UAE bank chief calls for alternative to cheques

Bounced cheques: The chief executive of Noor Islamic Bank has called on the financial services industry to develop alternative payment systems in an effort to cut down on the number of bounced cheques.

Hussain Al Qemzi said banks should aim to stop chasing customers who bounce cheques as it is a very costly process. Jeffrey Biteng / The National

The chief executive of Noor Islamic Bank has called on the financial services industry to develop alternative payment systems in an effort to cut down on the number of bounced cheques.

Hussain Al Qemzi said this month banks should aim to stop chasing customers who bounced cheques as it was a costly process and other methods of payment were readily available.

"I think we should develop payment mechanisms for individuals through the banking system or educate our customers how easy it is to pay without cheques," he said.

There was, in theory, no need for cheques, he added, "as long as you can send the money somehow".

Mr Al Qemzi says that if individuals could more easily transfer funds directly, they would use it. "If that technology is available and that is free, like the cheques, then people will use it."

More than 1.5 million cheques presented in the UAE last year were returned, representing payments of Dh55.3bn (US$15bn), according to the Central Bank.

The figure includes cheques that failed because of technical reasons - such as tears or missing details - and for insufficient funds. It is unclear, however, how many cheques failed for technical reasons.

UAE law criminalises issuing a cheque for payment without sufficient funds available to cover it.

Banks should try to reduce the number of cheques used in the system to reduce their administrative burden, Mr Al Qemzi added.

Replacing cheques would also speed payments through the financial system, because cheque payments typically take longer to clear. Many consumers avoid using cheques because of the potential legal aspects, which tend to be more severe than in many other parts of the world.

However, for some transactions, including home loans, unsecured borrowing and some corporate lending, cheques are necessary as a security in the UAE.

A total of 28.4 million cheques were deposited with banks in the country last year.

The chief of Dubai Police, Lt Gen Dahi Khalfan, has repeatedly questioned the criminalisation of bouncing a cheque for insufficient funds in the UAE, saying pursuing such cases is a waste of police time.

This year, dozens of jailed businessmen in Dubai took part in hunger strikes to draw international attention to the issue of bounced cheques.

The cost of pursuing issuers of bounced cheques in the courts also loads banks with additional expenses, which simultaneously forces them to set aside more money to cover missed payments. Economists say that the result is a deadweight for the local economy.

The Central Bank did not respond to requests for comment.

One potential alternative might be wider use of standing instructions, where regular payments are scheduled at pre-set intervals and transferred electronically between bank accounts, said one regional financial analyst working in the IT industry.

Though regulatory restrictions prevent standing instructions from replacing cheques for every transaction, putting those systems in place would at the very least remove issues with damaged or torn cheques, he said.

However, replacing the cheque as a method of backing unsecured lending was easier said than done, said Tom Smith, the United Arab Bank's head of retail banking.

"Nobody's yet come up with any better alternative than the security cheque," he said. "No matter how burdensome or annoying it is."

In the absence of a credit bureau, one of the only ways banks feel comfortable with personal lending, which can be a multiple of up to 20 times an individual's salary, is through use of cheques as security backing the loan, Mr Smith said.