The Implication of Imposing Interest in the UAE

In the current world, where trade ties are vital in strengthening the economy of a country, it is often necessary to enter into legal contracts with various entities around the world. It is also necessary that these contracts are based on agreements and policies common to all, so as to secure the imposing interests of all parties.

A common aspect in trading and contracts is the question of default of agreements and how such defaults can be remedied. As the legal system in the United Arab Emirates is based on Sharia (Islamic Law), questions often arise on the imposition of interest on commercial settlements and Arbitration orders and whether the same can be enforced in the UAE. UAE arbitration law allows limited interest on delayed payments, in line with Sharia.

RIBA AND INTEREST

Riba literally translates to ‘increasing’ or ‘excessive’, and generally refers to Interest or Usury. Due to its nature of increasing the gap between the rich and the poor, and with a view to promote equity in commerce, Riba has been forbidden in Islam. But certain scholars have interpreted Riba to include only Usury, arguing that when interest implies to an increase in debt amount which is an adjustment to inflation, such amounts do not fall under the ambit of Riba.

As a result of the varied interpretation available, although the UAE Penal Code prohibits interest between individuals, certain forms of interest in the commercial ambit are permissible.

UAE PENAL CODE

Chapter 5, Article 458 of the UAE Penal code strictly forbids Usury or interest between two people. The penalty of imposing interest on a person is a minimum imprisonment of one year, and fine of not less that AED 50,000. The Article also forbids latent interest, i.e., any commission or benefit specified by a creditor as a consideration, wherein such commission has no corresponding legal benefit from the creditor. Article 459 issues further stringent penalties in case of repeat offenders of Usury.

UAE CIVIL CODE

With reference to contracts entered between parties, Article 714 of the UAE Civil Code (Civil Transaction Law) states that if such a contract stipulates the payment of a benefit that exceeds the contract requirement, other than ensuring the rights of the borrower, that stipulation is void, but the contract remains valid.

UAE COMMERCIAL CODE

The law perceives the interest imposed on delayed payment in a different manner. Pursuant to Article 72 of the UAE Commercial Code, interest on commercial loans is permitted as per stipulations in the contract, or the market rate at the time, provided that the said interest does not exceed 9% until full payment. The interest here is seen as a compensation for the delay in the payment of loan. However, in an open hearing held on 9/6/2021 in Appeal No. 1 of 2021, the General Assembly Cassation in Dubai has passed a decision that interest rates in commercial transactions must be reduced to 5% or below. Similarly, Courts in Ras Al Khaimah and other emirates are also employing their discretionary power to impose interest at a rate that does not exceed 5%. A pattern has also emerged in the Abu Dhabi courts where the interest rates now awarded range between 1% and 3 %.

ARBITRATION PROCEEDINGS

Interest may also be assessed in the context of Arbitration proceedings. Here too, levy of interest is permitted to compensate delay in payment, as long as all such interests are calculated at an appropriate rate. Top law firms in UAE help ensure contracts comply with local interest rules.

Usury, defined as lending money at inflated rates of interest has been banned across many religions since ancient times. The practice of Usury has negative effects on both economic and social aspects of society. It exploits the poor to such an extent that people engaged in it often find themselves in an endless cycle of borrowing money from different lenders. The money received from Usury are rarely invested to create any economic value, but rather, lent to other desperate individuals thus pulling more people into poverty. A famous saying goes ‘Money is more valuable than anything you could do with it’ and this perfectly ties to the practice of Riba. For tailored guidance on contract enforcement and arbitration, it’s advisable to seek legal advice in Dubai from professionals experienced in Sharia-compliant commercial law.

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