Shireen Kapoor
August 18, 2025
In a landmark decision set to redefine the enforcement of Sharia principles in commercial dealings, the Dubai Court of Cassation has issued a binding ruling that prohibits Islamic banks and Takaful companies from charging any form of interest or fees on delayed payments even in cases where debtors intentionally delay fulfilling their obligations.
The Court made it clear that financial institutions operating fully or partially under Islamic Sharia law cannot impose late payment interest, charges, or any monetary penalties whether labelled as compensation or by any other term on debts or obligations arising from Sharia-compliant transactions or commercial contracts. This ban applies universally, regardless of the debtor’s intent or the contractual wording.
This decision followed a formal referral to the General Assembly of the Court of Cassation under Article 20 of Law No. 13 of 2016, resolving long-standing inconsistencies in lower court rulings on the issue.
The Court emphasized that the prohibition of late payment interest under Sharia is a matter of public order, as enshrined in Article 473 of the Federal Commercial Transactions Law.
In doing so, the Court established that this rule must be applied independently by judges, even if previous rulings had allowed such charges. This approach ensures uniformity in the treatment of litigants and upholds the sanctity of Sharia compliant financial dealings.
The ruling draws strong support from Federal Decree-Law No. 50 of 2022, which explicitly forbids Islamic financial institutions from engaging in any interest-based borrowing or lending and from imposing any benefit on delayed debts including amounts described as delay interest or compensation.
Although the legislation did not specifically address statutory legal interest, the Court took a broad interpretative approach to categorically prohibit all forms of interest in Sharia-compliant transactions. This ensures that neither contractual provisions nor court-ordered interest awards can be enforced if they conflict with Sharia principles.
The case that led to this precedent concerned a Murabaha financing facility, a common Sharia compliant transaction. The central question was whether statutory late payment interest typically awarded in commercial disputes could be imposed when Sharia principles governed the agreement. The Court’s answer was unequivocal: no interest, whether contractual, statutory, or compensatory, may be applied to delayed obligations under Sharia-compliant contracts.
This interpretation preserves the ethical foundations of Islamic finance by preventing the reclassification of prohibited interest under alternative labels. The ruling sends a strong compliance message to Islamic financial institutions, and their legal counsel attempts to bypass Sharia restrictions through creative drafting or reliance on general commercial norms will not survive judicial scrutiny in the UAE.
By issuing this decisive interpretation, the Dubai Court of Cassation reinforces Dubai’s reputation as a jurisdiction deeply committed to Sharia compliance while addressing the realities of modern commerce. The judgment:
• Safeguards the integrity of Islamic finance by preventing prohibited earnings from delayed debts.
• Enhances investor confidence by ensuring transparency and fairness in enforcement.
• Sets a clear precedent for contract drafting, litigation strategy, and risk management in Islamic financial transactions.
This landmark decision will have far-reaching implications for Islamic banking, Takaful operations, and Sharia-compliant investments in the UAE and beyond. By prioritizing ethical principles and legal clarity, the Court has strengthened the foundation upon which the Islamic finance industry can continue to grow sustainably. The ruling stands as a clear message: in Dubai, Sharia principles are not negotiable they form the bedrock of Islamic financial practice.
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