The right to charge interest, whether simple or compound, has always been an area of uncertainty for contracting parties in the United Arab Emirates (“UAE”). However, in 2018, UAE introduced Federal Law No. 14 on the Central Bank and Organisations of Financial Institutions and Activities (“New Banking Law”), which has, amongst other things, clarified the Central Bank of UAE’s (“UAE Central Bank”) position in relation to banks and financial institutions charging compound interest on credit and lending facilities.

This article examines the relevant provisions of the New Banking Law, as well as broader developments in UAE law, which have provided banks, financial institutions and contracting parties more clarity on how charging interest on monies due should be dealt with in the UAE.

Developments in the Law

With the intention of eliminating abuse and unjust enrichment of parties in business and personal transactions, Sharia Law expressly prohibits the payment of interest (termed ‘Riba’), whether simple or compound. These Sharia Law principles are mirrored in the UAE Penal Code, which provides that charging usury interest between individuals is a criminal offence and punishable with a fine and/or imprisonment.

Similarly, the UAE Civil Code, provides a restriction on any increase or decrease in the value of money lent, also by way of interest. In line with the Sharia Law principles and the UAE Penal Code, the UAE Civil Code contains anti-usury provisions in respect of lending, which in practice, render void any provision in a loan agreement (aside from those provisions securing the lender’s right to repayment) that provides for a benefit in excess of the “essence” or the subject matter of the agreement.

However, due to economic necessity and growing concerns from the financial community, the UAE Commercial Code was introduced, which expressly permits interest to be charged in a number of commercial transactions. The UAE Commercial Code applies to “traders and all commercial activities entered into by two contracting parties”. In this regard, simple interest can be charged between any two parties, contracting to carry out a commercial activity. It should be noted that while the UAE Commercial Code takes precedence over the UAE Civil Code in commercial transactions, it does not govern transactions or agreements between natural persons or individuals. As such, charging of interest in transactions between individuals still remains a criminal offence.

Similarly, while the issue of charging compound interest has been largely discretionary, the introduction of the New Banking Law has offered some clarity on the ability of banks and other financial institutions to charge interest under more sophisticated lending facilities. While reinforcing the UAE Central Bank’s wider role to direct monetary credit and banking policy in the UAE, the New Banking Law also imposes requirements on financial institutions in relation to their activities as lenders and deposit takers. For example, Article 121 of the New Banking Law clearly prohibits banks and financial institutions from charging interest on accrued interest (compounding) on any credit or funding facilities granted to customers. It is still unclear whether this provision will permit capitalisation of interest, however implementing regulations (which are yet to be issued) to the New Banking Law will prove to be instrumental in providing details as to the practical implementation of these provisions and the UAE Central Bank’s regulatory powers over banks and financial institutions in UAE.

Interest chargeable by banks to individual customers

Subject to the New Banking Law’s position on compound interest in sophisticated lending facilities, Article 409 of the UAE Commercial Code expressly permits levying of simple interest on loans provided by banks to individual customers (including personal loans, car loans, overdraft facilities on current account and credit cards, wherein, banks must declare the rate of interest they intend to charge to the Central Bank). Each bank is required to obtain written approval of the rate of interest from the UAE Central Bank, prior to advertisement and publication of the chargeable interest.

To this regard, while banks charging compound interest on loans and credit cards from individual customers is a well-established and common practice in the UAE, it remains to be warranted under UAE laws and regulations.

Interest under commercial loans

With regards to a commercial loan arrangement, Article 76 of the UAE Commercial Code permits a position where a creditor is entitled to receive interest, as per the rate of interest stipulated in the contract. If the loan agreement is silent on such a rate, then the UAE Commercial Code provides that the interest rate will be calculated according to the current market rate of interest at the time of dealing, provided that it shall not exceed 12% per annum. Unless the commercial or banking practice requires otherwise, interest shall be payable at the end of the year if the loan is for one or more years, or on the maturity date if the loan period is less than one year.

Furthermore, in situations where the debtor has delayed payment under a loan agreement, the creditor is entitled to be paid interest as compensation for such delay. However, the interest in delay of payment of commercial debts shall accrue on maturity of such debts.

The UAE Courts have, at several instances, confirmed these provisions of the UAE Commercial Code and further clarified that in the lack of an agreed upon rate of interest, interest will be calculated at the rate of 9% per annum, with effect from the date the debt fell due for payment.

Interest under commercial contracts

Interest under commercial contracts is usually in the context of compensation for a delay in payment. As explained previously, Article 88 of the UAE Commercial Code provides that a debtor who has delayed payment can be required to pay to the creditor, as compensation, any rate of interest as agreed between both parties, provided it does not exceed the 12% per annum limit. It is important to note that even though this delay interest is stated as “compensation” under the UAE Commercial Code, Article 89 confirms that this provision is not conditional on the creditor proving that he has sustained damages as a result of such delay.

In this regard, the Abu Dhabi Court of Cassation has set out certain criteria which must be met if these provisions of the UAE Commercial Code are to be applied to commercial contracts. Some of the salient points set out in the criteria laid out by the Abu Dhabi Court of Cassation include:

• the subject matter of the obligation must be a sum of money, which was known when the obligation arose;
• at the time of demand for payment, the sum must be an ascertained amount; and
• the debtor must have delayed payment.

Additionally, Article 91 of the UAE Commercial Code also specifies that a creditor may claim complementary damage, to be added to the delay interest, and shall not be required to prove that the damages of the said interest were caused by the debtor’s fraud or gross default.

However, the UAE Commercial Code does not clearly specify whether any reference to interest” includes compound interest, or whether any provisions of a loan or commercial agreement containing compound interest will be permitted. However, as per the principles of Sharia Law and the UAE Civil Code, it was held by the Dubai Court of Cassation that any provisions “contrary to public order”, which was deemed to include those stipulating compound interest, will be considered to be null and void by the courts of UAE. Similarly, the UAE Courts will give effect to contractual provisions for payment of interest in any commercial context, provided that these provisions do not exceed the 12% per annum limit, and that they are not in any way, expressly contrary to ‘public order’.

Authors:

Adil Shafi, Partner (ashafi@ach-legal.com)

Devvrat Periwal, Senior Associate (dperiwal@ach-legal.com)

Mehak Kampani

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