Can Banks Deduct Money from End-of-Service Benefits to Cover Default Payments on a Personal Loan?

Introduction

In the UAE, Bank Loans Offered to Individual Customers are governed by Regulation No. 29/2011 Regarding Bank Loans & Other Services Offered to Individual Customers. Additionally, the Central Bank of the UAE issued Central Bank Notice No. 3692/2012, outlining the general terms and conditions for loan agreements, providing a framework for both lenders and borrowers.

One common concern among borrowers is whether banks can deduct money from end-of-service benefits to cover default payments on a personal loan. To address this question, it is essential to examine the relevant bank loan regulations and the clauses in the Personal Loan Agreement approved by the Emirates Banks Association.

Regulation No. 29/2011 Regarding Bank Loans & Other Services Offered to Individual Customers:

Article 2 of Regulation No. 29/2011 defines a personal loan as a bank given to individual customers, with repayments made from salary, end-of-service indemnity, or other verifiable regular income. The loan amount is covered at 20 times the borrower’s salary or total income, with a repayment period not exceeding 48 months. Importantly, the monthly deductions for loan repayment, including interest, may remain within specified limits, ensuring a reasonable proportion of the customer’s income.

Article 7 provides guidelines for repayment instalments, specifying that deductions from a borrower’s salary or regular income, covering various loan types, may not exceed 50% of their total salary. In cases where the repayment period extends to the retirement age, banks have the flexibility to schedule reductions, allowing for a maximum deduction of 30% from the borrower’s income or pension salary.

Furthermore, banks are limited to accepting postdated cheques covering instalments, with the value not exceeding 120% of the loan or debit balance. For the granting of loans and bank facilities, mandatory standard agreements and applications must be prepared in both English and Arabic. Importantly, these drafts require approval from the Emirates Banks Association, as outlined in Article 12.

Central Bank Notice No. 3692/2012 of the Personal Loan Agreement

According to Article 2(1) of the Personal Loan Agreement issued in Central Bank Notice No. 3692/2012, the focus is on the repayment of the loan, emphasizing that the principal loan shall be paid to the borrower’s account upon completion of all necessary securities and documentation. Importantly, the borrower commits to providing the bank with a letter from their employer, agrees to transfer the monthly salary and end-of-service benefits to the bank throughout the loan period.

Article 4 outlines various events of default, including the termination of the borrower’s employment, unauthorized transfer of the monthly salary, violation of obligations, and failure to make consecutive or non-consecutive monthly instalment payments. In the event of default, the loan and associated amounts become immediately due and payable. The agreement may allow the bank to take appropriate actions, including the possible use of end-of-service benefits to settle outstanding amounts.

Furthermore, Article 5 permits the bank to deduct any amounts owed by the borrower from funds in the accounts they hold with the bank or its branches. This provision may allow the bank to use the money in the borrower’s accounts, including end-of-service benefits, to cover outstanding loan amounts. Article 6 provides that, under certain circumstances, the bank may have the option to obtain a life insurance policy, settling the loan payment.

Conclusion

While the Personal Loan Agreement may allow banks to use end-of-service benefits to cover default payments, adherence to the specified regulations is crucial. Borrowers should be aware of their rights and obligations in the agreement.

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