The Federal Supreme Court has reaffirmed that banks and financial institutions in the UAE are barred from charging compound or accumulated interest, and that total interest payable in any loan dispute must never exceed the principal amount originally disbursed.
The clarification came as the country’s highest court struck down an appellate ruling that had ordered a borrower to repay Dh1.553 million on a loan worth Dh700,000, and remanded the case to the Court of Appeal for fresh consideration.
Loan Dispute Returned to Appeal Court
The case began when a bank sued a client, demanding Dh1.919 million plus 11.25% annual interest, claiming the borrower had defaulted on two loan facilities amounting to Dh634,000 and Dh66,000. The bank argued that it had fulfilled all obligations by depositing the funds, while the borrower failed to comply with the repayment schedule.
A trial court later capped the recoverable interest at the value of the principal and ordered partial repayment. The bank appealed, and the appellate court enhanced the payable amount to Dh1.553 million.
Interest Cannot Exceed Principal
The borrower challenged that decision before the Supreme Court, arguing that the interest charged by the bank amounted to prohibited compound interest. The Supreme Court agreed, pointing out that the accrued interest — Dh860,147 — had exceeded the Dh700,000 principal, which violates settled legal principles.
In its ruling, the court stressed:
- Banks may levy contractual or market-rate interest on unpaid balances before accounts are closed.
- Only simple interest may be applied after closure.
- Delay or default interest, meant as compensation for late payment, must not push total dues beyond the principal amount.
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