Direct debit system raises questions

The arrival of direct debit is an important milestone in building a solid UAE banking sector, although there are some unanswered questions.

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The proposed introduction of a direct debit payment system to the UAE is welcome news. Direct debit payments, promised by summer, will be cheaper for banks to administer, and at least part of the savings may be passed on to customers. The new system will also be more convenient for customers.

Yet the direct debit system raises some questions, especially if direct debits are to replace security cheques. Currently, customers who take out loans have to write several cheques for the repayments, with the threat of criminal liabilities if any of those cheques bounces.

At the moment, bouncing a cheque is a criminal offence (although since last year Emiratis have been safe from going to jail for this crime). Because of this, banks have a method of pressuring customers who fail to pay back their loans - they can threaten criminal proceedings against the customer and that threat will often result in a customer finding the money somehow.

As a pressure tactic, the threat of criminal proceedings is powerful. But as a method of getting bank debt repaid, it is inefficient: for one thing, those customers who are jailed are then unable to pay back any debt at all. In addition, all the customer's other debts - credit cards, other loans with other banks - are frozen, incurring more costs on banks.

It is that possible lack of a method of coercion that will concern bankers if there is a wholesale move to direct debit. At the moment, although cheques are expensive for banks (because of the processing costs), they are considered preferable to, for example, credit cards - one reason that average annual interest rates for personal loans are 5.75 per cent compared with 38 per cent for credit cards.

At the root of this is the need for the credit risk of individual customers to be assessed, something banks currently cannot easily do. As this newspaper has argued before - and as banks themselves have said - a national credit bureau would go a long way towards solving that issue and, in turn, helping banks safeguard against the Dh48.6bn in invalid payments incurred last year.

The arrival of direct debit is an important milestone in building a solid UAE banking sector. There are unresolved questions, though, which will concern customers and bankers alike.