Dubai: Islamic banks, insurance firms can not claim delayed interest, court rules

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.

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.

Dr Habib Al Mulla

“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.

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.

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