UAE: Can an employee take personal loan against gratuity amount?

Question: Can I get a personal loan against my gratuity amount? If yes, how does it work? For instance, how would debt recovery work in this case?

Response: It is understood that your queries on whether you can avail of a personal loan against your gratuity amount and, if so, you intend to know the procedures related to availing the personal loan and the rules related to debt recovery by the bank.

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Pursuant to your queries, the provisions of Regulation No. 19 of 2011 of Central Bank of UAE Regarding Bank Loans & Other Services Offered to Individual Customers (the ‘Central Bank Regulation No. 19 of 2011’), Notice No. 3692/2012 of Central Bank of the UAE pertaining to General Terms & Conditions and Loan Agreements texts drafted and approved by Emirates Bank Association (the ‘Personal Loan Agreements Formats Approved by the Central Bank of UAE’) and UAE Federal Decree Law no. 42 of 2022 on Civil Procedures Law (the ‘Civil Procedures Law’) are applicable.

In the UAE, a salaried individual may seek a personal loan from a bank or a financial institution (lender) based on the salary and end-of-service benefits of an employee, and the same may be treated as a security against a personal loan. A personal loan is defined in Article 2(a) of the Central Bank Regulation No. 19 of 2011 as “Is a loan that is given to individual customers, where repayments are made out of salary and end-of-service indemnity and/or any other verifiable regular income from a well -defined source."

The lender will obtain an undertaking letter from a borrower of a personal loan issued by the borrower’s employer stating that salary and end-of-service benefits will be deposited in the lender's bank account from where the personal loan is availed. This is in accordance with Article 2 of Personal Loan Agreements Formats Approved by the Central Bank of UAE, which states,

”Securities and Documentation

As a guarantee and security to pay the loan, interests, commissions, fees and any other amounts 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.

2. In the event the loan is granted against the personal guarantee, the borrower undertakes to provide the bank with the personal guarantee form approved by the Bank and signed by the guarantor(s).”

If a borrower has availed a personal loan from a lender and failed to pay three consecutive monthly instalments towards repayments or six non-consecutive monthly instalments towards the repayment of the personal loan this may be considered as an event of default by a borrower. This is in accordance with Article 4(4) of the Personal Loan Agreement format of Loan Agreements Formats Approved by the Central Bank of UAE

Therefore, in case of a default, a lender may choose to deposit the security cheque of a borrower for collection (if any). If the said security cheque is dishonoured due to insufficiency of funds, a lender may file an execution case against a borrower along with a request to impose a travel ban Based on the case filed by a lender, the court may approve the request and impose a travel ban on a borrower.

Alternatively, a lender may approach the relevant court which has jurisdiction if the outstanding debt is more than Dh10,000 and request the imposition of a travel ban on a borrower in accordance with provisions of Article 324 and Article 325 of the Civil Procedures Law. Additionally, a lender has the option of filing a payment order case or a civil case against a borrower in a court to recover the outstanding debt. If the final judgement is not in favour of a borrower, a lender may proceed to file execution proceedings against a borrower and that may include a request to impose a travel ban and issue an arrest warrant against a borrower.

Ashish Mehta is the founder and Managing Partner of Ashish Mehta & Associates. He is qualified to practise law in Dubai, the United Kingdom and India. Full details of his firm on: www.amalawyers.com. Readers may e-mail their questions to: news@khaleejtimes.com or send them to Legal View, Khaleej Times, PO Box 11243, Dubai.

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