The UAE Cabinet's approval on Sunday of a federal law concerning "the insolvency of natural persons" is an important step forward.
Entering into force next year, this federal law will protect residents of the UAE who are unable to pay off their personal debt from becoming bankrupt. It will shield them from legal prosecution and decriminalise their financial obligations. Moreover, it will offer them an opportunity to work to remove themselves from debt and support their families. And for those unable to pay back their debt, the court will give them the option of liquidating their assets such as property, cars or financial holdings. This will be a crucial safety net for hard-working citizens and residents.
Debtors will particularly welcome a provision that will allow them to take help from court-appointed experts to settle their financial obligations. These experts will co-ordinate between debtors and creditors to come up with a plan, lasting no longer than three years, to settle their liabilities.
This is a vital provision as it is likely to give much needed breathing space to the debtor, as Sumera Hasan, a single mother from Pakistan, explained. Ms Hasan received up to 10 calls a day from collection agents when she had an outstanding liability.
She said the option of insolvency would have saved her “the mental trauma” of dealing with debt collectors and bank employees “who are given a free hand to mentally harass debtors to pay up or else”.
The effect of the insolvency regime is likely to be felt on a much wider scale.
Already comparable to some insolvency regimes abroad, according to some experts, the public's ability to engage in a court-approved process to clear their debt will enhance the country's reputation and stimulate its entrepreneurial economy.
However, it is essential that the law strike a balance between protecting creditors who want to maximise their recovery with the ability for the debtors to be able to rebuild their lives following a financial setback. This is the balance that all insolvency laws must strike. As financial expert Adrian Low points out, there needs to be a distinction between the reckless and the unfortunate, as “you don't want to encourage people to run up large debts with no chance of ever being able to pay it back and then being easily rehabilitated into the financial system only for them to do it all again.”
Also, as legal expert Matthew Dyson observes, it is just as important for banks to tighten credit approvals. “The new law will require banks to engage with struggling debtors in a constructive way,” Dyson says, “but, indirectly, the law will also make banks look at their credit approval processes.”
None of this should replace financial literacy or absolve banks for what may have been reckless lending practices in the past. Even with the law in place, it is incumbent on residents to realise this is a last-resort legal provision to help those who have fallen into tough circumstances, but it is not a magic wand to wave a problem away. On the institutional side, banks should continue to review their lending practices to ensure they are not booking loans that their customers are unable to pay back.
