s a ripe time to for the authorities to change this law by giving a clear timeframe. We need change and change and change cannot happen overtime. The government should allow a clear timeline where in banks are allowed to streamline their operations. The credit decisions (mainly non-secured loans such as personal loans and credit cards) are to be undertaken by these banks with utmost diligence as the terms clearly say that these are unsecured. It is like sitting on a time bomb if authorities are not taking actions this time around.
HSBC CEO is Encourage his staff not to offer fair solutions to the defaulters or bank clients ,, So lets close our bank accounts with HSBC Lets meet at HSBC head Office and show them we are very serious The Media will be there
why jail a person because a cheque has "bounced" why not block his ability to flee the country, give him the chance and opposrtunity to clear up the debts. By jailing him, you deprive him of this opportunity to work and clear up the debt. Banks use this avenue because they get the money back from the insurance, I have even heard of one major UAE bank, that hikes up the amount demanded.. our esteemed rulers should give a good thought to the idea of blocking a persons departure, giving him a clear aopportunity to clear up the debt. if not than Jail him... Jail should not be an automatic action...
the comment made by the hsbc boss is an amazing form of lunacy. company bosses like him should always be accountable to customers, shareholders, and the board (in the real world, where business with these types of individuals would be unprofitable). i dont see how any of those mentioned would approve of him remaining in his post. he should have been sacked. but agian, that is the real world!
HSBC will suffer from their lack of business sense and taking advantage of a Law to cover their incomptence. UAE gvt should charge the banks everytime they are rquested to get someone for a bounced check. These charges should be 50% of the check amount. This will encourage the Banks to do the due deligence, there is no need to change the laws and the gvt will get income. Today the authorities are only getting bad image and the cost.
Let every expat customer of HSBC become serious and leave the bank. If people are ready I will be one of the first to leave the bank. I have 2 salary accounts at HSBC. Let us bring banks with irresponsible CEO's to their senses, so that such irresponsible persons are kicked out of their smugness.