There is a serious misuse of the law that has been going on in the UAE, one that has not only unfairly, and unethically, harmed many in the UAE, but it has also created a distortion in the socio-economic policies of the UAE. The perpetrators of this action are the banks.
Banks play an important role in society. At the most basic level they match lenders, people who have excess money they wish to get a return on, with borrowers, people who require money. Lenders, better known as depositors, neither have the time nor the skills to lend directly to borrowers, but banks do. Therefore, depositors are willing to entrust their money to an institution that can manage the funds and pay the depositor a return in the form of an interest rate on deposits. Borrowers benefit from being able to efficiently engage with lenders.
The main role of the bank is to manage the risks of all these loans. The main risk is the credit risk. It is here that we notice the beginnings of the misuse of the law. The banks are meant to manage the credit risk. This begins with a credit analysis, looking at primary sources of income, secondary sources of income, what assets can be used as collateral or security and other potential ways to reduce risk.
This is hard work and requires skilled employees and detailed processes that produce a deep understanding of the business or individual seeking to borrow money. Banks with strong credit processes and teams tend to make loans that are more likely to be repaid and therefore reduce risk. Unfortunately, someone at some point found a way that they thought would help reduce the risk to the banks.
Now most, if not all, banks use this so called risk management method. This method is to take signed post dated cheques from the borrower, with the amounts equal to the repayments he needs to make. The catch for the borrower is that if any of the cheques bounce, then he will be immediately jailed. This method, used by banks to manage risk without putting any effort, makes things easier for banks at a massive cost to the economy.
It is important to understand that cheques, legally known as negotiable instruments, basically act as a substitute for money. If someone wants to buy something that costs more money than they normally carry with them, they write a cheque. A cheque is part of an immediate transaction. It is not normal to write a cheque for next month, let alone next year, let alone five years from now. It is this use of cheques as a substitute for money in a current transaction that makes the law allowing the jailing of anyone whose cheque bounces sensible. Basically, it is to stop fraud, whereby people issue cheques that they know will bounce. Unfortunately, this protection by the law of businessmen has been exploited by banks and others. Banks started to use cheques not as a substitute for cash in transactions but as security.
Normally security against a loan is an asset, such as shares or real estate. If a borrower cannot pay back his loan to the bank, then the bank can request the courts to allow it to sell the asset so as to recover its money. This is normal credit risk management. Using a cheque as security changes this in two ways. The first is that the cheque is not a financial asset that can be sold or otherwise converted into cash to repay the bank. The cheque is instead used in such cases as a weapon, one that the bank can use to quickly put a borrower in jail. Whereas the law was created to combat fraudulent issuance of cheques, the banks are using it to coerce troubled borrowers. Rather than work through the normal course of negotiating the issues, and working mutually via dialogue towards a resolution, the equivalent of a nuclear weapon is used.This is the first perversion of the law.
The second perversion of the law is that the banks can use it to circumvent due process and the courts. The main issue in case of a troubled loan is just that: the loan. If there is ever a dispute on the loan, then the natural course of justice should be followed, not least of which is giving the borrower the chance to present his case to a judge before being jailed. Instead, the inappropriate use by banks of cheques as security has allowed them to circumvent the intent of the legal system in the country, and deny borrowers their legal rights.
Such behaviour also impacts the social policies of the UAE. For a troubled borrower, the only way to avoid jail after having issued security cheques to a bank is to leave the country. This is good for people with no roots in the country, who can easily flee. On the other hand, it greatly harms those who are most important to the UAE, nationals and residents with deep roots. This is an unjust use by the banks of a legitimate law enacted for different purposes.
The banks should refrain from using this unethical method of circumventing due legal process. The central bank should intervene and ban banks from not only asking for security cheques, but from using any security cheques currently in their custody. The central bank should insist that banks actually discharge their duty of managing risk using the conventional methods of analyzing repayment sources and financial asset collateral. The government might consider differentiating between how to handle fraudulent cheques issued against an actual transaction, such as buying goods and services, and how it handles security cheques which banks seem to use as a substitute for good credit analysis and risk management.
In the final analysis, an economy can only grow if there is a fair and equitable balance between all the stakeholders involved. The banks already have a massive advantage, both in terms of financial resources as well as relevant knowledge. Borrowers are in need of assistance as it is, and the arming of the banks with such a powerful legal advantage as provided by security cheques is not only detrimental to borrowers in the short term, but is detrimental to the economy in the long term.
This article was originally published in The National under the title: UAE banks’ practices are unfair and unethical.