The UAE Central Bank issued new Regulations No.29/2011 Regarding
Bank Loans & Services Offered to Individual Customers effective
as of 1 May 2011 (the Regulations). The Regulations are intended to
control lending activities and excessive charges by banks following
public complaints about a surge in bank fees. The Regulations are
also aimed at protecting banks by regulating lending and
encouraging banks to carry out proper due diligence on their
potential borrowers. The new Regulations enable individual
customers to borrow only up to 20 times their salary or monthly
income and requires that repayment installments should not exceed
50% of the borrower's gross salary or any regular income from a
specific source.
In brief
- The Regulations, which are applicable to individual consumer retail banking practices, have the dual purpose of controlling lending activities and excessive fees charged by banks while at the same time protecting banks through the introduction of new due diligence compliance requirements.
- Conventional and Islamic banks and financial institutions which supply personal or retail banking services are subject to the new Regulations.
- The new Regulations will apply on current loans but not in relation to commissions, fees or any fines charged on them prior to the date of the Regulations coming into effect.
Scope of application
The Regulations apply to both conventional and Islamic banks and finance institutions and cover all retail loans including personal, housing and car loans, overdraft facilities and credit cards as well as loans made to sole proprietorship firms and companies secured by salaries of the owner or partners of such firms or companies.
The Regulations apply to both new and existing loans except for commissions, fees or any fines charged on the existing loans prior to the date on which these Regulations came into effect.
The provisions of the Regulations apply to all Shari'a compliant banking services except in relation to computing interest which shall be determined in accordance with Shari'a principles. In such case a copy of the established rates must be sent to the Central Bank for publication.
The provisions of the Regulations are not applicable to merchant banks or investment banks as such institutions are not authorised to provide personal loans or retail banking services. Money exchange bureaus are subject to the Regulations but only in relation to bank transfers and currency exchange.
Reasons for issuing the Regulations
In our opinion there are two main motives behind the new Regulations:
- In the past banks and finance institutions provided hefty loans to consumers because of relaxed borrowing rules. However, due to the economic downturn many customers became unable to repay their debts which left some lenders out of pocket. Such a tide of bad consumer debt linked to the global downturn led to proposals to tighten the lending limits.
- There has been a rising number of complaints from customers frustrated at the level of fees and commissions that banks were charging for basic services and the lack of harmony amongst the banks and finance institutions in relation to the fees being charged.
What the Regulations cover
- The new Regulations set a cap on the amounts banks can lend to
individual customers at 20 times their salary and a maximum period
of loan repayment at 48 months. In addition the Regulations provide
that the overall monthly installments for all loans, including
personal, housing and car loans as well as overdrafts and credit
cards must not exceed 50% of an individual customer's gross
salary or any regular income from a defined or specific source at
any time.
Analysts have noted that without fully developed credit bureaus it would be hard for banks to know the full extent of an individual exposure to enforce the Regulation (50% cap on monthly installments). - Credit cards shall only be issued to customers whose annual
income equals or exceeds AED 60,000. Banks and finance institutions
may provide such credit cards against a pledged deposit of no less
that AED 60,000 but they are prohibited from taking blank cheques
for issuing the credit cards or for granting any loans or overdraft
facilities.
It will be interesting to see what the impact of such prohibition is on banks and finance institutions as many of them in the past have demanded blank cheques from customers as security against the credit cards or loans being offered which has led to many borrowers facing the risk of going to jail or having to abscond. - Car loans should not exceed 80% of the value of the financed vehicle and this loan must be secured by a pledge over the vehicle with a maximum period of 60 months for repayment of the loan.
- The Regulations set out a formula for computing interest which banks and financial institutions must follow except for Islamic banks and financial institutions which shall apply Shari'a principles for calculating profit.
- The Regulations regulate the repayment installments for loans whose terms extend to the retirement age whereby banks and finance companies must schedule reduction of those loans in such a way as to allow deduction of only 30% of the pension.
- The Regulations limit the number of postdated cheques which banks and finance institutions can take to cover the loan installments to a maximum of 120% the value of the loan or the debit balance.
- The Regulations set out the fees, commissions, deductions and charges on loans, overdrafts and unpaid credit card balances which banks and finance institutions can charge. The figures will be reviewed annually by the Central Bank. Should any bank or finance institution wish to impose fees, commissions or charges other than those mentioned in the Regulations it must first obtain the Central Bank's written approval.
What the Regulations do not cover
- The new Regulations will apply on current loans but not in
relation to commissions, fees or any fines charged on them prior to
the date of the Regulations coming into effect.
From our understanding, if for example a customer has taken out a car loan on or after May 1 2011 when the new Regulations came into effect and the customer then wishes to make an early repayment of the loan, an early repayment charge of 1% of the remaining balance will apply as provided for in the table attached to the Regulations. If however the customer took out a car loan before the Regulations came into effect and the loan documentation did not provide for any fine for early repayment of the loan, the bank cannot then apply any early repayment fine. If on the other hand the loan documentation provided for an early settlement fine of say 5% the bank is under no obligation to reduce the 5% to 1%. - It has been reported that the Central Bank has confirmed that the new Regulations do not apply to credit card fees and that banks can follow their own policies in this regard.
- Islamic banks and finance institutions will not be subject to all the provisions of the Regulations specifically in relation to interest.
According to the Regulations the Banking Supervision & Examination Department will issue a guide to clarify how banks and finance institutions should comply with the provisions of the Regulations and how to submit the required data to the Central Bank.
Conclusion
The general consensus among banks and banking analysts seems to be that the new Regulations are credit-negative and are likely to curtail the loan growth as they lower income from fees, commissions and penalties and will hurt their profitability by deterring banks from lending to certain sectors.
On the other hand many have welcomed the changes and see the new Regulations as enforcing "responsible lending" and "transparency" between the banks and the customers which will lead to less chances of default by customers.
Others say more reform measures must follow the Regulations, including the "decriminalization" of bounced cheques and the development of credit bureaus top monitor lending and individual exposure.
It yet remains to be seen as to how effective the new Regulations are on the banking sector and how they may impact lending and borrowing in the UAE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
