Bank charges: are customers in the UAE getting a fair deal?

Empirical evidence, especially the number of concerns about banking practise being sent to Khaleej Times, suggests that complaints against banks in the UAE are becoming louder and more frequent. But are they being heard? Apart from complaining to the manager of the concerned bank and, if necessary, to the Central Bank there is little that can be done — besides moving one's custom to another bank.

In the UAE, banks can set charges as they see fit. Presumably, however, they are set within "competitive limits" and reflect the cost of processing the transaction.

Banks only have to comply with circular No.12/93 dated 23/2/1993 issued by the UAE Central Bank. The relevant paragraph states: "Interest rates, fees, commissions and charges pertaining to personal loans plus all fees, commissions and charges pertaining to persons' transactions at banks and finance companies must be clearly written in Arabic and English on a board measuring at least (80 by 100cm) and fixed in a prominent position in the banking hall."

Although bank charges in the UAE vary from bank to bank they fall largely within the same ballpark figure. The differences are most pronounced when it comes to charges imposed for failing to keep a minimum balance or for retaining sufficient funds in an account. These can vary from Dh50 to Dh150. The charge for a bounced cheque could be anything between Dh300 and Dh500 depending on the bank. And unauthorised overdrafts are costly. Not only is there a charge for sending out a letter and an unauthorised overdraft fee but penal rates of interest are charged as well.

Khaleej Times asked several local banks to explain how they set their charges but all refused to comment. This is not unusual. It is no different in the UK. Last December, on the BBC's Money Programme, Ben Limberg commented: "The key point in this case is that none of the banks want to reveal their true administrative cost for penalty charges."

The programme also asked two professors of banking and a former banking executive to estimate the banks' costs associated with specific transactions. They noted: "The highest figure they concluded that banks could justify was 4.50 pounds (Dh33.7) — much higher than banks currently charge." These can vary between £12 and £45 depending on what the penalty is for.

In the UK it is estimated that the banks make £4.7 billion worth of fees each year from charges, which include unauthorised overdrafts, bounced cheques and clearing direct debits when there is insufficient funds in the account. Ultimately, these charges are made to offset the cost of bad debts that banks incur. No similar study has been carried out in the UAE so how much banks in the UAE make from bank charges and the extent to which charges reflect the real cost of a transaction is unknown.

That bank charges and service fees in the UAE are increasingly under scrutiny comes at a time when the UK's Office of Fair Trading (OFT) has decided to take seven banks and one building society to court to determine if their charges and penalty fees are fair.

If customers in the UAE are to know when bank charges are "fair" they must be able to assess the charge imposed upon them against the actual cost of a transaction. Under English Law, the sum charged by a bank must reflect the actual costs incurred and not exceed the damages it suffers due to the breach of contract.

As yet, there has been no test case in the UAE courts to determine what constitutes a "fair" charge. This is unlikely to happen however until bank customers are able to go to an independent body that can make an objective ruling on what is an acceptable bank charge or penalty.

In 2001 the Financial Services Ombudsman was set up in the UK to act as an independent body to hear complaints about most financial matters involving products and services provided in (or from) the UK. With bank customers in the UAE increasingly concerned about the level of charges imposed by banks, is it not time that customers were able to take action?