The rapid and significant growth of the U.A.E. economy in the recent years has been unprecedented, at least by some accounts. The growth, evident throughout all aspects of life, was especially manifested in the amount of foreign investment brought into the country. Foreign investment took the form not only of cash investments, but also the number of new companies, business concepts and people.
Since the onset of the global financial crisis, that growth has naturally tapered off. Many wondered whether the country could sustain its recent ambitions and maintain the critical mass it had built during the boom years. Yet, three years later, the U.A.E. continues to attract outside interest. Much of this can be attributed to the country's relatively quick response in business and legislative initiatives, despite what some critics may argue.
The crisis, however, has also brought to light how much the country's economic, legal and sociological landscapes have changed, along with the country's appetite and ambitions for its role in the global arena. Among other things, the U.A.E. aspires to continue to be a lucrative market for foreign investment, attracting investments from even more sources and new markets.
To continue to grow and embrace new challenges for the long term, however, further legislative and business reforms are required. And while many of the reforms may be especially urgent for Dubai, there is a need for them to be enacted at the federal level and span a broad gamut to be effective in the long run. Some of the most urgent reforms relate to protecting already existing foreign investors and for attracting new ones.
One important and much overdue reform is the introduction of a property visa that grants real estate investors a long-term U.A.E. residence visa. This is important because many had invested, in Dubai in particular, significant amounts of money relying on the availability of such visa in the past. Two years ago, however, Dubai abolished that practice, leaving many investors in a bind, as much of the day-to-date life in the UAE is linked to a residence visa. It includes the ability to open a bank account, to own a car and to send children to school. Recognizing this, the U.A.E. has recently announced that it would enact a federal law granting a three year visa to property owners. More than six months later, however, the law has yet to be introduced and its forecasted timing is unclear. Furthermore, the details of its scope have been too scant to allow postulating as to whether it will provide the adequate protection and incentives.
Another much needed change is an introduction of a credit rating system to track investors' creditworthiness, be it through central bank regulations, government agency or a private system. This will also aid in establishing an effective debt collection system that holds borrowers accountable for their debts, without necessarily expelling them out of the country or by jailing them.
Such system will inevitably address a mounting and pervasive problem of what is a rather archaic system of criminalizing issuers of dishonoured cheques. Due to the absence of a credit rating system, most debts in the U.A.E. are secured by cheques. If a borrower's financial ability changes whereby he can no longer honor those payments, the cheque is cashed as security and, when bounces for insufficient funds, becomes a criminal offense. The penalty is jail sentence, until the cheque is paid off. There are numerous problems related to this issue. But the main concern is that jailing someone, who is otherwise a productive member of society with earning powers, albeit reduced, does not benefit anyone. It is far more beneficial to allow borrowers to restructure their debt obligations, thereby ensuring at least partial repayments.
This problem is especially acutely manifested in cases of mortgages. All mortgages with U.A.E. banks are secured by guarantee cheques. Since the downturn, however, many borrowers have lost the ability to pay their obligations as per original terms. Nevertheless, banks remain reluctant to restructure mortgages to make them affordable. Instead, they continue to exert pressure through criminal sanctions by cashing guarantee cheques, which they know cannot be honoured.
Similarly, the U.A.E.'s foreclosure laws require clarification and enforcement, incentivizing banks to begin foreclosing. The mechanism for doing so is already in place vis-à-vis Dubai's current foreclosure laws. But it is yet to be effectively enforced and tested. Foreclosure will move the market along, away from the current stalemate state of affairs.
Along the same lines, there is an urgent need to modernize the U.A.E.'s bankruptcy laws, allowing borrowers a chance to restructure their obligations, without being subject to criminal sanctions. This will also encourage innovation and entrepreneurship, which are inextricably defined by risk. Those with good faith intentions and viable ideas should be allowed to fail, although not without repercussions, so that they can continue to test their creativity and initiative. Recognizing this, the U.A.E. legislators have announced that a new bankruptcy law is imminent. And while a draft bankruptcy law is already in circulation, it is still only a draft and the enactment of the final version is uncertain.
Another important development is to clarify and expand the right of freehold ownership. In particular, freehold ownership should mean an absolute and unconditional right to dispose of property. Yet, in Dubai, there is a continuing requirement for owners to obtain a clearance certificate from developers to sell their freehold properties, defying the very meaning of freehold. Abu Dhabi too may benefit from offering foreigners the right to own property freehold, replacing its current 99 year leasehold system.
Another important way for other institutions to boost the market is, for example, for Courts to become more transparent and more receptive to adapting to change. This ranges from some very simple tactics, such as making judgments publicly available to interpreting laws in the context of today's reality. For example, the laws on bounced cheques should be read in the new and, in fact, more letter-of-the-law manner, where it is the intent to defraud rather than mere writing of the cheque that is criminal. Another much needed change is for Courts to do away with the requirement that every real estate contract can only be adjudicated in a separate case, each one of which is accompanied by rather high court fees, thereby making it prohibitively expensive for investors to seek recourse through Courts.
To its credit, the country appears to recognize the need for many of these legal and business reforms. And a number of laws and initiatives have been already introduced and more are being considered. The key now is to finalize the drafts of the most urgent and long-ago promised initiatives and to begin enforcing the laws in the context of today's reality and needs.
The views expressed in this article do not necessarily constitute the views of Zawya.
© HPL Yamalova & Plewka JLT 2012
