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Introduction
Islamic finance blends traditional Sharia principles with modern legislation, and the UAE has been at the forefront of adopting models such as Murabaha, Mudaraba, and Musharaka. These contracts are bound by Sharia as a matter of public order.
One recurring issue, however, concerns Murabaha: Can Islamic banks charge late payment interest or additional fees? The UAE Court of Cassation has provided a clear answer, reinforcing that such charges are invalid.
1. The Legal Nature of Murabaha
Murabaha is a sale contract, not a loan. The bank buys a commodity requested by the client and resells it at cost plus an agreed profit.
- The price is fixed from the start and does not change with time.
- Unlike loans, there is no concept of "interest."
- Treating Murabaha as a disguised loan undermines Islamic finance and falls within the prohibition of usury (riba).
2. The Rule "The Contract is the Law of the Parties"
Under Article 246 of the UAE Civil Transactions Law, contracts are generally binding between parties. But this freedom has limits:
- Public order – rules that cannot be overridden by private agreement.
- Sharia provisions – in Islamic finance, these are part of public order.
This means any clause in a Murabaha contract that imposes late payment interest is null and void, even if both sides agree to it.
3. Governing Provisions in UAE Law
The Court of Cassation relied on key articles of the Commercial Transactions Law (Federal Law No. 50 of 2022):
- Article 468: Islamic financial institutions must comply with Sharia.
- Article 473: They cannot deal in interest on loans or debts.
- Article 481: Murabaha is a sale contract with a fixed cost-plus-profit price; no later increases are permitted.
Together, these articles make clear: Islamic banks cannot charge interest, returns, or increases on debt.
4. Interest vs. Compensation: A Key Distinction
Banks sometimes argue that interest is just "compensation" for late payment. But the Court drew an important line:
- Interest = a pre-agreed increase simply because of delay → always void.
- Compensation = genuine damages, proven by evidence, assessed by the court.
The Court stressed that renaming interest as "compensation" does not change its reality.
5. Practical Implications of the Judgment
- Islamic banks must revise contracts – no clauses for late payment interest, even disguised as "returns."
- Clients are protected – no risk of invalid financial obligations being imposed.
- Market confidence grows – the ruling reinforces the UAE's reputation as a global hub for authentic Islamic finance.
6. Alignment with Gulf Legal Systems
This position is not unique to the UAE:
- Saudi Arabia – courts reject any form of interest in Islamic finance.
- Kuwait – the Court of Cassation ruled Murabaha interest clauses void, with compensation limited to proven damages.
A unified approach across Gulf jurisdictions strengthens Sharia-based financial systems regionally.
Conclusion
The UAE Court of Cassation's ruling is more than a single case outcome. It establishes a principle of general application:
- All interest or returns in Murabaha contracts are void, even if agreed by the parties.
- This affirms Murabaha as a legitimate sale contract, not a loan in disguise.
- It safeguards Islamic finance's integrity and strengthens the UAE's position as a leader in Sharia-compliant finance.
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