In a significant development for Islamic finance litigation in the UAE, the Dubai Cassation Court has issued a ruling on the legality and enforceablity of late payment interest in facilities granted under Islamic finance structures.
Background
The case arose from a dispute concerning a Murabaha facility granted by a bank to one of its customers. Following the customer’s default, the bank initiated legal proceedings to recover the outstanding amount along with statutory late payment interest (currently applied at 5%).
The Court of First Instance ruled in favor of the bank with respect to the principal amount but rejected the claim for statutory interest, relying on Article 473(1) of the Federal Commercial Transactions Law, which provides that:
“It shall not be permissible for Islamic financial institutions to borrow or lend with interest or benefit, in any way, nor to arrange or charge interest or benefit on any amount of debt of which settlement is delayed, including the delayed interest, even as compensation, and any agreement to the contrary shall be null and void.”
On appeal, the Court of Appeal reversed the decision and awarded interest. The customer then filed a Cassation, arguing that Article 473 clearly prohibits all forms of interest or financial benefit associated with delayed repayment, regardless of whether such interest is contractual or statutory.
Court of Cassation’s Ruling
On 8 July 2025, Dubai Cassation Court overturned the Appeal Court’s judgment and reinstated the decision of the First Instance Court, as it ruled that Article 473 must be interpreted broadly and literally, such that the prohibition extends to any interest or financial benefit arising from a delay in repayment.
The nature of the claimed interest—being tied to delayed performance of a Sharia-compliant facility—brings it squarely within the scope of the prohibition, regardless of whether it is classified as contractual late payment penalties or statutory interest.
The ruling confirms that either legal classification does not override the substance of the prohibition when Sharia principles are engaged.
Conclusion
This judgment marks a pivotal development in the interpretation and enforcement of Sharia-compliant finance in the UAE. The decision provides critical clarity for institutions operating within Sharia-compliant frameworks and underscores the UAE judiciary’s commitment to upholding the foundational principles of Islamic finance.
Seek Legal Cousel
For expert advice on Islamic finance litigation and enforcement, consult Ali Dakhlallah, Head of Banking and Financial Disputes. Our team is committed to providing precise and effective legal solutions tailored to your needs.
