Draft insolvency laws meant to overhaul bankruptcy procedures and bring the UAE into line with international standards will be redundant as long as bounced cheques remain a criminal offence, lawyers warn.
Many banks tend to begin criminal proceedings as soon as a customer defaults, rather than try to negotiate, says Mazen Boustany, head of banking and finance at the law firm Habib Al Mulla & Company.
"When you have a bazooka, you use it," Mr Boustany says. "The purpose is not to put the borrower in jail. The purpose is to recover the funds."
Criminal procedures are regarded by banks as faster and more effective in recovering payments. The same problem could bedevil reforms to the UAE bankruptcy law, Mr Boustany says.
"When you have a powerful weapon such as the cheque, nobody will use complex procedures," he says.
Several prisoners, including the British businessman Safi Qurashi, have gone on hunger strike in the past few months to protest against the UAE's bounced-cheque laws and draw international attention to their plight.
It is unknown how many are serving time for bounced cheques. Last year, 1.5 million cheques bounced - more than one in every 20 cheques used for payments - for transactions worth Dh55.3 billion.
The threat of jail often convinces defaulters to flee the country, removing the possibility of any recovery of funds and increasing charges for the banks' remaining customers.
Making bounced cheques a crime limits the amount banks are able to lend, costing the UAE economy, analysts say.
Banks in the Emirates have hoarded cash for provisions instead of lending to the economy since the onset of the global financial crisis, setting aside more to cover the cost of defaulted debts than the total value of defaulted loans.
"Banks in the UAE, and the Middle East more generally, have provisions coverage over 100 per cent," says Dan Cowan, an executive director and financial analyst at Morgan Stanley.
"It's common practice in the Middle East and that could reflect bankruptcy laws or recovery rates."
While the UAE has had an insolvency law in effect since 1993, it is rarely used because of the length of time involved and the low recovery rates, Mr Boustany says.
