Dubai Bank has moved to ease mortgage payments for thousands of buyers of homes in stalled residential projects.
The bank is waiving profit payments for Islamic mortgage customers who have had delays beyond the "expected date of delivery", it announced yesterday.
The lender, owned by Dubai Holding, will also rework payment schedules for "eligible customers".
"This has the ability to set a precedent," said Ludmila Yamalova, a lawyer with HPL Yamalova & Plewka, which is working with clients who face mortgage payments on uncompleted projects. "This is the first time a bank has come out and announced an overall strategy."
Hundreds of developments in Dubai have been delayed, leaving buyers responsible for mortgage payments on units they cannot occupy.
Sharia-compliant loans do not charge interest. But customers are usually expected to pay a lump sum of profits on handover, the size of which depends on the construction period.
Atheeqe Ansari may have to pay an extra Dh500,000 (US$135,143) in payments for a villa he bought in Jumeirah Park, which was originally scheduled for completion in 2009. The house may not be completed until at least next year.
"It's very scary," Mr Ansari said. "That's three years extra."
Dubai Bank consulted with its Sharia board in crafting the measures designed to "resolve the issue and ensure end users are treated in a fair and equitable manner", the bank said. The initiative applies only to ijarah customers.
For "eligible end users", the bank will waive "all profit accumulated because of the developer handing the projects beyond the expected date of delivery", defined as the original completion date plus extension period, regardless of how long it takes for the unit to be delivered, the bank said.
Waiving the fees is "in contrast to conventional banking principles, which would mean the end user continues to pay profit rates, regardless of the length of time to the handover date", the bank said.
Dubai Islamic Bank (DIB), Noor Islamic Bank and Amlak Finance did not respond to requests for comment.
But a senior source at DIB, which took control of the mortgage provider Tamweel last year, said there were no immediate plans to waive profit payments on Islamic mortgages.
If such payments were outlined in contracts approved by Islamic scholars, the source said, they were considered by the bank to be Sharia-compliant.
Khalid Howladar, a vice president and Islamic finance expert at Moody's Investors Service, said the question of whether accruing profits on stalled projects was Sharia-compliant remained a grey area.
There is no central authority that decides which bank products comply with Islamic law. Those issues are addressed by institutions' own Sharia boards, which are free to impose their own interpretations.
Dubai Bank's move could be evidence, however, of an attempt to distinguish itself as a financial institution that puts extra emphasis on ethics in its dealings with customers, Mr Howladar said.
"The ethical angle of being an Islamic bank is perhaps driving them more towards this type of forgiveness," he said.
Most Islamic mortgages forbid collecting profits before properties are delivered to customers, according to a banking analyst in Dubai who asked not to be named.
Some banks in the UAE, including Dubai's Mashreq, have set up services to help financially distressed customers in the past two years.
These services typically allow customers to renegotiate loan terms or extend repayment dates to avert a default. They also offer advice to customers deep in debt.
Mashreq said last month that Mashreq Assist, set up in 2009 to work with customers struggling with loan issues, served more than 7,000 customers last year.