UAE Supreme Court bans compound interest on bank loans

Abu Dhabi: The Federal Supreme Court has reaffirmed that financial institutions in the UAE are prohibited from charging interest on accumulated or compound interest, and that total interest payable must not exceed the original value of the loan.

The ruling came as the country’s highest court overturned a previous appellate judgment that had ordered a borrower to pay Dh1.553 million on a loan originally valued at Dh700,000, and sent the case back to the Court of Appeal for reconsideration.

The dispute began when a bank filed a lawsuit seeking Dh1.919 million plus 11.25% annual interest, alleging that the borrower had defaulted on two facilities — one for Dh634,000 and another for Dh66,000.

The bank said it had fulfilled its obligations by crediting the full loan amounts to the borrower’s account, but the client failed to make repayments as agreed.

After multiple rounds of litigation, the Court of First Instance ordered the borrower to pay part of the claimed amount, with interest capped at the value of the principal. Both parties appealed, and the appellate court later ruled in favour of the bank, increasing the repayment amount to Dh1.553 million.

The borrower then approached the Supreme Court, arguing that the total interest charged amounted to compound interest — which is prohibited under UAE law.

The high court agreed, noting that the accrued interest of Dh860,147 exceeded the original loan amount of Dh700,000.

In its judgment, the court clarified that while banks may charge contractual or market-rate interest on outstanding balances before account closure, only simple interest may be applied thereafter.

It further emphasised that delay interest, which serves as compensation for late payment, must not cause the total debt to exceed the loan’s principal.