Unpaid personal loans could reduce your final settlement, but banks must operate within legal limits.
Dubai: Employees leaving their jobs in the UAE may not always receive immediate access to their full end-of-service gratuity, particularly if they have an outstanding personal loan with a bank.
Banks may place a hold on gratuity payments or use the money to recover outstanding loan balances, even if borrowers have not missed any monthly repayments. However, legal experts say banks must operate within regulatory limits, and employees may be able to challenge excessive or unjustified deductions.
So, can banks claim your entire gratuity to recover a personal loan? What happens if you resign or lose your job but continue paying your monthly instalments? UAE legal experts explain borrowers’ rights and the rules governing end-of-service payments.
Can UAE banks use your gratuity to recover a personal loan?
Ahmed Odeh, Managing Partner at MIO & Partners, said banks can generally use an employee’s end-of-service benefits to recover outstanding personal loan amounts, provided the loan agreement allows it and the bank complies with UAE Central Bank regulations.
“Under those rules, personal loans are repaid from salary or end-of-service benefits, so most loan agreements require both to be paid into the lending bank, which may use them to cover the debt. When an employee leaves, the bank may freeze the account receiving the gratuity as a precaution, while still collecting instalments,” he explained.
However, an outstanding loan does not automatically give banks unlimited access to an employee’s gratuity.
Odeh stressed that placing a hold on gratuity payments as security and actually using the money to settle a loan are two separate actions, both of which must have a valid legal basis.
Borrowers who continue making their repayments on time may have grounds to request the release of their gratuity, he added.
In general, banks may use end-of-service benefits to recover personal loans if the loan agreement permits it and applicable Central Bank rules are followed. However, this does not give lenders unrestricted access to an employee’s funds.
Ahmed Odeh, Managing Partner at MIO & Partners
Can banks withhold your entire end-of-service gratuity?
Not in every case. Odeh said UAE Central Bank regulations restrict banks from freezing amounts exceeding the borrower’s outstanding debt. Banks are also not permitted to freeze gratuity payments for the purpose of recovering a home loan.
The borrower’s consent is another relevant factor.
“Consent is usually given in the loan agreement, so the bank may not need to ask again. However, no clause can override these rules. Borrowers can request a full loan statement, object to any amount frozen beyond what they owe, and complain to the bank. Failing that, they can approach Sanadak, the UAE’s independent banking complaints body, or the courts,” Odeh said.
What happens if you resign but continue paying your loan instalments?
Employees who leave their jobs but continue making regular loan repayments should not assume that their gratuity will automatically be released. The terms of their original loan agreement remain important.
Praise Olawanle, Trainee Solicitor at Stephenson Harwood Middle East LLP, explained that UAE Labour Law does not automatically give banks the right to claim an employee’s end-of-service benefits.
“The Labour Law controls when an employer can make deductions, such as for loans the employer itself has advanced. Any right a bank has comes from the loan agreement it signed with the borrower/employee. So, the wording of that loan agreement is critical,” Olawanle said.
Employees should therefore review their loan agreements carefully to understand the bank’s rights over their salary, gratuity and outstanding liabilities when their employment ends.
Olawanle added that employees may also have grounds to challenge a bank’s claim if there is no contractual provision allowing it to withhold their gratuity or if the outstanding loan has not yet become payable.
“If the bank had no contractual basis, or the loan wasn’t yet due, then an employee may be able to query that and seek a refund,” she said.
Employees should not assume that UAE Labour Law automatically gives banks the right to claim their end-of-service gratuity. The law governs when employers can make deductions, including repayments of loans they have provided to employees. A bank’s right to recover money from gratuity, however, depends on the personal loan agreement signed with the borrower.
Praise Olawanle, Trainee Solicitor at Stephenson Harwood Middle East LLP
What does UAE Labour Law say about deductions?
Article 25 of the UAE Labour Law specifies the circumstances in which employers can deduct or withhold amounts from an employee’s wages.
These include recovering loans provided directly by the employer, subject to the employee’s written consent. Such loans must be interest-free, and deductions must remain within the prescribed legal limits.
Where several deductions or withholdings apply, their combined value cannot exceed 50 per cent of the employee’s wage.
However, Olawanle clarified that these provisions governing employer-related deductions are distinct from the contractual rights a bank may have under a personal loan agreement.
Can your employer transfer your gratuity directly to a bank?
Employers cannot automatically transfer an employee’s end-of-service benefits to a bank simply because the employee has an outstanding loan.
Olawanle said an employer is not required to pay an employee’s gratuity directly to a lender unless it has provided the bank with a specific written undertaking. Making such a payment without proper authorisation could expose the employer to a complaint from the employee.
She also pointed out that the Labour Law allows deductions from gratuity only in specific circumstances.
“Before agreeing to any request from a bank, or issuing a salary or liability letter, employers should check exactly what they have committed to and should get the employee’s clear written consent before paying any part of the gratuity to a third party on their behalf,” she said.
