Banks are ready to introduce direct-debit payments for customers as early as next week.
The new system will revolutionise retail banking and herald the end of writing reams of post-dated cheques for car loans and other transactions.
“The introduction of the direct-debit system is a step in the right direction towards increasing the efficiency of our banking system,” the Central Bank said.
“Given our focus as a regulator we believe it is necessary to have a prudent, stronger and stable economy.”
The regulator gave no official launch date but senior bank sources said some banks could start offering direct-debit services from October 5.
Direct enables customers to pay regular and variable bills such as housing, utilities, telephone and credit cards electronically. It is a popular and accepted form of payment in the US and Europe.
Its absence in the UAE means people use standing orders or postdated cheques to meet many large recurring expenses.
Analysts say direct debit is more flexible than standing orders as banks and retailers can make amendments to the amount they collect without the need to obtain the customer’s signature each time.
In most countries, direct debit also guarantees customers a refund if an incorrect amount is debited.
Paying for an item by direct debit could also avoid the risks involved in bouncing a cheque, which is a criminal offence for non-Emiratis.
The Central Bank said the service would enable customers to make “regular, automatic payments from their bank accounts towards fixed mortgages, card payments, personal and car loans”.
A source at a leading bank said the service was likely to be launched in stages, starting with personal loans. At a later stage customers would be able to use direct debit to pay for items such as utilities and insurance.
“It will be rolled out gradually as many people in the UAE are not familiar with the direct debit system,” the source said.
The planned date for introducing the system had been June 15 but had to be pushed back because of the technical work involved. The Central Bank first began considering the system partly because of the time and costs involved for banks in handling bounced cheques.
Retail customers often have to sign several postdated cheques when taking a loan. Direct debit eliminates paperwork for banks and helps customers to plan their expenses more effectively, as they will know more accurately when the money will be withdrawn from their account.
The system would allow for “hassle-free and convenient payments, especially for customers who have several loan facilities with a bank”, said the Central Bank.
Jaap Meijer, executive director of equity research at Arqaam Capital, an investment bank, said: “Direct debit will be helpful in lowering payment system costs, and less costly than cheques, as well as easier for banks.”
Trials of direct debit began in November last year to help to address the 1.4 million cheques that failed at the point of use during last year, representing one in every five used.
Bouncing a cheque is a criminal offence, although a presidential decree in October excused UAE nationals from serving prison sentences for writing a bad cheque.
Analysts say another important component in modernising the banking system is establishing a federal credit bureau. That process is also progressing.
Banks have begun compiling information on account holders to assess their credit worthiness. The Central Bank, Ministry of Finance and banking representatives are working on the plans.