Introduction The Legal regime in the United Arab Emirates is primarily Sharia based. While seeking monetary claims, it is important to consider how the claim of interest should be considered to fit in within the laws of the United Arab Emirates (“UAE”). Whenever the question of a right to claim interest arises, a lot of confusion revolves around this topic. Another question that remains unresolved is how in commercial debt the interest should be calculated and claimed on outstanding payments. Sharia Law of UAE lays a prohibition on all roots of unjustified embellishment and dealings which contain exorbitant risk or speculation (riba). It is inclusive of interest of any kind. UAE introduced Federal Law No. 14 in 2018 on Central Bank and Organisations of Financial Institutions and Activities (“New Banking Law”) which has simplified the position and role of the Central Bank of UAE’s (“UAE Central Bank”) with respect to charging compound interest on credit and lending facilities by the banks and other financial institutions in practice. This article postulates the relevant provisions of the New Banking Law and extensive developments in the Laws of UAE. The article highlights the provisions in the context of laws and developments which gave transparency to banks, contracting parties, and financial institutions on the procedure of charging interest. Legal advice from the lawyer or the law firm in the UAE should be obtained on any specific matter. Sharia Law Express prohibition is laid down on interest payment in Sharia Law (‘riba’). The interest here means compound or simple. The intent behind this provision is the elimination of abuse and biased endowment of parties in personal transactions as well as business. UAE Penal Code does reflect the fundamentals of concerned Sharia Law. It postulates that charging exploitive and unreasonably high interest shall be a criminal offence punished with a fine and/or imprisonment. The term used here is called “usury” This concept of Riba is also enriched within the ambit of Civil Transactions Law, Federal Law No.5 of 1985 (the UAE Civil Code). Interest under the UAE Civil Code and Commercial Code As discussed above, Article 714 of the UAE Civil Code (UAE Federal Law No. 5 of 1985 on civil transaction) prohibits and declares loan provision in contract void which provides a benefit that would surpass the "essence" of the agreement. Certainly, it would seem to incorporate interest. The civil code of UAE restricts an increase or decrease in the value of money lent and through an interest too. It accommodates the fundamentals and provisions of anti-usury with respect to lending. The Commercial Code presides over the UAE Civil Code in case of commercial transactions, i.e. where at least one of the parties is a trader and/or the transaction concerned comprises “commercial activities”. It won’t govern transactions or agreements carried out between individuals or natural persons. It would still be a criminal offence if interest is charged in transactions between individuals. To understand in a better way let's understand this by an example. Mr. A enters a construction contract with Mr. B in the course of business of Mr. A. This construction contract between Mr. A and Mr. B is a commercial transaction. Therefore, simple interest can be charged between Mr. A and Mr. B contracted to carry out commercial activity. Articles 76 of The Commercial Code clarifies that a creditor is entitled to interest on a commercial loan as compensation for delayed payment either at the rate agreed by the parties in their contract. Such rate in no case shall exceed 12% until the whole settlement.( Judgment Dated 17 March 2009 in case 266/2008 by The Dubai Court of Cassation). In absence of a rate specified in such a contract, the calculation is done on the basis of prevailing market rate subject and interest to be calculated at 9% per annum, with effect from the date the debt fell due for payment. It is interesting to note that the party may or may not prove “damage” for claiming interest as per Article 89 of the Commercial Code. Article 88 of the said law needs to be understood as well and it postulates that provides that the debtor shall be bound to pay compensation for the delay at the interest fixed in Articles 76 and 77 to the creditors where the commercial obligation is a sum of money which was known when the obligation arose, the unless otherwise agreed. Other development in laws The Charge of compound interest has been largely discretionary in nature. The New Banking Law clarified the capability of financial institutions and banks charging interest under more complex facilities of lending. The Central Bank of UAE has reinforced the broader role of directing monetary credit and policy of banking in the UAE. It also imposed preconditions on financial institutions as lenders and deposit takers related to their activities concerned. Let’s understand this by an example- Article 121 (the New Banking Law) strictly lays down prohibitions upon banks and financial institutions. They are prohibited from charging interest on accrued interest (compounding) on any funding or credit facilities given to customers. There is still no clarity whether Article 121 will permit interest capitalization. Implementations and enforcements of regulations (yet to be issued) to the New Banking Law will be effective in the coming time to provide the necessary details regarding practical implementation of such provisions. It will also provide regulatory powers of the UAE Central Bank over banks and other financial institutions. Interest charged to individual customers Considering the compound interest in sophisticated lending facilities laid down under the New Banking Laws, levying of simple interest on loans by banks to individual customers is expressly permitted by Article 409 of the UAE Commercial Code (including car and personal loans, overdraft facilities on current account and credit cards, wherein, banks must declare the rate of interest charged to the Central Bank. Prior written approval of rate of interest shall be obtained by every bank from the UAE Central Bank. The concerned approval shall be obtained before the advertisement and publication of the chargeable interest. Whereas it is an established common practice in the UAE to charge compound interest on loans and credit cards from individual customers. This practice is regulated under UAE laws and regulations. Interest charged under commercial contracts Usually, interests charged under commercial contracts are for compensation for a delay in payment. As discussed previously, a creditor receives delayed payment as compensation from the debtor rate of interest as mutually agreed between them as per Article 88 of the UAE Commercial Code but it shall in no case exceed the annual limit of 12%. It shall be noted that delay interest under Article 88 is expressed as “compensation”. Article 89 further affirms that this provision is not conditional upon the creditor who proves damages sustained by him due to such delay. If the above mentioned provisions of the UAE Commercial Code are to be applied to commercial contracts, criteria set up by the Abu Dhabi Court of Cassation must be met. They include: the subject matter of the obligation must be a sum of money, which was known when the obligation arose; the sum must be an ascertained amount at the time of demand for payment and; payment must be delayed by the debtor Moreover, the creditor may claim complementary damage added to interest delayed under Article 91 of the UAE Commercial Code. There is no requirement to prove that such damages were caused by fraud or gross default of the debtor. The said Code provides no clarity about if compound interest is included about interest. It also does not clarify if provisions regarding the conjoint reading of principles of Sharia Law and the UAE Civil Code, the court held that provisions “contrary to public order” will be declared null and void by the courts if such provisions include specified compound interest. The Dubai Court answered the question as to whether as per article 90 of the Commercial Transactions Law the interest was to be calculated as of the date of the contractor from the date of filing the claim. The court held that: “Even if the debtor is disputing the claimed amount or the due date, calculation of interest for the delay on outstanding amounts will be calculated as of the date of the claim (i.e. the debt must be known at the date it falls due). It shall also apply where amount due has been specified in the contract and the court terminated the contract then legal interest will accrue as of the date of the claim.” Interest under commercial loans If there is a valid commercial loan arrangement, the creditor is entitled to interest under Article 76 of the UAE Commercial Code as per the rate of interest decided in their contractual agreement. If the rate of interest is silent in the agreement of loan then the interest rate will be decided on the current rate in the market as it is provided that it shall not exceed 12% per annum. If the commercial loan is for one or more years in such a scenario the interest shall be payable at the end of the year but if the loan period is less than one year then the interest shall be payable on the maturity date, unless the commercial or banking practice requires otherwise. Also if under a loan agreement the debtor has delayed payment, the creditor is entitled to interest as compensation for such delay. However, such interest shall accrue on the maturity of such debts. Interest charged under DIFC Interest can be recovered for damages on the judgment delivered. Such interest runs into effect from the date of the judgment as per Article 39 of the DIFC Law No 10 of 2004. Rules of DIFC courts fix the interest rate or determine by DIFC court as it deems fit. As per rules of DIFC, A judgment creditor who claims interest and seeks enforcement of a judgment debt shall provide: Certain information while requesting the issue of enforcement proceedings The amount of interest claimed The rate of interest claimed Dates from and to which interest has accrued. Also, under the DIFC Arbitration Law, no restrictions are placed on claiming interest. There are no mandatory or customary rates. Arbitral tribunals generally award interest at between 9 and 12 percent per annum, but this situation is specific. Conclusion The payment of interest will be allowed by UAE courts within the limitations prescribed by the abovementioned legislation taking into account the facts and circumstances of the individual case. In practice, the contracting parties are advised to include a legally defined interest clause in their contractual agreement who wish to include a claim for interest for delayed payment. The concerned clause shall comply with relevant UAE laws. Summarizing the whole article, it is pertinent to note that the legislation and courts of UAE provide good equilibrium and measured system concerning the charging of interest to meet the economical requirements. Interest charged in UAE shall work within limits and restrictions in Sharia.
16 Mar '21

Legality And Applicability of Interest Charged Under The Laws of UAE

Posted in 
Posted by Shoeb Saher

Introduction

Legality And Applicability of Interest Charged Under The Laws of UAE – The Legal regime in the United Arab Emirates is primarily Sharia based. While seeking monetary claims, it is important to consider how the claim of interest should be considered to fit in within the laws of the United Arab Emirates (“UAE”). Whenever the question of a right to claim interest arises, a lot of confusion revolves around this topic. Another question that remains unresolved is how in commercial debt the interest should be calculated and claimed on outstanding payments. Sharia Law of UAE lays a prohibition on all roots of unjustified embellishment and dealings which contain exorbitant risk or speculation (riba). It is inclusive of interest of any kind. UAE introduced Federal Law No. 14 in 2018 on Central Bank and Organisations of Financial Institutions and Activities (“New Banking Law”) which has simplified the position and role of the Central Bank of UAE’s (“UAE Central Bank”) with respect to charging compound interest on credit and lending facilities by the banks and other financial institutions in practice. This article postulates the relevant provisions of the New Banking Law and extensive developments in the Laws of UAE. The article highlights the provisions in the context of laws and developments which gave transparency to banks, contracting parties, and financial institutions on the procedure of charging interest. Legal advice from the lawyer or the law firm in the UAE should be obtained on any specific matter.

Sharia Law

Express prohibition is laid down on interest payment in Sharia Law (‘riba’). The interest here means compound or simple. The intent behind this provision is the elimination of abuse and biased endowment of parties in personal transactions as well as business. UAE Penal Code does reflect the fundamentals of concerned Sharia Law. It postulates that charging exploitive and unreasonably high interest shall be a criminal offence punished with a fine and/or imprisonment. The term used here is called “usury” This concept of Riba is also enriched within the ambit of Civil Transactions Law, Federal Law No.5 of 1985 (the UAE Civil Code).

Interest under the UAE Civil Code and Commercial Code

As discussed above, Article 714 of the UAE Civil Code (UAE Federal Law No. 5 of 1985 on civil transaction) prohibits and declares loan provision in contract void which provides a benefit that would surpass the “essence” of the agreement. Certainly, it would seem to incorporate interest. The civil code of UAE restricts an increase or decrease in the value of money lent and through an interest too. It accommodates the fundamentals and provisions of anti-usury with respect to lending. 

The Commercial Code presides over the UAE Civil Code in case of commercial transactions, i.e. where at least one of the parties is a trader and/or the transaction concerned comprises “commercial activities”. It won’t govern transactions or agreements carried out between individuals or natural persons. It would still be a criminal offence if interest is charged in transactions between individuals. To understand in a better way let’s understand this by an example. 

  • Mr. A enters a construction contract with Mr. B in the course of business of Mr. A. This construction contract between Mr. A and Mr. B is a commercial transaction. Therefore, simple interest can be charged between Mr. A and Mr. B contracted to carry out commercial activity. 

Articles 76 of The Commercial Code clarifies that a creditor is entitled to interest on a commercial loan as compensation for delayed payment either at the rate agreed by the parties in their contract. Such rate in no case shall exceed 12% until the whole settlement.( Judgment Dated 17 March 2009 in case 266/2008 by The Dubai Court of Cassation). In absence of a rate specified in such a contract, the calculation is done on the basis of prevailing market rate subject and interest to be calculated at 9% per annum, with effect from the date the debt fell due for payment. It is interesting to note that the party may or may not prove “damage” for claiming interest as per Article 89 of the Commercial Code. Article 88 of the said law needs to be understood as well and it postulates that provides that the debtor shall be bound to pay compensation for the delay at the interest fixed in Articles 76 and 77 to the creditors where the commercial obligation is a sum of money which was known when the obligation arose, the unless otherwise agreed.

Other development in laws

The Charge of compound interest has been largely discretionary in nature. The New Banking Law clarified the capability of financial institutions and banks charging interest under more complex facilities of lending. The Central Bank of UAE has reinforced the broader role of directing monetary credit and policy of banking in the UAE. It also imposed preconditions on financial institutions as lenders and deposit takers related to their activities concerned. Let’s understand this by an example-

  1. Article 121 (the New Banking Law) strictly lays down prohibitions upon banks and financial institutions. They are prohibited from charging interest on accrued interest (compounding) on any funding or credit facilities given to customers.
  2. There is still no clarity whether Article 121 will permit interest capitalization. Implementations and enforcements of regulations (yet to be issued) to the New Banking Law will be effective in the coming time to provide the necessary details regarding practical implementation of such provisions. It will also provide regulatory powers of the UAE Central Bank over banks and other financial institutions.

Interest charged to individual customers

Considering the compound interest in sophisticated lending facilities laid down under the New Banking Laws, levying of simple interest on loans by banks to individual customers is expressly permitted by Article 409 of the UAE Commercial Code (including car and personal loans, overdraft facilities on current account and credit cards, wherein, banks must declare the rate of interest charged to the Central Bank. Prior written approval of rate of interest shall be obtained by every bank from the UAE Central Bank. The concerned approval shall be obtained before the advertisement and publication of the chargeable interest. Whereas it is an established common practice in the UAE to charge compound interest on loans and credit cards from individual customers. This practice is regulated under UAE laws and regulations.

Interest charged under commercial contracts

Usually, interests charged under commercial contracts are for compensation for a delay in payment. As discussed previously, a creditor receives delayed payment as compensation from the debtor rate of interest as mutually agreed between them as per Article 88 of the UAE Commercial Code but it shall in no case exceed the annual limit of 12%. It shall be noted that delay interest under Article 88 is expressed as “compensation”. Article 89 further affirms that this provision is not conditional upon the creditor who proves damages sustained by him due to such delay. If the above mentioned provisions of the UAE Commercial Code are to be applied to commercial contracts, criteria set up by the Abu Dhabi Court of Cassation must be met. They include:

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

Moreover, the creditor may claim complementary damage added to interest delayed under Article 91 of the UAE Commercial Code. There is no requirement to prove that such damages were caused by fraud or gross default of the debtor. The said Code provides no clarity about if compound interest is included about interest. It also does not clarify if provisions regarding the conjoint reading of principles of Sharia Law and the UAE Civil Code, the court held that provisions “contrary to public order” will be declared null and void by the courts if such provisions include specified compound interest. The Dubai Court answered the question as to whether as per article 90 of the Commercial Transactions Law the interest was to be calculated as of the date of the contractor from the date of filing the claim. The court held that:

 “Even if the debtor is disputing the claimed amount or the due date, calculation of interest for the delay on outstanding amounts will be calculated as of the date of the claim (i.e. the debt must be known at the date it falls due). It shall also apply where amount due has been specified in the contract and the court terminated the contract then legal interest will accrue as of the date of the claim.”

Interest under commercial loans

If there is a valid commercial loan arrangement, the creditor is entitled to interest under Article 76 of the UAE Commercial Code as per the rate of interest decided in their contractual agreement. If the rate of interest is silent in the agreement of loan then the interest rate will be decided on the current rate in the market as it is provided that it shall not exceed 12% per annum. If the commercial loan is for one or more years in such a scenario the interest shall be payable at the end of the year but if the loan period is less than one year then the interest shall be payable on the maturity date, unless the commercial or banking practice requires otherwise. Also if under a loan agreement the debtor has delayed payment, the creditor is entitled to interest as compensation for such delay. However, such interest shall accrue on the maturity of such debts.

Interest charged under DIFC

Interest can be recovered for damages on the judgment delivered. Such interest runs into effect from the date of the judgment as per Article 39 of the DIFC Law No 10 of 2004. Rules of DIFC courts fix the interest rate or determine by DIFC court as it deems fit. As per rules of DIFC, A judgment creditor who claims interest and seeks enforcement of a judgment debt shall provide:

  1. Certain information while requesting the issue of enforcement proceedings
  2. The amount of interest claimed
  3. The rate of interest claimed
  4. Dates from and to which interest has accrued.

Also, under the DIFC Arbitration Law, no restrictions are placed on claiming interest. There are no mandatory or customary rates. Arbitral tribunals generally award interest at between 9 and 12 percent per annum, but this situation is specific.

Conclusion

The payment of interest will be allowed by UAE courts within the limitations prescribed by the abovementioned legislation taking into account the facts and circumstances of the individual case. In practice, the contracting parties are advised to include a legally defined interest clause in their contractual agreement who wish to include a claim for interest for delayed payment. The concerned clause shall comply with relevant UAE laws. Summarizing the whole article, it is pertinent to note that the legislation and courts of UAE provide good equilibrium and measured system concerning the charging of interest to meet the economical requirements. Interest charged in UAE shall work within limits and restrictions in Sharia.