The most complex topic in the UAE is Money Lending, as it is illegal. If you are unaware of this fact you could be breaking the law without any intention. It can bring a lot of anxiety and stress for an individual if you find yourself in that difficult situation.
There can be desperate financial circumstances where you need assistance and are not eligible for a loan at banks or financial institutions. In such conditions, you will probably consider borrowing from family, friends or any associate. This is not legal and at times these loans can come with more pressure than bank loans do.
Borrowing cash from lenders apart from licensed institutions certified by the Central Bank of the UAE is illegal. If you have taken cash from any individual and if they are threatening you to recover the payment with interest, without documentation, proof of legal agreement then you have every right to take legal action.
Though borrowing money from an uncertified entity is illegal in UAE, it is completely legal and Sharia-compliant (halal) to take ‘friendly’ loans without interest on repayment. It is not permitted and considered as haram to make a profit from loans that are issued friendly.
Can you borrow money from friends/relatives in the UAE?
Borrowing money from friends and relatives is very easy and money lending and repaying depend on mutual relationships. If the loans are not paid or there is a delayed payment, there is increased pressure and a feeling of heated relationships resulting into issues. There is very little scope for any legal action against parties as both the lender and the issuer are known to each other and in most cases, they are friends or relatives.
In the UAE, borrowing money from any person or group of individuals who are not licensed by the country’s central bank is not permitted. It is a practice that people do take loans from friends and relatives in the UAE. The condition is that these loans should be given without charging any interest on the repayment. It is an unlicensed form of lending and charging interest is not permitted. Moreover, it is haram to charge interest on friendly loans in the UAE.
As a best practice, when you are borrowing money from friends and relatives or lending money to them there is an effective way for legal proceedings if the loan amount is unpaid. The condition is there must be a written agreement and documents executed.
The loan amount should be specified, repayment tenure and structure should be specified, both parties should agree to the terms and conditions and sign the document. If the agreement’s terms are not honoured then the right practice is to issue money through the cheque. The cheque issued will serve as evidence of payment or receipt of funds.
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Since the loans issued to friends depend on mutual trust in practice most cases there are no mutual agreements nor any cheques are issued. Money is lent on a word of mouth agreement and there cannot be any legal proceedings where there is no documentation.
A loan from friends and relatives can be taken for different purposes. The loan amount can be from hundreds to thousands of dirhams or any larger amounts. In dire situations of emergencies, the loan amounts can be issued and it should not be haram meaning interest should not be charged for friendly loans.
If a friendly loan is issued for a larger amount then it should be documented. The details of repayment should be clearly mentioned in the agreement. Money is a sensitive matter and when something goes wrong it seriously affects the relationship between the persons involved. A practical and realistic repayment structure should be agreed upon.
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Points to note
- Money borrowed from friends has no formal repayment system because it is a moral obligation. Having an effective repayment schedule and repayment mechanism helps the lender in recovering money.
- The borrower should keep in mind that repayment should be made on time. Borrowers should make true promises and arrange repayment of borrowed money. If payment is not made it will directly affect the relationship between borrower and lender.
- Salaried borrowers should consider monthly savings and set aside money for repayment of borrowed money.
- Salaried employees should not consider future bonuses and commissions for repayment. Since it is unpredictable earning and promises of repayment cannot be made on unpredictable income.
- Focus on early repayment of borrowed money. It will increase your respect and trust.
- The loans issued are non-interest bearing and the borrower should not ignore and ensure payment is done on time.
- Reduce unnecessary expenses like holiday trips and spending luxury purchases.
- Make a note that the repayment schedule is followed and payments are done on time.
- Loans are issued as interest-free and they are issued as a favour and not on demand. The lender has the right to recover money and it should offend you.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.