30 Nov 2009

NO PERSONAL GUARANTEES PERMITTED FOR EX-PAT PERSONAL LOANS

Authored by: Lori-Ann Campbell

NO PERSONAL GUARANTEES PERMITTED FOR EX-PAT PERSONAL LOANS

Due to the recent downturn in the market and the increased number of redundancies across all sectors in the UAE, banks have had to re-examine their personal finance products and the basis on which these are offered. In some cases, particularly where customers have lost their jobs, banks are facing difficult decisions as to how to balance customer demands with the bank’s security requirements.

In Brief: 

  • In the UAE, Central Bank provisions prohibit lenders from taking personal loan guarantees from non-UAE nationals.
  • Because expatriates can leave the UAE freely, banks have to carefully monitor the status of their personal loans and in the event that a customer becomes unemployed or security is jeopardised they should insist upon full repayment of the loan.
  • Currently, banks are unable to agree to alternative security arrangements with respect to expatriate personal loans.

Pursuant to Central Bank Circular No: 12/93 entitled "Interest Rates & Fees applicable to Personal Loans, plus fees and charges on services provided to personal customers” (the 1993 Circular) banks are prohibited from taking personal guarantees as security for personal loans in respect of non-UAE nationals.

The 1993 Circular does not apply to UAE nationals who can avail of the additional security of a personal guarantee for a personal loan, provided that this is given by another UAE national and not an expatriate.
 
Personal loans, as described in the 1993 Circular, cover loans that are given to individuals for specific purposes, secured by assigning salary and end of service indemnity or any regular income from a well defined source, and which do not exceed AED250,000.

Accordingly, banks are limited to taking either an assignment of salary or end or service benefits when providing personal loans to expatriates. In relation to UAE nationals however, the requirements are slightly more lenient and banks can accept a personal guarantee from another UAE national as collateral security.
 
In relation to UAE nationals, banks can:

  • accept a personal guarantee from a UAE national for the obligations of another UAE national; or
  • accept a transfer of the obligation of a UAE national under an existing personal guarantee to another UAE national to secure the existing obligations of another UAE national as principal debtor.

However in relation to expatriates, banks cannot:

  • accept a personal guarantee from an expatriate for the obligations of a UAE national
  • accept a personal guarantee from an expatriate for the obligations another expatriate
  • accept a personal guarantee from a UAE national for the obligations of an expatriate
  • accept a transfer of the obligations of an expatriate as guarantor under an existing personal guarantee to a UAE national for the obligations of another UAE national as principal debtor.

These provisions were clarified in a publication made by the Central Bank in July 1993 (the 1993 consolidated report). This publication was a consolidated response made by the Central Bank following a round of inquiries from various banks on the 1993 Circular. In the report, the Central Bank clarified the rationale behind their 1993 Circular explaining that the objective of the circular was to reduce risk and further set out that a bank's decision to lend should be based solely on the credit worthiness of the expatriate borrower, without the reliance of a guarantee or other collateral security. 
 
An expatriate (whether a principal debtor or a guarantor) may leave the UAE at any time. This can result in practical difficulties for the creditor when seeking recourse against the absent obligor. Where the principal debtor is an expatriate and there is a risk that the expatriate may leave the UAE jurisdiction, the bank is advised to seek repayment of the loan in full (either by mandatory prepayment or acceleration through an event of default).

The result of the 1993 Circular means that banks have to carefully monitor the status of their personal loans and upon indication that the customer is no longer working or that the security may be jeopardised banks should insist upon full repayment. Although in the current market banks are aiming to find mutually beneficial solutions for longstanding customers, unfortunately they are restricted by regulation in agreeing to alternative security arrangements with respect to expatriate personal loans.