UAE lowers cap on maximum interest rate from 12 per cent, providing a significant lift for businesses, especially SMEs. However, this applies only to those contracts where the rate terms have not been spelt out. Image Credit: Shutterstock

Dubai: The UAE’s revised Commercial Transaction Law has sought to reduce the cost of debt obligations for businesses by lowering the upper limit on interest rates charged. This, however, only applies to those loan contracts where the interest rate obligation has not been stated.

This is what the Law states now: ‘The creditor shall have the right to charge interest on the commercial loan as per the rate stated in the contract.

‘If the interest rate is not determined in the contract, it shall be calculated as per the interest rate prevailing in the market at the time of transaction.

‘However, in this case, the rate shall not exceed 9 per cent per annum until full payment.’

According to Atik Munshi, Managing Partner at Finexpertiza UAE, “The previous version had a maximum limit of 12 per cent. The change to 9 per cent will influence future court decisions in case of disputes and interest rate norms would likely be changed accordingly.”

Taking auctions on an electronic platform is another testimonial to digital transformation by the UAE Government.

- Esha D'Souza, Partner at Corporate Group

Balancing the debt exposure

At the same time, the Law has placed the onus on banks to ensure they have enough safeguards when lending to businesses. What this means is banks are required to ‘obtain sufficient guarantees against the loans they offer’.

According to a banking source, the extra caution is warranted. “UAE banks have worked to bring down their impairments diligently through two difficult years, with Covid creating a whole set of disruptions to clients,” he said. “When they come out, the 2022 full-year results of banks will show the improvements made – what’s required is to continue this trend.

“Help clients, but with safeguards, that’s what the authorities are saying.”

Win-win for lenders and borrowers

According to Luca Angiolilli, Head of Tax at Corporate Group, “This move would ensure that the growth becomes structural and sustainable and - importantly - does not attract ‘daring’ investors looking for hit-and-run opportunities.

“This provision should help banks safeguard their interest by obtaining sufficient guarantees against loans offered to avoid attracting reckless investments resulting in a loss for the financial sector.”

Bringing down interest rate cost

Naveed Ali, who is with Zand Bank, one of UAE’s new-gen digital-only banks, says the drop in interest rate chargeable – under certain circumstances – represents a win-win for all stakeholders.

The reduction by 3 per cent will a have multi-faceted impact on borrowers, lenders as well as the economy.

- Naveed Ali

“SME businesses will be the major beneficiary of this change, as larger businesses have the comfort of negotiations with multiple banks offering credit to them. While smaller businesses can breathe a sigh of relief from a lower debt servicing cost, lenders will enjoy improved asset quality with better repayment capacity of borrowers.

“This will reduce provisions and bad debts at banks, resulting in improved profitability. Reduced interest rates will help startups and SMEs to grow faster with higher disposal income and improved liquidity.

“And a lower debt servicing cost will attract new investors to venture in starting businesses with a combination of own capital and debts.”

Opening up e-auctions
The updated Commercial Transactions Law also creates openings for auctions on ‘movable’ assets to be held the e-way. Again, Law takes note of how more of doing business or engaging in trade is turning digital, and has made it easier for all involved to conduct such transactions in the online space.

“Taking auctions on an electronic platform is another testimonial to digital transformation by the UAE Government,” said Esha D'Souza, Partner at Corporate Group. “Online auctions will enable accessibility and broaden the marketplace for potential bidders.”