The Dubai Court of Cassation has issued a binding ruling prohibiting Islamic banks and Takaful companies from charging any form of interest or fees for delayed payments even in instances where debtors intentionally delay fulfilling their obligations.
The court declared that Islamic financial institutions and Takaful companies operating fully or partially under Islamic Sharia law are not permitted to impose late payment interest or fees regardless of whether these are labeled as compensation or by any other name on debts or financial obligations arising from Sharia-compliant transactions or commercial contracts. This prohibition applies in all cases of delayed payments, irrespective of the debtor's intent. The court emphasized that this principle is a matter of public order and must be applied independently, even if prior rulings suggested otherwise.
The ruling followed a formal referral to the General Assembly of the Court of Cassation to resolve conflicting court decisions on whether Islamic financial institutions could lawfully charge late payment penalties as compensation. This referral was made under Article 20 of Law No. 13 of 2016, which governs Dubai's judicial authority.
The ruling is based on Article 473 of the Federal Commercial Transactions Law, which considers the prohibition of delay interest as a matter of public order.
Federal Decree-Law No. 50 of 2022 regarding commercial transactions explicitly prohibits Islamic financial institutions from borrowing or lending with interest or benefit of any form, as well as from imposing or collecting interest or benefit on any delayed debt including delay interest, even if characterized as compensation. Although the law did not explicitly address legal interest, the court adopted a broad interpretation to prohibit all forms of interest, regardless of nature.
The ruling clarified that the legal text is subject to interpretation, depending on whether interest is considered a form of compensation or falls under the category of prohibited usury (riba) under Sharia law. This distinction determines whether delay interest or contractually stipulated late payment penalties fall under the prohibition or whether court-awarded legal interest is included. The unified interpretation reached ensures equal treatment of litigants and serves as a deterrent against delays in fulfilling obligations.
The case concerned a Murabaha financing facility, and the Court was tasked with determining whether statutory late payment interest commonly applied in commercial disputes could be enforced when Sharia principles governed the facility. The Court gave a literal interpretation to Article 473 of the Federal Commercial Transactions Law, ruling that no interest whether contractual, statutory, or compensatory may be imposed on delayed obligations under Sharia-compliant contracts.
This interpretation is both legally sound and ethically aligned, preserving the integrity of Islamic finance structures. The ruling clarifies that Sharia principles override procedural norms when the underlying financial facility is structured in accordance with Islamic law. It also serves as a compliance reminder to Islamic financial institutions and their legal advisors that any attempts to circumvent Sharia prohibitions whether through reclassification of charges or reliance on general commercial norms will not withstand judicial scrutiny in the UAE.
This ruling represents a progressive and forward-thinking development in the UAE's legal landscape, reinforcing Dubai's commitment to ensuring that Islamic finance remains fully compliant with Sharia principles while adapting to modern commercial realities. By adopting such a clear and decisive interpretation, Dubai positions itself as a leading jurisdiction in the implementation and enforcement of Sharia-compliant financial practices. This landmark decision not only safeguards the integrity of Islamic finance but also enhances investor confidence and promotes the continued growth and stability of the Islamic financial sector in the region. It sets a strong precedent that will shape contract enforcement, litigation approaches, and risk management in Islamic finance across the UAE and beyond.
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