Compound Interest Prohibited by UAE Federal Supreme Court

Compound Interest Prohibited by UAE Federal Supreme Court

The UAE Federal Supreme Court “FSC” determinedly decided in one of its recently passed judgments that compound interest is prohibited, resolving a long-lasting debate over the permissibility of the compound interest, especially under Saria law which considers interests as forbidden and usury.

The UAE Federal Supreme Court replied on Article 121, para 4 of Federal Decree-Law No. 23 of 2022 on the Central Bank and the regulation of financial activities, which stipulates that licensed financial institutions may not charge interest on accumulated interest, i.e. compound interests, in respect of the facilities granted to clients. In this regard, the controls and rules set by the Central Bank in the control regulations issued thereby shall be followed.

The FSC also relied on Article 88 of Federal Law No. 50 of 2022 Promulgating the Commercial Transactions Law, which stipulates that a creditor may not claim a compound interest, i.e. the interest on the frozen interests, or claim such interests as a complementary compensation.

This approach which has been adopted by the FSC would provide protection and secure to clients of the licensed financial institutions, and would definitely reduce burdens of debts.

The author of this alert is Hassan Tawakalna.

Hassan has an extensive legal background spanning over three decades, 21 of which he has spent with Galadari Advocates & Legal Consultants. As one of the firm’s most experienced lawyers, Hassan is responsible for training many local and expat lawyers. Hassan’s focus is on civil disputes, particularly in real estate, insurance, trademark, family law, employment, banking, corporate, commercial and arbitration matters.

For more information, please contact Hassan on:

Hassan Tawakalna Senior Counsel [email protected]