Dubai Court Judgments Clarify Islamic Banking Principles and the Prohibition of Interest in Commercial Disputes
Dispute Resolution / UAE
Naief YahiaPartner,Head of Dispute Resolution - Dubai
Mosaab AlySenior Counsel,Dispute Resolution
Mohamed Gaber AbdelsabourSenior Counsel,Dispute Resolution
Zane AnaniSenior Knowledge Lawyer,Dispute Resolution
Two recent judgments by the Dubai Court of Cassation (Dubai Court of Cassation, Commercial Appeals Nos. 595/2025/445 and 608/2025/445 and General Assembly Decision No. 9 of 2025) clarified the Dubai court’s approach regarding the imposition of interest, particularly in the context of Islamic financial institutions operating in the UAE. Dubai Court of Cassation Judgment 595 of 2025, which concerned a dispute between a borrower and a bank, has reaffirmed the legal position regarding the prohibition of interest—whether compensatory, delay, or otherwise—on debts arising from Islamic finance transactions in the UAE. The court’s decision in Judgment 595 of 2025 was reinforced by General Assembly Decision No. 9 of 2025, which resolved conflicting lower court rulings on the issue of interest and established a uniform position:
“The General Assembly concludes, by the majority stipulated in Article 20(b) of Law No. 13 of 2016, that any amount of debt or financial obligation arising from a commercial transaction or contract subject to Sharia law, where the debtor delays payment, may not attract any interest or compensation, whatever its designation, and any agreement to the contrary is void.”
These decisions consider the position of banks charging interest. For conventional banks, the statutory framework still permits interest within defined limits. However, for Islamic banks and takaful (Islamic insurance) companies, the prohibition is absolute and non-negotiable, reflecting a matter of public order that courts must enforce.
This article will explore two recent judgments and the legal debate surrounding Islamic banks and the impermissibility of interest.
A dispute arose from two murabaha (Islamic finance) facilities granted by a bank (the Claimant) to a borrower (the Defendant) in the UAE. The bank sought to recover outstanding amounts, claiming a total debt of USD 1,493,657 (or its AED equivalent), plus legal interest at 9% per annum from the date of claim until full payment. The Defendant contested the claim, arguing that the bank had already recovered part of the debt through the liquidation of pledged investment fund shares, and that the value of the remaining shares’ exceeded the outstanding debt. He further asserted that the bank, as the pledgee, was solely authorized to redeem these shares and that the claim was premature since the debt’s maturity had not yet occurred.
The lower courts had initially awarded the bank the principal sum plus the claimed interest. However, the Defendant/borrower appealed, contending that the imposition of interest was contrary to the law governing Islamic finance transactions
General Assembly Decision 9 of 2025 addressed a similar legal issue, with the Dubai Court of Cassation convening a general assembly to resolve conflicting lower court decisions regarding the entitlement of Islamic financial institutions to charge delay or compensatory interest on overdue debts after the enactment of Federal Decree-Law No. 50 of 2022.
Both judgments analysed the legal principles governing the prohibition of interest (riba) in the context of Islamic finance transactions under UAE law.
Enforcement of Islamic Banking Contracts The court in Dubai Court of Cassation Judgment 595 of 2025 reaffirmed the principle that contracts must be executed in good faith and in accordance with their terms, as stipulated by Article 246 of the UAE Civil Transactions Law. The court emphasized that the trial court has broad discretion to assess the facts, evaluate evidence, and rely on expert reports, provided its conclusions are supported by the case record. The court held that “It is established in the jurisprudence of the Court of Cassation that, according to Article 246 of the Civil Transactions Law, both parties to a contract must execute it in accordance with its contents and in a manner consistent with good faith. The scope of the contract is not limited to what is expressly stated but also includes what is required by law, custom, and the nature of the transaction.”
The court rejected the Defendant’s argument that the claim was premature, noting that the debt had become due during the proceedings and that the Defendant failed to provide evidence that the bank continued to receive proceeds from the pledged shares. The court also clarified that the bank, as pledgee, was merely an agent authorized to deal with the fund, and that the pledge would be extinguished upon full repayment of the debt.
Prohibition of Interest in Islamic Finance TransactionsBoth judgments reaffirm the statutory prohibition on charging any form of interest—whether contractual, delay, or compensatory—on debts arising from transactions conducted by Islamic financial institutions. The court in judgment 595 of 2025 makes reference to the UAE Commercial Transactions Law, particularly Articles 468 and 473.
Article 468 provides that the rules in the relevant chapter apply to all commercial transactions and contracts involving Islamic financial institutions, defined as those whose constitutive documents require them to operate in accordance with Sharia principles.
Article 473 (1) provides:
“It is not permissible for Islamic financial institutions to borrow or lend with interest or benefit, in any form, nor to stipulate or claim interest or benefit on any debt that is delayed in payment, including delay interest even as compensation, and any agreement to the contrary is void.”
The court emphasized that this prohibition is absolute and applies to all forms of interest or benefit, regardless of how they are characterised (interest agreed upon for late payment and court-awarded interest (interest imposed by the court as compensation for delay)). The courts considered both forms “delay interest” in view of the wording of Article 473 (1).
The court in judgment 595 of 2025 also provided a detailed distinction between the concept of “profit” in a murabaha contract and the “interest” (riba) that is categorically prohibited under Sharia law and UAE legislation.
The court referenced Article 478 of Federal Decree-Law No. 50 of 2022 (the Commercial Transactions Law), which defines a murabaha contract as follows:
“Murabaha is a contract whereby the seller sells an asset to the buyer after acquiring and possessing it, at the buyer’s request for financing, and the sale is at cost plus a fixed, pre-agreed profit specified in the contract, with the total forming the deferred sale price.”
The court emphasized that the profit in a murabaha contract is not a return on money lent, but rather a legitimate commercial gain arising from a sale transaction. The bank, acting as seller, first acquires the asset, then sells it to the customer at a disclosed markup. This markup (profit) is agreed upon in advance and forms part of the sale price, not a charge for the use of money.
The court drew a sharp distinction between this profit and the concept of interest (riba). Profit in Murabaha is a fixed amount, agreed at the outset, representing the bank’s compensation for selling an asset to the customer. It is permissible under Sharia because it is tied to a real economic activity (the sale and transfer of ownership of an asset) and not to the mere passage of time or the use of money. Interest (Riba) by contrast, is a charge for the use of money over time, regardless of any underlying asset or trade.
Accordingly, the court partially overturned the lower court’s decision, annulling the award of interest and affirming the principle that Islamic banks cannot claim interest or any form of benefit on delayed payments, in strict compliance with Sharia and statutory requirements. The court confirmed the bank’s entitlement to the principal amount but denied any claim for interest, in line with the statutory and contractual framework governing Islamic finance.
A central issue in the case was whether the bank, as an Islamic financial institution, could claim interest on the outstanding debt. The court’s analysis turned on the interpretation of Articles 468, 473, and 474 of the UAE Commercial Transactions Law (Federal Decree-Law No. 50 of 2022), which govern Islamic financial transactions.
The importance of Dubai Court of Cassation Judgment 595 of 2025 is further underscored by the General Assembly’s Decision No. 9 of 2025, which resolved conflicting judgments on the issue of delay interest in Islamic finance. The General Assembly held that, following the entry into force of Federal Decree-Law No. 50 of 2022, Islamic financial institutions are categorically prohibited from charging any form of interest or benefit on delayed payments, including as compensation for delay. The decision states:
“...the legislator, by issuing Federal Decree-Law No. 50 of 2022, has expressly prohibited in Article 473 the charging of delay interest, even by way of compensation, on any financial obligation arising from a commercial transaction subject to Sharia law... This is a matter of public order, and the court must apply it of its own motion.”
This decision is binding on all courts in Dubai and marks a definitive shift in the legal landscape, ensuring that Islamic banks cannot circumvent the prohibition on interest by characterizing it as compensation or by any other means. It is important to note that the General Assembly Decision has no binding effect on other local and federal courts in the UAE but will be considered persuasive.
Notwithstanding the foregoing, it can be argued that Islamic financial institutions may not be barred from seeking damages pursuant to the general provisions of the Civil Transactions Law. These provisions are intended to compensate a claimant for losses resulting from a debtor’s breach of contract. However, it should not be framed as if the bank is claiming for delay damages. The bank must base its claim on the general legal principles governing compensation, rather than on any contractual terms that would entitle it to damages for delayed payments. In fact, it remains to be seen how this issue will evolve, and whether the Islamic banks would change their contractual remedies under their finance transactions’ documentation to cater for this new development. It certainly needs careful consideration.
These judgments provide clear guidance on the enforcement of Islamic banking contracts and the absolute prohibition of interest in such transactions. By applying the statutory provisions and the underlying principles of Sharia, the Dubai Court of Cassation and General Assembly confirm that the prohibition on interest is strictly enforced in all transactions involving Islamic financial institutions. The court’s analysis in Judgment 595 of 2025 together with the General Assembly’s Decision No. 9 of 2025 ensure that Islamic banks cannot circumvent the prohibition on interest by recharacterizing it as profit or compensation in the event of late payment. The only permissible profit is that which is agreed upon at the inception of the murabaha contract, disclosed transparently, and tied to the sale of an actual asset. Any additional amount claimed due to delay in payment—whether called “interest,” “compensation,” or otherwise—is strictly forbidden. The decision underscores the importance of strict compliance with contractual and legal requirements in Islamic banking and serves as a warning to financial institutions regarding the impermissibility of interest. For conventional banks, the position remains unchanged: they may continue to charge interest in accordance with the Commercial Transactions Law and the UAE Banking Law, subject to statutory limits. However, for Islamic financial institutions, the prohibition is absolute.
For further information,please contact Naief Yahia.
Published in October 2025
