UAE: Bank loses Dh950,000 claim after failing to secure loan guarantees

Abu Dhabi: A bank in Abu Dhabi has lost its attempt to recover nearly Dh950,000 from a borrower and her guarantor after a court found it had failed to follow central bank rules designed to safeguard customers.

The Abu Dhabi Commercial Court of First Instance dismissed the claim, ruling that the lender did not secure adequate guarantees before granting the loan, in breach of regulatory requirements. 

The bank had sought to compel the two defendants to jointly repay Dh949,938, representing the outstanding balance of a loan extended to the first defendant, with the second acting as guarantor. It also requested annual legal interest of 9 per cent from the date of default until settlement, along with court fees and immediate enforcement, Emarat Al Youm reported. 

According to court documents, the bank submitted a loan agreement, account statement and a copy of the guarantor’s undertaking. However, judges concluded that the lender had failed to obtain sufficient guarantees or the required number of post-dated cheques linked to the instalment schedule.

In its ruling, the court cited Article 150 of Federal Decree Law No. 6 of 2025 on the Central Bank and the regulation of financial institutions. The law requires licensed financial institutions to obtain and retain adequate guarantees for all credit facilities granted to individuals and sole proprietors, in line with the borrower’s income and the value of the facility.

The legislation also states that courts and arbitration bodies cannot accept claims brought by financial institutions in cases where such guarantees were not obtained or preserved.

The court noted that lenders are not allowed to collect a single cheque covering the full loan amount unless the loan is repayable in one instalment. Where repayment is structured over several instalments, multiple guarantee cheques must be secured, matching the number and value of those instalments, and their total value must not exceed 120 per cent of the loan.

Judges found that the bank had granted the facility without obtaining any guarantees from either the borrower or the guarantor, in violation of central bank instructions. While contracts are binding on both parties, the court said this principle does not apply when contractual terms conflict with mandatory legal provisions.

The claim was therefore deemed inadmissible, and the bank was ordered to bear the legal costs.