Blank Cheques and Bank Loans: A Case of Catch-22

The UAE has one of the more unique credit systems in the world whereby security for a bank loan comes in the form of a blank cheque provided by the borrower to the bank. Bouncing a cheque in the UAE is a crime punishable by prison. In 2013, there were 79,525 cases of bounced cheques in Dubai according to Dubai Police, a 15% increase compared to the previous year. The logic is that, if for example, a personal loan customer defaults, the bank can try to deposit the cheque for the amount owed in addition to any penalties or fees. Of course, the cheque is likely to bounce, in which case the bank can open a court case against the borrower.

The Central Bank is urging customers who are looking for a credit card or loan in the UAE not to issue a blank cheque to the bank. It is important to note that the bank has the right to reject an applicant if they do not provide a blank cheque; currently there is no policy forbidding this. The catch-22 is that individuals are advised to look for other credit card or loan options if the bank requests a blank cheque, while virtually every bank in the UAE requires it.

The UAE Central Bank sought to clarify the matter recently; while it is not illegal for a bank to request a blank cheque, the bank cannot use the cheque as evidence against the borrower in court. Moreover, the customer is only liable for the loan amount taken, and not for any penalties or additional interest the bank attempts to charge them. The UAE passed a law in early 2013, whereby bounced security cheques were no longer considered a criminal offence. However, cheques written for regular payments can still be used in court.

Rather than provide a blank cheque, customers should provide a cheque that is completely filled out including the amount of the loan. While most banks will not accept this, some such as National Bank of Abu Dhabi and HSBC have stated they no longer follow the blank cheques practice and only accept cheques with a confirmed amount written by the borrower.

While progress is undoubtedly being made, allowing banks to request blank cheques while encouraging customers not to provide them sends a conflicting message to consumers. It seems that the logical solution is to not allow banks in the UAE to demand this type of security in the first place.

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