Dubai Court of Cassation Rules Out Late Payment Interest in Islamic Financial Transactions

In a landmark judicial precedent that reinforces the principle of adherence to Sharia in Islamic finance, the Dubai Court of Cassation issued a ruling last Monday declaring that Islamic banks and Takaful companies are not entitled to charge late payment interest, even if labeled as "compensation," provided the underlying transaction is governed by Islamic Sharia law.

Grounds of the Ruling

The Court’s General Assembly stated in its judgment:

“It is impermissible for Islamic financial institutions and Takaful companies that conduct their activities, wholly or partially, in accordance with the provisions of Islamic Sharia to charge late payment interest, even under the guise of compensation or by any other name, on any debt or financial obligation arising from a Sharia-compliant transaction or commercial contract where the debtor delays repayment.”

The Court emphasized that this principle pertains to public policy, which the court must apply on its own initiative, regardless of the parties’ arguments. It further ruled to revoke any previous judgments or interpretations that contradict this principle.

Background of the Referral

The judgment was issued under the chairmanship of Judge Abdul Qader Mousa Mohammed, head of the Court’s panel, based on a referral by the Chief Justice of the Court of Cassation to the General Assembly, citing conflicting judgments on whether Islamic financial institutions may consider late payment interest as compensation. The referral was made in accordance with Article 20 of Law No. 13 of 2016 concerning the Judicial Authority in the Emirate of Dubai.

Significance of the Ruling

This ruling represents a turning point in the unification of judicial interpretations in the UAE regarding financial obligations governed by Sharia. It puts an end to any legal ambiguity over whether Islamic institutions can impose penalties or interest for late payments—even under civil or compensatory terms.

What Does This Mean for Institutions and Clients?

• For Islamic financial institutions: Contract models and collection mechanisms must be revised to comply with this new judicial direction. Any clauses involving late payment penalties should be eliminated.

• For clients: The ruling provides legal and religious protection against the imposition of interest or fees that are inconsistent with Sharia, reinforcing the principles of fairness and non-harm in Islamic financial contracts.

Conclusion

The judgment of the Dubai Court of Cassation reflects not only a judicial stance but also a legal and ethical commitmentto upholding the core principles of Islamic finance. It reinforces the idea that what is impermissible under Sharia cannot be legitimized under alternative legal terminology.

The coming period will reveal how the financial markets and institutions adapt to this precedent, and whether it will help bolster trust in Islamic banking as a genuinely Sharia-compliant system—not just in form, but in substance.