The UAE Federal Supreme Court has reaffirmed that financial institutions are prohibited from charging compound interest on bank loans.
1
The UAE Federal Supreme Court has reaffirmed that financial institutions are prohibited from charging compound interest on bank loans.
The UAE Federal Supreme Court has reaffirmed that financial institutions are prohibited from charging compound interest on bank loans, ensuring total interest payable cannot exceed the original loan amount. This pivotal ruling overturned a previous appellate decision demanding a borrower repay Dh1.553 million on a Dh700,000 loan, recognizing that the accrued interest of Dh860,147 amounted to unlawful compound interest.
The court clarified that banks may charge contractual or market interest on outstanding balances before account closure, but only simple interest thereafter. Delay interest intended as compensation must not cause the debt to surpass the principal. This landmark judgment aligns with Articles 121(4) of Federal Decree-Law No. 23 of 2022 and Article 88 of Federal Law No. 50 of 2022, aimed at protecting borrowers from spiralling debt burdens and promoting fair lending practices.
Financial institutions in the UAE must now adapt their loan calculations and risk assessments accordingly, transitioning away from compound interest models toward transparent, manageable repayment terms. This ruling is a significant win for consumer rights, fostering a more equitable financial landscape.
Keep in touch with our news & offers
