Banks to gain from labor guarantees

Public Media | June 2004


The bank guarantee scheme introduced by the Ministry of Labor and Social Affairs will not only act as a strong safeguard for the employees against non-payment of salaries and other dues, but the huge sum of money the banks are likely to amass on this count will strengthen the bottom lines of local banks.

While large companies with more than 1,000 employees are expected to get a bank guarantee to the tune of Dh500,000 initially and thereafter for Dh3,000 against each employee joining the company, the medium-sized companies employing 101 to 1,000 employees must obtain a bank guarantee for Dh300,000, and thereafter for Dh3,000 against each employee joining the company.

In the case of small companies with 100 or fewer employees, the companies have to arrange Dh3,000 in bank guarantees against each employee.

These deposits will easily add a few hundred million dirhams to the UAE banking system which predominantly sits on short-term deposits.

"In a country where 80 per cent of deposits are with maturities of less than three months, the deposits flowing into the banks for issuing bank guarantees will certainly address the issue of lack of long-term deposits of UAE banks to a great extent," said another bank. On the one hand these funds can be utilized to acquire long-term assets and on the other, the banks will make fee income in the range of 0.5 per cent to 1 per cent from issuing bank guarantees.

The one genuine fear expressed against this new scheme is, whether cash-strapped small companies will try to collect this deposit from the employees themselves. The concern is mainly being raised in the case of small companies employing only a handful of employees.

There are expatriate job seekers who are willing to pay hefty sums in order to get a job in the Gulf. And for them, this additional Dh3,000 is being explained away as an extra cost of getting a job. Some small establishments have begun to alert their employees in advance of visa renewal that the latter will have to pay.

"Some employers will "agree" with their employees to cut this Dh3,000 on a monthly basis from their salary," an employee placed with a small tailoring shop said. Though there is assurance on booking employers who do not honor government orders in their true spirit, employees are scared that their job will be at risk if they inform this to the authorities. "Moreover, employers do not leave any proof regarding this with the employees, " a worker with a small firm said.

In many countries, recruiting agencies take an undertaking from the employees stating that the agencies or employers had not taken any extra money other than services charges. "This practice is gaining momentum with the introduction of the deposit scheme, " an agency source said.


UAE banks will call the shots

According to sources in the banking industry, the sum to be deposited by the companies will depend on the relationship they maintain with the banks, as well as the goodwill these companies enjoy in the market.

"The sums these companies have to place with banks can be conveniently called margin deposits and the portion of the deposits they will have to keep with the banks will be decided by the banks," said the head of corporate banking with a local bank.