Lending money comes with a lot of risks. Banks operate and make profits by lending money, but at the same time they face a high risk of non-payment by borrowers. There are situations where banks fail to determine the repayment capacity of borrowers, which exposes both the banks and the borrowers to financial risk. This was initially addressed by Article 121, which, through amendment, has now been carried forward by Article 150 of Federal Decree-Law No. 6 of 2025.
Understanding the Legislative Intent Behind Article 150
Borrowers are often in a weaker bargaining position and may be in a vulnerable state due to a desperate need for money. This could be abused by lenders. Banks possess superior financial knowledge, greater negotiating power, sophisticated risk assessment tools, etc. Borrowers often rely on the bank’s assessment when taking credit facilities. Article 150 therefore places a positive obligation on banks to ensure that adequate guarantees exist before extending credit. Article 150 should be read together with other Central Bank regulations, which provide practical guidance regarding salary assignments, security cheques, credit insurance, and lending limits.
What Does “Adequate Guarantees” Mean?
Article 150 states that guarantees must be:
- Commensurate with the customer’s income.
- Commensurate with existing guarantees.
- Commensurate with the size of the facility.
A. Income-Based Assessment
The bank must examine the monthly salary, other sources of income, and the borrower’s ability to repay.
B. Existing Guarantees
The bank should also consider existing mortgages, existing pledges, and existing security arrangements.
C. Size of the Facility
The amount borrowed also determines whether a person can afford to repay the debt.
Introduction of the Admissibility Requirement
In a normal case, regulatory breaches lead to fines, warnings, or administrative sanctions. However, Article 150 goes beyond that. It states that if adequate guarantees were not obtained, then the claim will not be admissible in the event of a breach. The bank may lose its ability to pursue recovery proceedings.
Judicial Approach
A very significant issue that came before the Abu Dhabi Court of Cassation was: What happens if a bank breaches a prudential lending rule but still obtains adequate security?
In Case No. 33-Commercial-2025-A-T
In this case, the loan allegedly exceeded the salary-based lending limits, and the lower court held that this was sufficient to dismiss the claim. The bank had taken a salary assignment, loan insurance, and a security cheque. The Court held that the guarantees obtained by the bank satisfied the statutory requirement and, hence, the claim should be accepted.
In this case, the Court shifted the focus from technical regulatory breaches towards the practical existence of security.
In another Judgment No. 819 of 2025
In this case, the lower courts found that the facility exceeded the lending limits and that the security arrangements were insufficient.
The Court of Cassation reversed the findings of the lower courts. An interesting aspect of this case was the treatment of a single promissory cheque, whereas the regulations refer to obtaining “a number” of cheques. The borrower argued that a single cheque was insufficient. In this case, the Court adopted a substance-over-form approach and held that where one cheque secures the entire indebtedness, it can still constitute adequate security. The Court was concerned with the function of the security rather than its technical structure.
Impact of Article 150 Under the New Banking Law
Even though Article 121 has been replaced by Article 150, the amended provision preserves the same legal framework. Hence, the existing judicial precedents issued in relation to Article 121 remain relevant. Banks can continue to rely on these judgments.
Conclusion
The benefits of Article 150 are it:
- Encourages responsible lending.
- Protects borrowers.
- Promotes financial discipline.
- Enhances banking sector stability.
- Prevents the reckless extension of credit.
The article creates a rare hybrid mechanism which has a lot of benefits. However, there are some potential concerns that may arise, as the concept of “adequate guarantees” remains flexible. Courts may interpret adequacy differently, and there are still some uncertainties as to what forms of security will satisfy the requirement.
The recent Abu Dhabi Court of Cassation judgments have clarified that the provision is intended to ensure the existence of meaningful security rather than punish every regulatory deviation. This is likely to remain the guiding principle under Article 150 of the new Banking Law.
We at Ayesha Aldhaheri Advocates & Legal Consultants closely monitor developments in UAE banking and financial regulations.