The judgment issued by the Dubai Court of Cassation on July 8, 2025 (Commercial Case No. 595/2025) marks a significant advancement in Islamic banking litigation in the UAE, firmly establishing the principle of absolute prohibition against any form of interest or financial benefit tied to delayed repayment of Islamic financing obligations. The ruling overturned the Court of Appeal’s decision, which had previously allowed an Islamic bank to claim statutory late payment interest.
Core of the Cassation Court’s Decision:
The Court of Cassation ruled that Article 473(1) of the Federal Commercial Transactions Law must be interpreted comprehensively and literally, thereby cementing three key principles:
- Absolute Prohibition of Any Benefit: The Court affirmed that the Article imposes an absolute prohibition on any form of interest or financial benefit (regardless of the amount) arising solely from delay in repayment.
- Sharia Substance Over Legal Form: The legal classification of the claim (whether “statutory interest” or “contractual penalty”) is irrelevant. As long as the claim originates from a delay in settling an obligation arising from Sharia-compliant finance (e.g., Murabaha), it falls within the scope of the prohibition.
- No Compensation for Delay: Islamic financial institutions cannot claim any interest, even if intended as compensation for damages resulting from the customer’s delay, as this contradicts Sharia principles that forbid earning a profit merely from the passage of time on a debt (Riba).
Legal and Practical Implications of the Ruling:
- Final Clarity for IFIs: The judgment provides unambiguous legal clarity that Islamic Financial Institutions (IFIs) cannot claim statutory interest (currently applied at 5%) or any other financial compensation arising from delayed payment.
- Strengthening Sharia Governance: The decision underscores the UAE judiciary’s commitment to upholding the foundational principles of Islamic finance, thereby promoting integrity and trust in Sharia-compliant contracts and products within the state.
- Contractual Review Necessity: Islamic banks are now required to meticulously review the “default and delay” mechanisms in all their contracts to ensure that alternatives used (such as requiring the customer to donate to charity) do not conflict with the literal and broad interpretation of Article 473.
This ruling serves as a critical signal that the judicial system in Dubai and the UAE prioritizes Sharia principles over general legal classifications when it comes to Islamic financing.