The UAE Central Bank has issued Regulation No. 1 of 2026, introducing new rules governing Islamic commercial transactions under Federal Decree-Law No. 50 of 2022 (the Commercial Transactions Law).
Of particular significance is Article 6(2)(a), which expressly recognises contractual undertakings requiring debtors to make charitable contributions in the event of delayed payment, provided that the creditor does not benefit from such amounts, directly or indirectly.
This development follows the Dubai Court of Cassation’s landmark judgment in Commercial Case No. 595/2025, issued on 8 July 2025, which confirmed the prohibition on late-payment interest in Islamic banking transactions.
Dubai Court of Cassation’s Judgment: The Prohibition on Late-Payment Interest
As discussed in our previous article published on 14 July 2025, titled Dubai Court of Cassation Issues Key Judgment on Prohibition of Late-Payment Interest by Islamic Banks, the Dubai Court of Cassation addressed the enforceability of late-payment interest arising from a Murabaha facility granted by an Islamic bank.
The bank sought recovery of the outstanding debt together with statutory late-payment interest at 5%. While the Court of First Instance rejected the interest claim, the Court of Appeal subsequently awarded it.
On 8 July 2025, the Court of Cassation overturned the appellate judgment and reinstated the Court of First Instance’s decision, relying on Article 473(1) of the Commercial Transactions Law.
The provision expressly prohibits Islamic financial institutions from borrowing or lending with interest or deriving any interest or financial benefit from overdue debts, including late-payment interest claimed as compensation. Any agreement to the contrary is null and void.
The Court confirmed that this prohibition applies regardless of whether the interest is contractual or statutory, reinforcing the principle that Islamic financial institutions cannot derive financial benefits merely from delayed repayment.
Regulation No. 1 of 2026: Recognition of Charitable Late-Payment Undertakings
Against this background, Article 6(2)(a) of Regulation No. 1 of 2026 introduces an important clarification.
While maintaining the prohibition on increasing outstanding debts merely because of delayed payment, the Regulation expressly recognises amounts that debtors undertake to donate to charitable causes upon default, provided that the creditor receives no direct or indirect benefit.
The distinction is significant: while late-payment interest payable to an Islamic financial institution remains prohibited, contractual undertakings requiring payments exclusively for charitable purposes may be recognised under the new Regulation.
Accordingly, the Regulation does not contradict or reverse the Dubai Court of Cassation’s judgment. Rather, it clarifies the treatment of charitable late-payment undertakings within the existing statutory prohibition on interest.
Implications for Islamic Banking Agreements and Litigation
This clarification is particularly relevant to Islamic financing agreements that provide for additional amounts payable upon default for charitable purposes.
For instance, certain Islamic financing facilities contain provisions requiring customers to pay additional amounts in the event of delayed payment, with the proceeds designated for charitable causes approved by the relevant Sharia Supervisory Committee.
Such provisions may fall within the framework recognised by Article 6(2)(a), provided that the Islamic financial institution does not derive any direct or indirect benefit from the charitable contributions.
The Regulation may therefore provide an important legal basis for distinguishing prohibited interest from charitable late-payment undertakings in disputes before UAE Courts.
Conclusion
The Dubai Court of Cassation’s judgment in Commercial Case No. 595/2025 established a clear prohibition on contractual and statutory late-payment interest claimed by Islamic financial institutions under Article 473(1) of the Commercial Transactions Law.
Regulation No. 1 of 2026 builds upon this legal framework by expressly recognising charitable late-payment undertakings, provided that the creditor (the Islamic financial institution) derives no direct or indirect financial benefit from such amounts.
Together, these developments provide greater clarity on the distinction between prohibited interest and charitable contributions under Islamic financing agreements and offer important guidance for financial institutions and practitioners involved in Islamic banking disputes.
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Our expertise in banking and finance, financial regulation, and dispute resolution enables us to advise clients on complex issues arising from Islamic financing arrangements, regulatory developments, and banking litigation, taking into account the evolving legal and regulatory framework in the UAE.
Our team regularly advises financial institutions, lenders, and corporate clients on Islamic banking transactions, regulatory compliance, financing disputes, debt recovery proceedings, and the interpretation of banking and commercial legislation. We provide practical guidance on navigating the interaction between statutory requirements, regulatory developments, and Sharia-compliant financing structures, including matters involving Islamic financial institutions and financing agreements.
For further information, please contact Ali Dakhlallah, Partner, Ahmed Al Zaabi, Senior Associate, or Omar Mansour, Associate.
Disclaimer
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