The General Authority of the Dubai Court of Cassation has ruled that takaful companies and Islamic banks may not demand late payment interest resulting from a customer's failure to pay a takaful contribution or repay a loan, even if the interest charged is called by another name.
The court ruling stated Islamic financial institutions, operating in accordance with Shariah law, “may not charge late payment interest, even as compensation, or whatever its name, on any debt or financial obligation arising from a transaction or commercial contract subject to the provisions of Islamic Shariah, which the debtor delays in fulfilling. This is a matter of public order, and the court shall rule on its own initiative, reversing any conflicting provisions", according to the Emirates Today newspaper.
The ruling was issued based on a request from the President of the Court of Cassation regarding a discrepancy in the rulings on the issue of Islamic financial institutions being entitled to late payment interest as compensation. The President of the Court of Cassation decided to refer this discrepancy to the General Authority of the Court of Cassation for adjudication, pursuant to a law concerning the judicial authority in Dubai. This ruling, announced by the General Authority of the Dubai Court of Cassation, is based on a newly introduced article in the Federal Commercial Transactions Law, as a matter of public order.
Discrepancy
Dr Habib Al Mulla, founder of Habib Al Mulla & Partners law firm, said on the social media platform X that this ruling differs from that of the Federal Supreme Court in the 1990s that Islamic financial institutions could claim legal interest as compensation for late payment.
However, the Federal Decree-Law of 2022 regarding commercial transactions prohibits Islamic financial institutions from borrowing or lending with interest or benefit in any form, or imposing or collecting interest or benefit on any deferred debt, including late payment interest, even if it is in the form of compensation.
But the text does not address legal interest, and therefore the Court of Cassation interpreted the text broadly in its ruling, deeming any interest prohibited, regardless of its nature.