UAE: Can banks deduct loan amounts from end-of-service gratuity?

Question: I have an outstanding loan in the UAE. Does the bank have the right to recover the amount from my end-of-service gratuity?

Answer: It is assumed that you are expecting termination of your employment and it is further assumed that you have availed a personal loan from a bank. Therefore, the provisions of Notice No. 3692/2012 of the Central Bank of the UAE pertaining to General Terms and Conditions and Loan Agreements texts drafted and approved by Emirates Bank Association are applicable.

A personal loan agreement between a lender and a borrower may include a clause stating that the salary and the end-of-service benefits of such borrower are to be credited to the bank account of a lender. This is in accordance with Article 2(1) of Securities and Documentation of the Personal Loan Agreements Formats Approved by the Central Bank of UAE.

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“Article 2 - Securities and Documentation.

As a guarantee and security to pay the loan interests, commissions, fees, and any other amounts that become due under this agreement, the Borrower commits and undertakes as follows:

1. Provide the bank with a letter from the borrower's employer pursuant to which the employer undertakes to transfer his monthly salary and the end-of-service benefits to the bank throughout the loan period.”

Furthermore, a lender may demand a borrower to pay the outstanding balance of the personal loan if it feels that the borrower may not be in a position to pay back the loan in case of termination of employment. This is in accordance with Article 4(6) Personal Loan Agreements Formats Approved by Central Bank of UAE, which states, “The loan elapses and all the instalments, interests and any other fees and expenses become due and payable immediately without having to give any notification or any court ruling and without prejudice to any other rights of the Bank according to this agreement or in accordance with the law in the event of occurrence of any of the listed below events:

6. If the bank notices that there are grounds which could lead to the inability of the borrower and/or any of his guarantors, as permissible under Central Bank’s prevailing regulations, to fulfil his obligations towards the Bank."

Based on the aforementioned guidelines of the UAE Central Bank on personal loan agreement, in case of termination of your employment, the lender may recover its outstanding loan amount from the final settlement amount a borrower shall receive from its employer in its bank account.

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