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Cheques and the UAE
Posted on Nov 23, 2012 by Amber
Is the UAE behind the times in banking? Are cheques in the UAE outdated?
Despite huge amounts of infrastructural development and a future that is expected to be at the forefront of innovation, when it comes to payment methods, the UAE is still in the dark ages. Cheques remain a predominant form of payment for everything from rent to school fees, from car payments to bank loans to mortgages. This reliance on a somewhat archaic transaction system causes all sorts of problems in the region and needs to be reformed soon. Not only is this reliance on cheques outdated compared with the rest of the developed world, but the punishment for having a cheque bounce – so called cheque fraud – is harsh beyond reason. We’re going to take a look at what transactions cheques are used for in the UAE, the law and steep penalties surrounding having a cheque bounce, and some alternatives to cheques that the UAE should consider adopting.
Cheques are used for a multitude of things. Landlords in the UAE often require a year’s rent in one cheque or in two cheques worth six months rent a piece, one post-dated for six months into the contract. In cases like this, the post-dated cheque that is to be cashed at the six month mark must be valid on that date meaning sufficient money must be in your account or the cheque will bounce. Cheques are also used for security by banks against loans, mortgages, or the issuing of a credit card. This is often a requirement by banks. Security cheques are blank cheques given to banks or landlords so that should you default on payments they can fill in the (hopefully) correct amount on the cheque and cash it to cover your payment failure. This practice is dubious, and creates insecurities for the person issuing the cheque; the cheque should be returned upon completion of payments but there are stories of landlords cashing security cheques after receiving all their payments and running off with the money. It is actually illegal for banks to ask for security cheques according to recent UAE Central Bank regulations, however the practice remains prevalent when receiving loans from banks as there are no other ways in place of adequately guaranteeing a bank loan. In the event of a failure to pay your debt, mortgage payments etc. banks can cash these security cheques. If there are insufficient funds in your account to cover the cashed cheque then it will bounce, and in the UAE a bounced cheque is considered a crime punishable with imprisonment.
Cheques can bounce for financial reasons such as insufficient funds in your account, or forgetting to transfer money into the correct account before the time the cheque is cashed. Alternately if a landlord cashes a cheque for six months rent whilst you are waiting for payment into that account from a completed job and so have insufficient funds to cover the cheque; or, as has sometimes been the case, if the bank accidentally cashes a post-dated cheque months early, before the funds were in your account, then the cheque will bounce. Cheques can bounce for superficial reasons as well as financial reasons, adding to the burden of using this Draconian payment method. If a cheque is slightly torn, missing some information, contains misprinted information, or has text outside of the designated area then unfortunately you can be held accountable for check fraud and imprisoned. There are no figures available to determine how many people are imprisoned throughout the UAE for cheque fraud. Last year a total of 1.5 million cheques were rejected in the UAE with a value of Dh. 55.3 billion (US$ 15.05 billion). This equated to more than 1 in 20 cheques bouncing, or more than 5%. When comparing this statistic with that of the UK, where only 0.5% of cheques bounced we can see that the UAE’s payment system is in dire need of some reformation.
The law regarding bounced cheques states that the cheque must be issued in ‘bad faith’ or with ‘malicious intent’ for it to be considered a crime, however in recent years little attention has been paid to this. In the eyes of the court, the owner of the signature on the cheque is responsible for the payment, so regardless of mitigating circumstances you will be held accountable. Asking for a review of your case or appealing the court’s decision is a timely and costly process that you probably won’t be able to pursue if you are unable to pay back your debt in the first place, and that means you’re going straight to jail. The sentence for a bounced cheque is anywhere between three and seven years in jail, however sentences often last longer as if multiple cheques have bounces you will suffer consecutive sentences. Furthermore you will not be released from prison until your debt is repaid; a problem that is exponentially harder to resolve from behind bars, especially if you lose your job as a result of the imprisonment, or the cheque bounced due to economic difficulties like those suffered by many in the UAE’s economic downturn in 2009.
The economic downturn, and the harsh penalties for bouncing a cheque led many expatriates in the UAE to flee and return home, adopting fugitive status. Amanda Allen did just this. In 2008, Mrs Allen bought property in Abu Dhabi using a bank loan secured with an undated blank cheque. In 2009 she defaulted on a payment for her loan. The bank used her blank security cheque to cover this payment, but due to the lack of funds in her account this cheque bounced and Mrs Allen was left facing jail time. This is despite no malicious intent on her part at the time of taking out the loan and a belief that she would be able to make all the necessary payments. The UAE government tried and convicted Mrs Allen whilst she was in the UK and asked the UK to extradite her back to Abu Dhabi to serve her sentence. However the UK courts refused to on the grounds that there may be a perfectly justifiable reason for defaulting on a 20 year loan such as the economic climate, sudden unemployment or an unfortunate health expense. The opposition to this law from international governments demonstrates the need for reformation of payment methods and a removal of the law and its associated punishment.
Earlier this year, the UAE President freed all Emiratis who were imprisoned for cheque fraud in a move that many hoped would lead to reform of this outdated law. The law is still in place for expatriates at present though, which has led many inmates to stage hunger strikes in protest and to drum up international awareness of this law. The UAE seems to be taking notice of the protests at this antiquated process, despite denying the hunger strikes in the press. Part of the new federal strategy throughout the UAE for 2014-16 includes steps to decriminalise cheque fraud and administer alternative penalties such as fines as part of consumer protection plans. This is a good start to the reformation, but the UAE needs to now implement other payment options and guarantee methods for banks to truly bring their financial system in line with the modern world.
With so many problems and regulations regarding the use of cheques, and such a high percentage of instances resulting in cheque fraud and imprisonment, we must wonder why the UAE relies on cheques so much? The main reason cheques are used in such abundance is as security for lenders and landlords against payments that need some sort of guarantee. Without a developed legal infrastructure, especially regarding bankruptcy law, and no form of a credit bureau to review the creditworthiness of potential borrowers, security cheques are more of a necessity. Banks need to choose which customers are safe to lend to and who will default on their loans. To do this accurately they need access to a berth of information that is not available at present in the UAE. Security cheques therefore exist as collateral and the fear of imprisonment as a deterrent from failing payments and exploiting banks. This need for guarantees on loans exists throughout the rest of the world too, but they have long-since replaced cheques for most payments, so clearly alternatives are available.
In the UK rent is commonly paid on a monthly basis. It can and often is paid by standing order payment which is an automatic bank transfer from the tenant’s account to the landlord’s every month. This provides the tenant with some financial stability as they only have to have enough income to pay for one month’s rent at a time rather than having six months worth of rent up front. Should a tenant not be able to pay, then the landlords will often have a guarantee system in place whereby one of the tenant’s family members or friends acts as a guarantor and will pay the rent instead. Additionally the landlord will take a one, two or three month deposit up front that will cover the tenant in the event of their inability to pay for whatever reason and provides the landlord with time to find a replacement and evict the tenant. On top of all these measures put in place, the landlord will require bank statements and employment records from the prospective tenant to make sure that they are in a financial state where they can pay the rent every month. This places the burden of responsibility for guaranteeing the payments on the landlord, and provides measures to deal with an instance of not being paid without resulting in jail time for someone who may be suffering an economic crisis (unless they repeatedly avoid payments.)
In addition to standing orders, payments for utilities and the likes can use a direct debit. This is essentially the same thing as a standing order except that the monthly amount withdrawn from your account differs monthly according to fees sent to you in your bills. Direct debits can be activated online, by telephone, or even at some post offices and local shops (in the UK.)
Banks can secure loans to people without the use of security cheques as well. A credit check system would solve this issue. This system assesses the credit ratings of potential clients; whether they will be able to pay debt owed in regular instalments, how much income they are bringing in regularly, whether they have a history of debt or of credit fraud. This system can be implemented throughout the whole UAE and allows banks to make more educated decisions regarding who to issue loans to. It places the burden of who to lend to on the lender instead of lending to everyone and resorting to security cheques and imprisonment for those that turn out to have been unsuitable. There is some suggestion a credit check system is in place in the UAE; Emcredit (www.emcredit.com/en/default.aspx) is a company that has been building a database of the credit risks of various companies and individuals. They share information between themselves and the police, and allow banks access to this information so that they can check a potential borrower’s solvency. The UAE Central Bank want to continue things like this as part of federal reforms over the next four years as well as wanting to switch from reliance on cheques to direct debit as a form of payment. This view is further supported by many UAE banks such as Noor Islamic Bank and Emirates NBD. Last year, the Central Bank issued a series of rules to limit the amount banks could loan to individuals based on their salary, which suggests that the UAE is on the way to ridding itself of the reliance on cheques and fear of imprisonment.
Through reforms the government can speed up the implementation of a federal credit bureau, allowing them to have greater oversight over financial transactions. It should be apparent both that cheques are an outdated and inconvenient form of payment in the digital age, and that the UAE’s penalties for cheque fraud are incredibly harsh in comparison with other countries. The UAE appears to be on its way to making positive reforms regarding payment options and the instigation of a credit bureau. For such a rapidly developing region, this innovation is necessary. The alternatives have been readily available globally for a long time, and without pursuing one of them the UAE risks deterring its expatriate community and international companies from having a role in the region.