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Tue, Nov 18, 2025 | Jumada al-Awwal 27, 1447 | Fajr 05:17 | DXB 
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Dubai court ruling prohibits Islamic banks from charging late payment interest
This ruling differs from when the Federal Supreme Court in the 1990s deemed it permissible for them to claim legal interest as compensation for payment delays, an expert said
A Dubai court has prohibited Islamic banks and Takaful insurance companies from claiming delayed interest, even if it is in the form of compensation, in cases where the debtor delays payment.
This ruling, announced by the General Authority of the Dubai Court of Cassation in Appeal No. 595 of 2025 (Commercial), is based on the newly introduced Article 473 of the Federal Commercial Transactions Law, considering it a matter of public order.
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Dr Habib Al Mulla, founder of Habib Al Mulla & Partners, said this ruling differs from what was previously announced when the Federal Supreme Court in the 1990s deemed it permissible for them to claim legal interest as compensation for payment delays.
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Al Mulla said Federal Decree-Law No. (50) of 2022 regarding commercial transactions had prohibited Islamic financial institutions from borrowing or lending with interest or benefit in any form, or from imposing or collecting interest or benefit on any delayed debt, including delay interest, even if it is in the form of compensation.
However, the text did not address legal interest, so the Court of Cassation, in its ruling, interpreted the text broadly and considered that interest, regardless of its nature, is prohibited, the renowned lawyer said on social media platform X.
He added that this text regarding legal interest is “open to interpretation in more than one way and depends on whether such interest is considered a form of compensation or falls under the category of prohibited usury (riba) under Sharia law.”
Based on this, he elaborated, it is determined whether the interest referred to in the text is delay interest or a contractually stipulated penalty for late payment, which is considered a form of prohibited usury under Sharia, or whether the text also includes legal interest claimed in court, acknowledging the difference in concept and provisions between the two.
“The conclusion reached by the Federal Supreme Court in its famous aforementioned ruling, which considered legal interest a form of compensation, is more precise, especially since it places all litigants on an equal footing and serves as a deterrent to those who seek to procrastinate in fulfilling their obligations. We may see differing rulings from other courts in interpreting this text, which would necessitate referring the matter to the Authority for Unifying Principles,” he said.
Navandeep Singh Matta, senior associate at Kochhar & Co. Inc. Legal Consultants, said the Dubai Court of Cassation’s ruling on July 8 marked a pivotal reaffirmation of the foundational principles of Islamic finance in the UAE.
“The case concerned a Murabaha financing facility, and the Court was asked to decide whether statutory late payment interest commonly applied in commercial disputes could be enforced where Sharia principles governed the facility. Having reviewed the judgment closely, this ruling sends a strong and necessary message that Islamic finance must remain substantively Sharia-compliant, not just in form. The court rightly gave a literal interpretation to Article 473 of the Federal Commercial Transactions Law, holding that no interest, whether contractual, statutory, or compensatory, may be imposed on delayed obligations under Sharia-compliant contracts,” said Matta.
He noted that this interpretation is not only legally sound but also ethically aligned, as it preserves the integrity of Islamic finance structures. “While some institutions may argue that statutory interest is neutral or legally justified, this judgment makes clear that Sharia overrides procedural norms when the underlying facility is structured on Islamic principles.”
He elaborated that this decision also serves as a compliance reminder to Islamic financial institutions and their legal advisors. “Any attempt to circumvent Sharia prohibitions, whether through reclassification or reliance on general commercial norms, will not withstand judicial scrutiny in the UAE. The judiciary has shown its unwavering commitment to ensuring that Sharia-based transactions remain insulated from conventional interest-bearing remedies.”
“This is a landmark precedent and should serve as a guiding framework for contract enforcement, litigation strategy, and risk assessment in all Islamic finance matters going forward,” Matta concluded.
At the end of the second quarter of 2025, according to the Central Bank of the UAE, the number of licensed insurance companies in the UAE stood at 59, comprising 23 traditional national and 10 takaful national companies, and 25 branches of foreign insurance companies and one branch of a foreign reinsurance company operating in the UAE. The number of insurance-related professions increased to 504.
There were 24 local and 38 foreign banks operating in the UAE at the end of last year.
Waheed Abbas
Waheed Abbas is Assistant Editor, covering real estate, aviation and other business stories that directly affect the lives of UAE consumers. He frequently reports human interest stories, too.
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