x Abu Dhabi, UAESunday 23 July 2017

Bounced cheque issue requires more attention

Banks in the UAE should stop using post-dated cheques as a way of securing personal loans

Banks in the UAE should stop using post-dated cheques as a way of securing personal loans

Using personal cheques as a form of security on a personal loan is an archaic and incongruous practice – yet this method is widely used across the UAE’s banking system. It is a convenient measure for banks, because the law allows for a person who bounces a cheque to be prosecuted and potentially jailed until the debt is cleared.

The law as it stands makes sense in the case of a person who deliberately writes a cheque for a purchase knowing they do not have the funds in their bank account to cover the cheque. That is an act of fraud. But writing a post-dated cheque to make a payment due in up to five years’ time makes no sense at all. Who among us knows what the balance of our current account will be at a given date in the future?

Former investment banker Sabah Al Binali strongly makes this point in the Business pages of today’s paper, saying that the practice is unethical. He argues that banks in the UAE use cheques as a “weapon” that may be used to put the defaulting borrower into prison. And, as this newspaper has argued before, jailing people for indebtedness not only creates a burden on the state, it deprives that person of the opportunity to earn money to pay off the debt.

In many countries, it is standard practice for banks to perform credit checks on individuals to etsablish their ability to repay. Money is also lent on the basis of security – in the form of assets such as shares and real estate that can be used as collateral. When a default occurs, many steps are taken to refinance the debt before the legal system becomes involved. Using cheques as security is a convenience for the banks, because they do not have to carry out these checks. But, as Mr Al Binali argues, it creates an imbalance between lender and borrower that can hold back the country’s economy.

There has been some movement in the right direction. The Central Bank has endorsed a direct-debit system that will replace cheques in certain transactions, and the establishment of a national credit bureau, due by the end of this year, will allow banks to share data on customer lending. These initiatives, coming on top of a December 2012 decree by the President, Sheikh Khalifa, that federal courts should not accept bounced cheques alone as evidence of a crime, will hopefully ensure the demise of the cheque as an instrument of security on loans.