UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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

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