By lowering the maximum interest rate that can be charged, the new Commercial Transaction Law in the UAE aims to minimize the cost of debt obligations for enterprises. However, this only applies to loan contracts when the duty to pay interest has not been specified.
The law currently reads as follows: “The creditor shall have the right to impose interest on the commercial loan in accordance with the rate established in the contract. If there is no interest rate specified in the contract, it must be calculated using the rate that is in effect at the time of the transaction.”
‘However, in this case, the rate shall not exceed 9 percent per annum until full payment.’
According to Atik Munshi, Managing Partner at Finexpertiza UAE, “The previous version had a maximum limit of 12 per cent. The change to 9 per cent will influence future court decisions in case of disputes and interest rate norms would likely be changed accordingly.”
Balancing the debt exposure
At the same time, according to Gulf News, the Law has placed the onus on banks to ensure they have enough safeguards when lending to businesses. This means that banks are required to ‘obtain sufficient guarantees against the loans they offer’. According to a banking source, the extra caution is warranted. “UAE banks have worked to bring down their impairments diligently through two difficult years, with Covid creating a whole set of disruptions to clients,” he said. “When they come out, the 2022 full-year results of banks will show the improvements made – what’s required is to continue this trend. “Help clients, but with safeguards, that’s what the authorities are saying.”
Win-win for lenders and borrowers
According to Luca Angiolilli, Head of Tax at Corporate Group, “This move would ensure that the growth becomes structural and sustainable and – importantly – does not attract ‘daring’ investors looking for hit-and-run opportunities.”
“SME businesses will be the major beneficiary of this change, as larger businesses have the comfort of negotiations with multiple banks offering credit to them. While smaller businesses can breathe a sigh of relief from a lower debt servicing cost, lenders will enjoy improved asset quality with better repayment capacity of borrowers.”
“This will reduce provisions and bad debts at banks, resulting in improved profitability. Reduced interest rates will help startups and SMEs to grow faster with higher disposal income and improved liquidity.”
“And a lower debt servicing cost will attract new investors to venture in starting businesses with a combination of own capital and debts.”