Direct Debit: Move from criminal to civil

No other issue has spread so much dread and tyranny in the hearts and minds of the members of the UAE’s business community as the incidence of cheques turning bad. Thousands of entrepreneurial dreams have turned sour due to this vexed problem and several thousands more have ended up in jail, in most cases for no fault of theirs. Policy planners, law enforcing authorities, the judiciary, government agencies have all grappled with this problem without any degree of success.

The UAE central bank, in one single stroke, has now struck at the root of the problem. And most significantly, this has been done not by adding to the deterrence or removing the element of guilt from the process, but by removing a major reason that contributed to the incidence of cheque bouncing.

With the introduction of its proposed Direct Debit (DD), the issuance of cheques will be a reduced to a fraction of what it is today. So, when there are fewer cheques in the system, the chances of their turning problematic also become less.

The implementation of Direct Debit will enable customers to make regular, automatic payments from their bank accounts towards their payment obligations, such as personal loan instalments, credit card payments or repayment of mortgage loans without the need to issue post-dated cheques. Apart from removing a major reason for writing cheques, which will henceforth be handled with the help of greater technology integration in the retail banking system, the new arrangement also redefines the relationship between the parties involved in the transaction: the payer, the payee and the intermediary that handles the obligation such as the third party bank.

Legally-binding contract

With every deal, product or service availed by the customer, a legally binding contract will be drawn up, which will authorise the bank to make direct debits from the customer’s account and it will be a legally binding contract involving the customer, who will be the payer; the originator, which will be the bank offering the product and the beneficiary of the payment; and the paying bank, which has the customer’s account. The terms and conditions of the direct debit will be as per the rules framed by the central bank from time to time.

In terms of the chances of default, the contract will stipulate that if there are insufficient funds in the customer’s account or in the event of the customer issuing a stop payment instruction, the payer has the obligation to arrange alternative funds so that there is no disruption in the payment process. In case of disputes, the parties have the right to approach a UAE court. The central bank can also impose fines for defaults.

The most important aspect of the new arrangement is that the disputes are not referred to the police, as has been the case so far because default in the form of a bounced cheque was considered a criminal offence, which warranted arrest and detention.

The new system virtually de-criminalises payment defaults, which addresses a long-felt need and introduces greater sophistication in the payment and default regime as practiced in developed countries.

Just as the system currently in vogue treated the defaulter as a criminal offender, it also involved considerable hardships to the bank or any aggrieved party.

The resort to the extreme step meant that the institution that was owed the money had little chance of recovering it as defaulter forfeited all means of earning and making the transaction good, putting the institution under the additional burden of meeting the cost of detaining the offender. The banks were losing on both counts.

This had prompted the banks to lobby with the central bank to seek a change in the current laws so as to remove the criminality of the bounced cheques and help protect the interests of the banks by putting in place a more realistic approach that was in accordance with global practices. The country’s banking community, re-organised under the banner of UAE Banks Federation, had made several recommendations to the central bank in this respect.

So the new system is a big positive for all: the customers, the banks and the system as such.

— The writer is a UAE-based journalist.