UAE: Understanding Loan Recovery from End-of-Service Gratuity6 min read
- Posted by: Derya Bandak
- Category: Dubai
When it comes to loans and financial agreements, recovering outstanding amounts, especially from the end-of-service gratuity under UAE Labor Law, is subject to the specific terms and conditions outlined in the loan agreement. In this article, we’ll have a look at the intricacies of these agreements and shed light on the connection between loan terms and salary crediting.
The Relationship Between Loan Agreements and Salary Crediting
A personal loan agreement usually includes a clause that obligates the borrower to credit their salary and end-of-service benefits to the lender’s bank account. This clause is aligned with the regulations stipulated in Notice No. 3692/2012 by the Central Bank of the UAE and Article 2(1) of the Securities and Documentation of Personal Loan Agreements Formats Approved by the Central Bank. As a result, borrowers are required to provide a letter from their employer, confirming that their salary and end-of-service benefits will be transferred to the designated bank account throughout the loan term.
Repayment and Termination of Employment
The dynamics of loan repayment and employment termination introduce another layer of complexity. As per Article 4(6) of the Personal Loan Agreements Formats Approved by the Central Bank of the UAE, the lender can demand the outstanding balance if they perceive that the borrower may struggle with repayment after employment termination. In such cases, the loan becomes immediately due and payable, and the lender can recover the outstanding amount from the borrower’s final settlement received from the employer.
Employment Status and Its Impact on Loan Recovery
The borrower’s employment status is a crucial factor in determining the lender’s ability to recover the outstanding loan amount, particularly from the end-of-service benefits. The borrower may have an advantage if they secure new employment and can demonstrate to the lender that they will receive a continuous salary. In such cases, the lender may choose not to exercise its right to recover the outstanding amount from the end-of-service benefits, recognizing the borrower’s commitment and capacity to fulfill their financial obligations.
How TME Services Can Support
Navigating the landscape of loan agreements and their implications on the recovery of outstanding amounts requires a nuanced understanding of the clauses and conditions outlined in these agreements. Borrowers, lenders, and employers should be well-informed about these intricacies to ensure a fair and transparent financial ecosystem where obligations are met, and rights are respected. Staying informed and proactive is essential to successfully navigating the complexities of personal loan agreements and safeguarding the interests of all parties involved as the financial landscape evolves.
TME Services is a team of 45 professionals in legal-, tax-, accounting and compliance with over 18 years of experience. We advised a significant number of SMEs in the context of the implementation of the tax framework in the UAE and KSA over the last decade to make sure that our clients are well-oriented in the new and fast-evolving tax landscape and to reduce the legal liability of managers which may arise in connection with non-compliance.