It may be standard elsewhere, but paying by direct debit does not exist in the UAE – until now. Directives are in place to introduce the paperless payment system soon, which could revolutionise the banking sector here.
So you have searched, compared prices and found the perfect personal loan for you. There’s just one problem. You have to write out 48 cheques to pay off the four-year loan. Why? Because, unlike more developed economies around the world, the UAE currently does not have a direct debit system in place.
But that’s all about to change. According to recent local media reports, the Central Bank is planning to introduce direct debits to the UAE by mid June.
Instead of painstakingly writing out cheques, this process allows a borrower to set up an electronic agreement to fund repayments directly from their bank account when the instalments are due.
Once the agreement is in place, the monthly or quarterly payments – depending on the agreement in place – will happen automatically until the payer puts a stop on the direct debit.
The Central Bank says their decision to introduce direct debits across the board is because they believe such a process is ‘necessary to have a prudent, stronger and stable economy’.
It is great news for customers who are often put off borrowing by the laborious task of writing out dozens of post-dated cheques. Although the new system’s first responsibility will be to streamline personal, home and car loan payments as well as credit cards, it could potentially be used to pay utility bills, insurance premiums and perhaps, even rent. Imagine if we could pay our landlords monthly? It would transform the rental market and prevent unscrupulous agents from running off with a tenant’s annual rent.
Direct debits can also be beneficial to the banking sector from an administrative point of view because it reduces paperwork, saves time and improves efficiency.
However, banks have some concerns? For an effective direct debit system, you need a credit rating system in place to back it up. After all, it’s not fair to ask a bank to trust you with a large loan if they have no idea how you have behaved financially in the past.
For all they know, you may have run up several credit cards, already have two outstanding loans and effectively be a serious credit risk.
Plus, it would seem that not all UAE residents are particularly trustworthy. According to the Central Bank, more than 29 million cheques were issued last year of which 1.4 million cheques failed. That means almost 5 per cent of all cheques either bounced or were returned.
As a result, not all banks believe a direct debit will fully replace the traditional reliance on the cheque. Until a fully operational credit bureau is introduced, cheques may remain as a way for a banking institution to assess a client’s credit worthiness.
This is because bouncing a check is still illegal in the UAE. The offence may have been decriminalised for UAE Nationals but the rest of us are still liable. For banks, it is a way to keep customers on their toes about their own credit worthiness. We are effectively policing ourselves because we don’t want to go to court, or even jail, if we bounce a cheque.
There’s no doubt a credit bureau will solve the problem. Any mismanagement of finances would affect a person’s credit rating and potentially deter lenders from giving a loan to that person in the future. But until that happens, direct debits or not, it seems we might be writing out cheques for a while yet.