Debt changes are important as a first step

The system of jailing those who bounce cheques or cannot pay debt is not working. This newspaper has run many stories in the past few months about debtors, and most of them follow a familiar pattern: people find themselves heavily in debt, a civil case will be opened against them, they are arrested and jailed and so have no possible way of earning money in order to pay off their debt.

The system places them in limbo. Unless they are able, from inside jail, to arrange suitable funds, they will continue to owe the money and be unable to begin paying it off. Naturally, there must be an incentive for people to pay their debts, and punishment for those who refuse to. But the system as it stands is clogging up the courts and making life difficult for those who actually want to pay.

The proposal for mediation, then, as discussed in The National yesterday, makes a great deal of sense. Under this new process, jail will be seen as a last resort, to be used in only the most serious cases. Debtors will be given the opportunity to find ways to pay their debts, even if a small amount at a time.

All of that is welcome. Debt is a serious problem. Companies that go under do not only owe money to banks, they also owe money to other companies and their own employees. For many of those employees, going without a salary for even a month or two could have serious implications for their family, their rent and their children’s schooling. The same applies to companies, where a bad debt can bankrupt them.

It is important, then, that there are clear rules for debt. But in the UAE, in particular, debt is less of a problem than it is in some other countries. The US, for example, will often bundle up debts (student loans, mortgages) and sell these bundles on to other companies. The link, therefore, between the debt and the debtor is severed, so those who own the debt have no real contact with the debtor.

When such debts are consolidated and packaged on an industrial scale, defaults on mortgages can have a disproportionate effect across the economy – as happened with the 2008 sub-prime mortgage crash. But the UAE does not securitise debt in the same way, so the direct link between the debtor and the debt remains.

That makes the need for reform a matter for dealing with what are small human matters, but deeply consequential ones. These reforms would be a necessary first step.