UAE bounced cheque law hurts businesses, economists say

Criminal punishment related to bounced cheques in the UAE disproportionately disadvantages entrepreneurs and SMEs, economists and business owners said on Tuesday.

The UAE’s Commercial Transactions Law states that issuing a cheque while knowingly lacking the funds to cover it is a criminal offence. Cheques are widely used as collateral for large purchases and loans made to businesses and consumers.

“Creating a climate of entrepreneurship means allowing that some businesses are not going to succeed,” said Rachel Ziemba, the director of global emerging markets at Roubini Global Economics.

“But there are access to credit issues. It’s very difficult for new entrants to gain credit, whether they’re individuals or small businesses. And the cost of failure is high.”

Data from the Central Bank showed that US$12.7 billion of cheques bounced in 2012, the last year for which data is available. That is 1.4 million cheques in total.

Defaults are also keeping the police busy. Dubai Police dealt with 68,707 criminal cases that year, covering some Dh12.2bn of cheques.

Ms Ziemba said: “The UAE needs standard implements to measure the creditworthiness of borrowers, and this would enable banks to lend to a larger range of individuals and smaller businesses.”

The psychological burden of criminal liability for debt can also hurt start-ups.

“When a start-up has grown and requires working capital, an entrepreneur must take out the loan against his personal assets, not against the strength of his business,” said JJ De La Torre, the founder of digital start-up incubator

“With this personal liability hanging over the entrepreneur’s head they will instantly become more risk-averse, less tenacious and less aggressive at driving the growth of the new company – all elements that negatively impact the success rate of start-ups. This will continue to be the case until the system changes.”

Radha Stirling, the founder of Detained in Dubai, a charity that aims to help foreigners jailed in the UAE, said that the laws relating to bounced cheques are black and white and do not take the circumstances of the matter or dispute into account.

“This can lead to unethical imprisonments and abuse of the cheque laws, and this abuse was clearly not envisaged at the time of introducing the laws,” she said.

“It is certainly time to review and update the laws to prevent this kind of abuse.”

But Henri Hazougi, the managing director of Business Setup Consultants, defended the law. “I feel pity for people who get in trouble, but they cannot absolve the damage they do to their clients and customers when cheques bounce,” he said.

“If banks are lax, it will be open season in the market – people will be able to walk away from their debts.”

The UAE Banks Federation, an industry group of retail banks, also weighed in on the issue.

“Decriminalisation would hamper debt recovery and threaten retail banks’ stability if not supported by new measures to ensure effective debt recovery,” said a federation spokesperson.

The UAE has also set up Al Etihad Credit Bureau, which will help banks to gather data about the creditworthiness of borrowers.

The UAE’s Central Bank must stop retail banks from using bounced cheques as “weapons” against their customers, Sabah Al Binali, a former senior banker, said.

Mr Al Binali writes that this practice has “unfairly, and unethically, harmed many people, but it has also created a distortion in the socio-economic policies of the country”.

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