1.5 million cheques worth Dh55.3bn bounced in the UAE last year

Bounced cheques: One in twenty cheques, used for payments amounting to Dh55.3 billion, bounced in the UAE last year, according to the most recent available data from the Central Bank.

The Central Bank is issuing more stringent directives to reduce bounced payments. Ryan Carter / The National

More than 1.5 million cheques used for payments amounting to Dh55.3 billion (US$15.05bn) were returned in the UAE last year, according to the most recent available data from the Central Bank.

That represents one failed transaction out of every 20 cheques used last year.

The total includes cheques that bounced due to insufficient funds and those that failed to clear for technical factors such as being damaged or missing details.

It is a criminal offence in the Emirates to issue a cheque without sufficient funds. Cheques are used for more than Dh1 trillion of payments every year, from backing corporate loans to making mortgage payments, which must by secured by a blank cheque by law.

The number of failed cheques was "a substantial number," said Mazen Boustany, the head of the law firm Habib Al Mulla & Company's banking and finance practice. The law firm has advocated ending the criminalisation of bounced cheques.

The failed transactions were more likely to reflect cheques used by consumers than by corporate customers, because of the alternative sources of collateral on offer to companies, added Mr Boustany.

The number of people who have been jailed for bounced cheques is unknown. However, Lieutenant General Dahi Khalfan Tamim, the chief of Dubai Police, has called for a decriminalisation of bounced cheques because of the costs imposed by pursuing bounced cheques used by local businesses.

This year, a hunger strike by dozens of imprisoned businessmen, many of them jailed for cheques that bounced in the wake of Dubai's downturn, made headlines.

The number of invalid cheques reflects 5.5 per cent of the 28.4 million cheques used in transactions worth Dh1.2 trillion last year.

The rate has improved from December 2009, when at the onset of Dubai's property downturn, dud cheques peaked at 7 per cent of the total used for payments.

The current inability of banks to recover debts through civil courts was creating an economic deadweight for lenders, said Nasser Saidi, an independent economic adviser who is a former Lebanese trade minister and a former chief economist of the Dubai International Financial Centre Authority.

"Currently, once it becomes a criminal offence, then your only choice is to go to the courts. That's expensive." It also effectively wrote off recovering the debt, he added.

The threat of criminal sentences for bounced cheques resulted in scores of UAE residents fleeing the country after the 2009 downturn.

Mortgage holders' efforts to renegotiate payments for properties valued at peak market prices during their construction, but worth a fraction upon handover, prompted a wave of absconded buyers when banks threatened to cash security cheques rather than redraw terms.

Meanwhile, successfully cleared cheque transactions grew at a rate of 2.4 per cent during the first half of this year to Dh562.1bn, the Central Bank's data show. That was the slowest rate since the same period in 2010.

Since then, banks have been forced to put aside large sums of capital to cover the costs of missed payments and debts gone sour. Such provisions totalled Dh64.2bn across all banks as of August, according to Central Bank data. The figure has steadily grown and sapped the amount of funds banks have available to lend.

The Central Bank could not be reached for comment.