Dubai Court Bans Late Fees for Islam Banking

Islamic Financial Institutions Cannot Charge Late Fees – Dubai Court Sets Important Precedent

The recent decision by the Dubai Court of Cassation marks a milestone in the Islamic financial practices of the United Arab Emirates. According to the ruling, banks and takaful insurers operating under sharia principles cannot levy any interest or fees labeled as compensation even if the client fails to fulfill payment obligations on time. This decision is not only applicable to the particular case but can be interpreted as a general regulation, as it has become part of public order with reference to relevant law.

New Law, New Interpretation

The basis of the decision is a judgment made on July 8, 2025, (commercial appeal number 595) which refers to Article 473 of the new Federal Law on Commercial Transactions. This provision specifically prohibits Islamic financial institutions from charging interest or any form of “profit”, even if applied simply as a delay fee or compensation.

This approach differs from a federal supreme court decision from the 1990s, which allowed legal interest as compensation. However, the new interpretation now also includes legal interest under the prohibition of interest, as it is considered a form of “profit” that contradicts the principles of sharia.

Sharia is Not Just Form, But Substance

The specific case revolved around a murabaha-type financing agreement, which is characterized by a predetermined profit. The question was whether commercial law-based late interest could be applied in such a transaction. However, the court declared that if a contract is sharia-based, no legal, contractual, or compensation-based interest can be enforced.

The decision highlights that in Islamic finance, formal compliance is not enough – the content must also align with sharia rules. Thus, the court has sent a strong signal that no reinterpretation, loophole, or disguise as “compensation” can be an excuse to circumvent the prohibition of interest.

Significant Impact on the Entire Financial Sector

The message of the decision is clear: Islamic financial institutions cannot deviate from religious principles, even if commercial law would interpret late fees differently. This ruling provides serious guidance for future contract negotiations, litigation, and financial risk assessments.

According to the UAE central bank's data for the second quarter of 2025, there are 59 insurance companies operating in the country – including 10 national takaful companies. Additionally, there are 24 local and 38 foreign banks present in the financial market, many of which offer Islamic financial products. For these service providers, the court's decision formulates a fundamental guideline for applying interest-free practices.

Summary

The Dubai Court of Cassation's ruling has set a significant precedent: it affirmed that genuine adherence to the principles of sharia is not just a theoretical question but a practical requirement in the Islamic financial sector. The decision is expected to influence contract wording, the resolution of disputed cases, and the entire legal environment within the UAE, further strengthening the country’s commitment to sharia-based economic operations.

(Based on a judgment by the General Authority of the Dubai Court of Cassation in Appeal.)