By Atty. Barney Almazar
Did you know that banks are not allowed to take blank cheques as a condition for your loan approval? This is provided for under Article 15 (b) of the UAE Central Bank Regulations No 29/2011 regarding bank loans and services offered to individual customers.
Learn about the regulations of the UAE Central Bank pertaining to credit cards, personal loans, top-up loans, car loans and overdraft facilities, as well as the rights and responsibilities of banks and their customers.
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Article 5 (a) of the Regulations defines credit cards as plastic cards linked to an electronic network, containing details and credit limit of the card holder. Value of a customer’s purchases and cash withdrawals are paid on his behalf by the issuing bank or the finance company, and the customer pays the value at the beginning of the month following the transactions’ month, or by installments as per agreement with the issuing bank or finance company, after end of the period allowed for full payment of the balance.
Banks and finance companies issuing such cards must abide by the following:
Provide these cards to persons whose annual income equal or exceeds AED60,000.
These cards may be provided against a pledged deposit of value not less than AED60,000.
Banks or finance companies should provide their credit card customers with a monthly statement of expenses, showing values of purchases and cash withdrawals, and they should immediately investigate if a customer challenges any expense item.
Article 2 (a) of the Regulations defines personal loan as a loan that is given to individual customers, where repayments are made out of salary and end of service indemnity and/or any other verifiable regular income from a well-defined source. In order to ensure that the monthly installments deducted for repayment of this loan and resulting interest are kept in a reasonable proportion to the customer’s income, the deductions from his salary and/ or regular income must not exceed 50% of his gross salary and any regular income from a defined and specific source at any time.
The amount of the personal consumer loan has been set at 20 times the salary or the total income of the borrower and banks must make sure that this limit is not exceeded. The repayment period for this loan must not exceed 48 months.
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This is a loan extended by the bank or finance company to its customer for the purpose of purchasing a private car. A car loan shall be treated as separate from the personal consumer loan, and should not exceed 80% of the value of the financed vehicle.
The maximum period for repayment of the loan shall be 60 months. This loan should be secured by a mortgage over the car.
An additional loan obtained by the borrower from the lending bank or finance company, prior to full repayment of the outstanding loan.
Facilities linked to a customer’s account, and are provided by banks for payment on his behalf, in advance are known as overdraft facilities. This usually results in a negative balance in the customer’s account, which would require deposit of funds to cover that balance plus resulting interest and deductions.
To obtain such facilities, there should be prearrangements between the customer and the bank. The customer must submit his application, which shows the purpose of the facilities, the expected repayment period and the sources of repayment.
Computation of Interest
Each bank or finance company must calculate the interest rate charged in accordance with the following formula pursuant to Article 6 (a):
Principal x Interest Rate x Loan Period (in months) +1 / 2 x 100 x 12
All banks and finance companies must declare their respective interest rates on loans, overdraft balances (in case of banks only), and balances due for credit cards within the table. The rate shall be determined on basis of the reducing balance of the loan on annual basis.
Deduction of a ratio of the loan in advance, as the payable interest amount is prohibited, the formula mentioned above should be used to calculate the first interest amount, and then interest amount shall be calculated on the reducing balance of the loan by using the following simple equation:
Interest Amount = Loan Balance at the beginning of the month × Interest Rate / 12 × 100
Banks and finance companies must arrive at the Interest Amount and deduct it from the agreed monthly installment, then use the net amount to reduce the loan balance and reach “the new balance of the loan at the beginning of the month” which would, in turn, be used in the calculation process at the end of the following month.
With regard to calculation of interest amount on credit cards due balances, these shall only be calculated for the outstanding balance after the maturity date for its full payment; i.e., in the month following the month on which the purchases and withdrawals have occurred. Interest amount must then be calculated as per Article 6 (a) of the Regulations.
A bank or a finance company shall determine the penalty rate in the event of full or partial prepayment before maturity date, or in case of a top- up loan, however, a top- up loan, should not be granted unless the original loan was repaid, without default, for a period not less than one year.
Deductions from salary or regular income of any borrower, for all types of loans extended by banks and finance companies together, including, but not necessarily restricted to, car loans, overdraft facilities, and credit cards facilities, must not exceed 50% of his gross salary and any regular income from a defined and specific source at any time.
Should a loan or a banking facility’s repayment period extends to the retirement age, banks and finance companies must schedule reduction of these loans or facilities in such way as to allow deduction of only 30% of the income (or pension salary).
Banks and finance companies may only take from the customer the number of postdated cheques covering the installments, and of value not exceeding 120% of value of the loan or the debit balance.
Terms and Conditions
Article 12 of the Regulations provide that the terms and conditions for granting personal loans, car loans, overdraft facilities and facilities for covering unpaid credit card balances must be included in standard applications, drafted in both Arabic and English and written in an easily readable font, and in accordance with texts drafted and approved by the Emirates Banks Association.
Banks or finance companies are not allowed to alter or vary terms and conditions for granting the loan or the facility during the tenor of the loan or the facility, unless agreed to in writing by the borrower. In case of changes to the commissions or fees, customers must be notified, at least, two months prior to implementation of such changes.
Banks and finance companies are prohibited from taking blank cheques for granting loans or overdraft facilities, or for issuing credit cards pursuant to Article 15 (b) of the Regulations.
The provisions of the Regulations are not applicable to investment banks or merchant banks, nor to finance or investment companies, since these institutions are not authorized to provide personal loans or retail banking services. Moneychangers, however, shall only be subject to the provisions regarding bank transfers and exchange of currency.