The UAE Banks Federation has challenged a move by the Central Bank to introduce a three-month ban on the transfer of loans by Emirati borrowers between lenders.
The ban "limits the choices of the customer, and plays against the open-market and the free economy system adopted by the country", the lobby group said in a statement.
The move could also give rise to monopolies and damage the reputation of the industry, the statement added. The Central Bank could not be reached for comment.
In May, the Central Bank told banks to halt transfers of loans by UAE nationals for three months so that it could conduct a study of market conditions. Financial services professionals believe the move was likely an effort to protect consumers from borrowing too heavily.
Many bank customers were taking advantage of introductory offers carrying zero interest to effectively refinance their outstanding debts without paying off the original amount, said Catherine McDougall, the senior legal consultant at DLA Piper Middle East.
"The Central Bank, from what we understood, wanted to stop people shopping around and having a huge amount of debt," she said.
"They would transfer their debts onto another credit card … and then keep jumping around, but never paying off the principal."
Consumer lending is accelerating as the economy strengthens. Personal loans to residents rose by 3.1 per cent during the first four months of 2013, more than double the rate of growth during the same period last year, according to Central Bank data.
Within the past year, the UAE Banks Federation has successfully lobbied against restrictions on mortgage lending, postponed a cap on banks' exposure to government entities and delayed the implementation of "chip and pin" security features on debit cards.
The lobby group said it wanted to ensure Emirati borrowers had access to the "best interest rates to reduce national borrowers' loans", said Abdul Aziz Abdullah Al Ghurair, the chairman of the UAE Banks Federation, who is also chief executive of Mashreqbank. "It is the customers' right today to gain from the current interest rates on personal loans," he added.
Efforts to prevent UAE nationals from becoming overly indebted have taken on a new degree of urgency in the aftermath of the financial crisis, as the housing market recovers and consumer confidence strengthens.
The Government established the Dh10 billion Nationals' Defaulted Debt Settlement Fund in 2011 to help to restructure the debts of Emirati borrowers and put their financial affairs on a more sustainable track.
Debt relief efforts have also included a presidential decree last October that immunised UAE nationals from serving jail time for bounced cheques, resulting in the release of more than 1,000 Emirati defaulters from prison.
The operational trials of the Al Etihad Credit Bureau, expected to begin in July, are expected to help banks to better identify customers who pose a high credit risk and reveal those who owe multiple debts to several banks.