A new move to decriminalise bounced security cheques could backfire without a federal credit bureau in place, a top banker has warned.
It comes as other banks point to a rise in Emiratis missing payments on unsecured lending, which includes credit cards and personal loans, ever since a presidential decree immunised Emirati borrowers from going to jail over bounced security cheques.
If they are barred from using cheques as a security measure, banks may become unwilling to lend to individuals, said Rick Crossman, the head of retail banking and wealth management at HSBC Middle East.
"It's not that all lending would stop, but certainly there would be a restriction," he said. "If you start taking out tools to manage the risk without replacing that with something else, just by default you'll have less lending."
A consensus has developed among banks that the UAE must move away from the use of cheques as a payment method, with banks, including Emirates NBD, saying that they support a decriminalisation of cheques for all.
Last year, 1.4 million cheques failed at the point of use in the UAE, representing payments worth Dh46.8 billion (US$12.74bn).
The amount of money returned as invalid upon payment has fallen by 15.3 per cent since 2011, but analysts say the sum - equivalent in total value to a little less than Apple's most recent quarterly net profits - represents an economic dead weight for the country.
Bouncing a cheque is a criminal offence, although Emiratis were immunised from going to jail for writing a bad security cheque as the result of a presidential decree in October.
About 1,000 Emirati defaulters have been released from prison since then.
The UAE's move towards international standards on cheque defaults required additional measures to strengthen banks' oversight of their lending books, Mr Crossman said.
"We're very supportive of the local laws and we adhere to all local laws," he said. "But we believe there are some infrastructure improvements that need to take place to allow banks to lend in an appropriate way in this market without the use of security cheques."
Bankers agree that the formation of a credit bureau would be a prerequisite before cheques could be decriminalised for all residents.
"I believe what would be an unintended consequence of doing away with security cheques ahead of a robust credit bureau would be that you could potentially see a contraction of lending," Mr Crossman said.
Reluctance on the part of banks to use civil courts has created problems in the past, with criminal action viewed by many lenders as a faster and more effective way of recovering money owed to them.
But dozens of bank customers fled the Emirates during the financial crisis when lenders threatened them with cashing security cheques - potentially leading to jail time - rather than agreeing to renegotiate terms. The result was an increased level of bad debts in the financial system.
If banks aggressively pursued customers, it would likely represent lost business in the future, Mr Crossman added.
ghunter@thenational.ae
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
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The biog
Birthday: February 22, 1956
Born: Madahha near Chittagong, Bangladesh
Arrived in UAE: 1978
Exercise: At least one hour a day on the Corniche, from 5.30-6am and 7pm to 8pm.
Favourite place in Abu Dhabi? “Everywhere. Wherever you go, you can relax.”
