UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for March 14, 2010

Credit Cards in the UAE

 

 

‘A contract regarding credit cards is completed upon the issuer’s approval of the customer’s application to join the holders’ agreement.  The customer is regarded from that date as accepting the terms stated in the application including those relating to interest.

In the case there is no agreement, interest may be calculated in accordance with the market rate and should not exceed 12%.  This limitation is based on Article 76 of the Federal Law No. 18 of 1993 on the grounds that the transaction is a commercial loan.

The UAE courts are not favorable towards provisions of credit card agreements, which give banks and institutions the right to unilaterally change the rate of interest or other terms and conditions of the credit card agreement.  In cassation petition 67 of 2005, the Dubai Supreme Court regarded such terms as arbitrary.  The court held that in case of any change to the agreed interest rate or levying any extra charges, the customer should be notified in advance and his or her approval must be obtained in writing.  In cassation petition 181 of 2005, the Dubai Supreme Court held that the provisions which give the bank a unilateral right to change the rate of interest automatically do not dispose of the need to seek customers’ written approval and that in interpreting such provisions, the card holders’ interests should be observed.

In cassation 121 of 2005, the Dubai Supreme Court held that a card holder should use the card in good faith and take care of and protect the card and the PIN number.  The holder should immediately inform the issuer of any loss or theft of the card and failure to do so gives rise to an obligation to pay for any unauthorized transactions.

An issuing bank may unilaterally terminate a credit card agreement and revoke the holder’s benefits and facilities provided by the card but should immediately stop charging any fees or the usual 2% monthly interest upon termination of the holders membership according to cassation petition 247 of 1990.’  (Omer Eltom)

Article 76 of Federal Law No. 18 of 1993:

The creditor shall have the right to receive interest on the commercial loan according to the rate provided for in the contract, and if the rate of interest is not specified in the contract, it shall be computed according to the rate of interest prevailing in the market at the time of dealing; provided that in this case it shall not exceed 12% up to the time of full  settlement.

“Banks will fall over themselves to try and give you a Visa or Mastercard credit card and they’re relatively easy to obtain but you do need:

  • a job with a regular salary, or income records for several months at least if self employed.
  • bank statements for 3-6 months.
  • residence visa.

 

Most standard cards will be free or cost 100 dhs per year. Gold cards are free to 400 dhs per year and Platimum cards 500-1000 dhs per year.

Be careful of hidden or obscure fees and charges, and opt-in services where you are opted in by default. For example things like personal accident insurance and credit card re-payment insurance. The UAE credit card market is not regulated in the same way as in the US or Europe so banks can get away with less consumer-friendly and more profitable-for-shareholders activities. Credit card limits will usually be 1-3 times your monthly salary.  Late payment fees will usually be 50-100 dhs for each month payment is late.”

http://www.dubaifaqs.com/banks-in-dubai.php

Collection of Commercial Paper in the UAE

 

The bearer of a commercial paper may endorse it to the bank as agent and by virtue of this endorsement the bank becomes an agent for collection of the value of the paper on the endorser’s account.

When the maturity date of the commercial date falls due, the bank must demand payment form the drawee of the writer.  If payment is made, the bank shall credit the value of the commercial paper to the customer’s account.  If payment is not made, the bank shall make representations or enter non-payment and in both cases the expenses shall be charged to the customer’s account.

The bank shall be liable for error or negligence in executing its agency.  The bank may stipulate that it shall be exempted from liability for delay in making representations and this stipulation shall be effective between the bank and customer unless the bank is accused of fraud or gross negligence.  Such a stipulation shall not be applicable to other endorsers.  The agency arising from an endorsement as agent shall not lapse upon the death or loss of competence of the endorser.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

Article 446  of the Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”)

The bearer of commercial paper shall endorse it to the bank as a mandatory endorsement under which the bank shall become a proxy in collecting the paper’s value in favor of the endorser.

Article 447 of the Law:

The bank shall on the date of maturity of a commercial paper claim payment from the drawee or the make.  If the payment is made, the banks shall enter the value of the paper in the credit side of the customer’s account and if the payment is not made, the bank shall make a protest or prove the nonpayment; and in both cases the fees shall be debited to the customer’s account.

Article 448 of the Law :

  1. The bank shall be responsible for error or negligence in the execution of its procuration.
  2. The bank may stipulate its exemption from responsibility for delay in making the protest.  The stipulation shall produce its effect between the customer and the bank unless fraud or a serious fault is ascribed to the bank.  This stipulation shall not apply to the rest of endorsers.

 

Article 449 of the Law:

Procuration resulting from a mandatory endorsement shall nto expire upon death or incapacitation of the endorser.

Credit By Acceptance in the UAE

 

 

 

Credit by acceptance is a contract where the bank fulfills the role of drawee and in this capacity accepts a commercial paper drawn on it by its customer or the other party with whom that customer is dealing and the bank is obliged to pay its value when due.

If the bank pays the value of a commercial paper accepted by it, it shall debit its value plus expenses to the customer’s account.  The bank shall be entitled to make recourse upon the customer for the sums paid pursuant to the credit opened for the customer and used as consideration for payment of the commercial paper it undertook to accept.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

Article 444 of the Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”)

Acceptance credit is a contract under which the bank assumes the role of the drawee and shall in this capacity accept a commercial paper drawn on it by its customer or by the other party who deals with such a customer and the bank shall undertake to pay its value upon maturity.

Article 445 of the Law:

If a bank pays the value of a commercial paper accepted by it, it shall enter its amount and the expenses in the debit side of the customer’s account and shall have the right to claim the amount paid in accordance with the credit opened in favor of the customer and used for settlement of the commercial paper accepted by it.

Current Account in the UAE

 

Definition:

A current account is a contract between two parties whereby the rights and obligations arising from their mutual relationship are converted to account entries which are offset against each other whereby the final balance on closing the account itself is a debt due for payment.

Nature:

The following conditions must be met regarding payments in order that they may be entered in current account:

  1. They must be in cash or replaceable of common kind so that there can be offset between them.
  2. They must arise from verified obligations of specific amount.
  3. The y must have been made to the recipient as an investment with ownership.

There may be more than one current account between the two parties if each account is restricted to a particular type of transaction or currency.

Interest:

Current account payments from the customer shall not produce interest unless otherwise agreed.  The interest shall be at the agreed rate and if the rate is not agreed, it shall be at the market rate prevailing at the time of the transaction but shall not exceed 12%.

Interest shall apply to the debit balance from the date of closure of the account unless otherwise agreed.

Closure:

If no period is specified for a current account it may be closed at anytime at the discretion of one of the parties whilst taking into account the agreed/customary notice periods.

In all cases, the account shall be closed if the customer dies or loses competence r if one of the parties files for bankruptcy.

If a current account is closed down the balance on it shall be deemed a debt payable forthwith unless the parties agree otherwise or the entry of certain transactions that have to be entered in the account is still in progress and the entry would amend the amount of the balance, in which case the balance a debtor shall be deemed payable forthwith from the day following the last entry required by such transactions.

If the proceeds of the discounting of a commercial paper are entered in a current account and the value of the paper is not paid by the date due, the person who discounted the paper, even after the person who presented it for discount has filed for bankruptcy, may cancel the entry of tis value in the current account by making a counter entry.

A counter entry may only be made in connection with commercial papers whose value has not been paid by the due dates and any agreement to the contrary shall be invalid.

An action for the correction of a current account shall not be heard even if the demand is based on error, omission or duplication of entries, in connection with entries made over a year from the date of receipt of the account statement unless during this period, one of the parties notifies the other that he is pleading correction of the account or unless the customer , in the case of a current account opened with a bank, proves that during that period he received no statement of his account from the bank.  In both cases, no action relating to a current account shall be heard upon the expiration of five years from the date on which the account was closed down.

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

Article 390 of the Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”):

The current account is a contract between two people under which the rights and debts arising from their mutual relationship turn into account entries settling the account between them, such that only the final balance at the closing of the account shall be a debt due for payment.

Article 391 of the Law:

  1. The bank shall open a current account for his customer if the operations performed by the bank in favor of the customer involve opening of credit or credit facilities in his favor.
  2. It may be agreed that the account must not be overdrawn by the customer whereby the balance shall always be in the credit side.  It may also be agreed that the account shall be overdrawn by both parties i.e. the balance may be in the credit or debit side for both parties. 

 

Article 392 of the Law:

To facilitate for entry of payments in current accounts, the following conditions must be satisfied:

  1. They must be in cash money or similar items integrated in kind in order for the clearing to take place among them.
  2. They shall be arising from debts that have real existence and specified amount.
  3. They must have been delivered to the receiver by way of ownership.

 

Article 393 of the Law:

Current accounts between two parties may be several if each account is limited to a specific kind of operations or currencies. 

Article 394 of the Law:

The following shall result from the contract of a current account:

  1. The title to the cash and properties received and entered in the current account shall be transferred to the party who has received them.
  2. Entry of a commercial paper in the account shall be considered valid, provided that its value shall not be taken into account if it is not paid at the date of maturity; however, in this case it may be returned to its owner and its entry may be reversed as shown in clause 2 of Article 407.
  3. Details entered in the current account as one whole are indivisible before the closing of the account and the calculation of the final balance.
  4. Settlement between one entry in the current account and another entry in the account itself may not be made.
  5. Details of entries in the current account may not invalidate the rights of both parties in respect of the contracts and transactions causing such entries.
  6. Each party to the current account may have the right to dispose at any time of his credit balance unless otherwise agreed.

 

Article 395 of the Law:

  1. All debts arising from work relationships between both parties to the current account shall be entered therein according to the law, unless such debts are guaranteed by legal securities or an agreement.
  2. Nevertheless, debts accompanied with conventional securities may be entred in the current account whether such securities are given by the debtor or a third party provided that the entry of such debts is agreed upon expressly by all parties concerned.

 

Article 396 of the Law:

  1. If it is agreed that a debt accompanied by a conventional security shall be entered in the current account, such security shall be transferred to a guarantee the balance of the account upon its closure to the extent of the debt regardless of the changes that may occur to the current account during its operation unless otherwise agreed. 
  2. If the law requires certain actions to be taken for conclusion of the security or for using it as an argument against a third party, the security shall not be transferred to guarantee the balance of the current account now shall it be used as an evidence except from the date ssuch actions are made.

 

Article 397 of the Law:

Debts due to either party if entered into the current account  shall lose their own characteristics and intrinsic nature and shall no longer be valid for honoring, clearing, prosecuting, or nonhearing of claims.

Article 398 of the Law:

  1. If details of entries in the current account include cash debts evaluated in various currencies or unsimilar things both parties may agree to include them in the current account provided that they are entered under separate sections taking into consideration similarity of the payments included and that the two parties give authorization for the current account to be kept integrated despites its several sections.
  2. The balance of such separate sections must be transferable so that at the time determined by both parties or upon closure of the account at most clearance may be effected among them to produce one balance.

 

Article 399 of the Law:

  1. Payments by the customers in the current account shall not yield interests unless otherwise agreed.  The interest shall be computed at the agreed rate and if the interest rate is not determined, it shall be computed on the basis of the interest rate prevailing in the market at the time of dealing, provided that it shall not exceed 12%.
  2. The interest shall apply to the debt balance as of the closing date of the account unless otherwise agreed.

 

 Article 400 of the Law:

  1. If a certain time is given for closure of the current account, it shall be closed at the end of such time; however, it may be closed earlier by agreement of both parties.
  2. If no fixed time is given for closure of the current account it may be closed at anytime as desired by either party; taking into consideration the notice periods agreed upon or those customarily practiced.
  3. In all cases, the account shall be closed upon death of the customer or his incapacitiation or upon declaration of bankuprtcy of either party or upon the expirty of the corporation or by deletion of the bank from the lsit of the operating banks or upon the bank’s cessation to carry out its business.

 

Article 401 of the Law:

A current account between a bank and its customer shall be considered closed by the end of the bank’s fiscal year; however, such closure shall not be considered as closure of the account but it shall remain open and its balance shall be carried forward to the same current account and shall recommence its movement on the first working day.

Article 402 of the Law:

If a current account is closed, the balance shall become a matured debt unless otherwise agreed by the parties or if the entry of certain operations which must be posted in the account is still running and the said entry may cause amendment of the amount balance in which case the debt balance shall become matured as of the day following the last entry needed for such operations.

Article 403 of the Law:

The common rules prescribed for non-hearing of a claim by lapse of time shall apply to the debt and its interests.

Article 404 of the Law:

If the debt entered in the current account is eliminated or if its amount is reduced due to a reason related to its entry in the account, the entry of such debt ought to be cancelled or reduced, as the case may be, and the account shall be amended accordingly.

Article 405 of the Law:

The creditor of either party to the current account may garnish the credit balance held by the garnishee at the time of garnishment.

Article 406 of the Law:

  1. if either party to the current account becomes bankrupt, the group of creditors may not be contested by any mortgage made on his properties after the date appointed by the court for suspension of payment in order to secure the debt in an amount equal to the balance of the debt at the time when the mortgage was decided.
  2. However, the group of creditors may be contested by the mortgage with respect to the difference if any between the amount of the debt balance existing at the time of deciding the mortgage and the amount of balance at the time of closure of the account, unless the mortgagee’s awareness of the debtor’s suspension of payment at the time of deciding the mortgage is proved.

 

Article 407 of the Law:

  1. If the total discount of a commercial paper is entered in the current account, and the value of such paper has not been paid at the time of maturity, the person who discounts such paper may cancel its entry in the current account by making a reverse entry even after declaration of bankruptcy of the person who has submitted it.
  2. The reverse entry means entry of an amount equivalent in value to the commercial paper plus the expenses in the debit side of the current account.
  3. No reverse entry may be made except for commercial papers whose value is not paid at the date of maturity and any agreement to the contrary shall be considered null and void.

 

Article 408 of the Law:

  1. Upon denial and absence of a legal reason, the petition for correction of current account shall not be heard even if the petition is based on error or oversight or duplication of entries in respect of entries that have been made since more than one year form the date of receipt of the account statement unless either party gives the other during this period  a notification showing his insistence on correction of the current account or if the customer, in case of a current account opened with a bank, proves that he has not received from it, during the said period, any statement of his account and in both cases, the claim shall not be heard after the lapse of five years from the date of closing the account. 

Discounting of Commercial Paper in the UAE

 

 

Discounting is an agreement whereby a bank undertakes to pay the value of commercial paper in advance to its beneficiary against transfer of its ownership to the bank.

The bank may deduct interest on the sum of the paper which it has paid to the beneficiary from the discount plus a bank charge.  It may be agreed that the discount is made for an overall sum.

The interest shall be calculated on the basis at the time elapsing from the date of submission of the commercial paper for discount to the date on which it matures, unless otherwise agreed.  The bank charge shall be calculated on the value of the commercial paper.

The bank acquires ownership of the discounted commercial paper and may exercise all rights of the bearer and may make recourse upon the signatories to the paper.

Cheque (Bills) Discounting facility is characterized by the fact that it gives the discounting banks the right of recourse against both the borrowers (endorsers) and the drawers of the cheques if the cheques are returned.  Therefore, banks must exercise due care and diligence to ensure that the financial and paying capacity of the drawers are satisfactory to safeguard the bank’s interests.  Consequently, the legal status, creditworthiness, documentation and location of the drawers shall have a significant bearing and should be considered as one of the pre-conditions for eligibility before graning bill discounting facilities.

If the value is not paid or the customer becomes bankrupt, the banks shall have the right to make a counter entry of the value of the instrument and the expenses on the debit side of the account of its customer who presents the paper to the bank.   If the customer does not have a current account with the bank, the customer is obliged to return the value of the commercial paper plus expenses back to the bank.

The right of recourse to the discounting bank aginst the borrower (endorser) and the drawer in respect  of the bill discounting facility is legally and only used by virtue  of the instrument (cheque) itself as evidence of course of action.  If such instrument is debited to the account of the borrower (endorser) and if returned unpaid by the payee (drawee) bank, recourse against both the borrower (endorser) and the drawer of the cheque will no longer exist as such debit entry will become part of the borrower’s account whereby right of recourse will only be against the borrower based on the statement of account if the account is overdrawn.  Therefore, in order to maintain full recourse against both the borrower (endorser) and the drawer and protect the Bank’s interest, it should be strictly ensured that the account of the borrower in respect is not debited.

 

*Emirates Institute for Banking and Financial Studies, Legal Environment in the United Arab Emirates, Laws Relating to Banking

According to Al Tamimi, discounting is an arrangement whereby a bank buys commercial paper from a beneficiary at a discount, thus making an advance payment to that beneficiary.  In addition to the discounted price of the commercial paper, banks usually charge a commission and for lost interest on the purchase price.

Article 440 of the Commercial Transactions Law, Federal Law No. 18 of 1993  (the “Law”)

  1. Discount is an agreement whereby the bank undertakes to pay in advance the value of a commercial paper to the beneficiary against the transfer of its title to the bank.
  2. The bank shall deduct from what it pays to the discount beneficiary an interest on the amount of the paper further to the commission.  However, the making of a discount against a lump sum may be agreed upon.

 

Article 441 of the Law:

  1. Interest shall be computed on the basis of the time that elapses from the date of submission of the commercial paper for discount to the date of its maturity unless otherwise agreed.
  2. Commission is estimated on the basis of the value of the commercial paper.

 

Article 442 of the Law:

  1. The bank shall acquire title to the discounted commercial paper and shall exercise all of the bearer’s rights; and shall have the right to make claim against signatories of the paper.
  2. Apart from that, the bank shall have an independent right towards the discount beneficiary in recovering the amounts it placed under his disposal and to receive any interest and commission obtained by him, without  prejudice to the rules governing the current account.  This right shall be exercised by the bank within the limits of the unpaid papers regardless of the reasons for failure to pay the discounted papers.

 

Article 443 of the Law:

  1. The bank shall reserve for itself the right to make a reverse entry in the value of the commercial paper and expenses in the debit side of the account of its customer who shall endores the paper to the bank in the event of failure to honor its value or if the customer becomes bankrupt. 
  2. Where the customer has no current account with the bank, he shall undertake to reimburse the bank for the value of the commercial paper and the expenses.
UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance