Introduction

In a significant ruling that clarifies the application of interest in Islamic banking transactions, the Dubai Court of Cassation issued a judgment on July 8, 2025, that reinforces the prohibition of interest (ribā) in Islamic finance. This decision, rendered in Commercial Appeals No. 595/2025 and 608/2025, provides important guidance on the interpretation of the UAE Commercial Transactions Law regarding Islamic financial institutions.

Case Background

The dispute arose from a Murabaha financing agreement between a bank and a client. The bank had provided the client with two Sharia-compliant financing facilities for the purpose of investing in shares in a trade finance fund. These shares were pledged as collateral to the bank.

When the client allegedly defaulted on payment, the bank filed a lawsuit claiming the outstanding debt plus legal interest. The case progressed through the courts, with both parties filing appeals against the initial judgment.

Key Legal Issues

The Court of Cassation addressed several significant legal questions:

• Whether the claim was premature, given the client’s argument that the debt had not yet matured
• The proper calculation of the outstanding debt after partial redemption of the pledged shares
• The responsibility for purchase notifications in Murabaha transactions
• Most importantly, whether legal interest could be imposed on debts arising from Islamic finance transactions

The Court’s Reasoning on Interest

The Court’s most notable finding concerned the application of interest to Islamic finance transactions. Citing Articles 468, 472, and 473 of the UAE Commercial Transactions Law, the Court established that:

• The provisions of the law apply to commercial transactions and contracts where Islamic financial institutions are parties
• Islamic financial institutions are defined as those whose founding documents specify that they operate according to Islamic Sharia principles
• Murabaha contracts are considered commercial transactions subject to Islamic Sharia when conducted through Islamic financial institutions
• Islamic financial institutions are prohibited from borrowing or lending with interest or benefit in any form, including charging delay interest even as compensation

The Court determined that the defendant bank qualified as an Islamic financial institution, and the Murabaha transaction with the client was subject to Islamic Sharia principles. Consequently, the Court ruled that imposing interest on delayed payment violated the explicit provisions of Article 473 of the Commercial Transactions Law.

The Final Judgment

The Court partially overturned the appealed judgment, specifically regarding the 5% interest that had been imposed on the debt. The Court affirmed the principal amount owed but eliminated the interest component, considering any agreement on interest to be null and void according to the law.

Significance of the Ruling

This judgment has several important implications for Islamic finance in the UAE:

• Clarification of Legal Framework: It provides clear interpretation of the revised Commercial Transactions Law regarding Islamic financial institutions
  
• Reinforcement of Sharia Principles: The ruling reinforces the fundamental prohibition of interest (ribā) in Islamic finance, even when termed as “compensation” for delayed payment
  
• Definition of Islamic Financial Institutions: The judgment offers guidance on what constitutes an Islamic financial institution under UAE law

• Contractual Implications: It invalidates interest clauses in Islamic finance contracts, regardless of how they are formulated

Conclusion

This landmark ruling by the Dubai Court of Cassation strengthens the legal framework for Islamic finance in the UAE by firmly upholding the prohibition of interest in all its forms. Financial institutions engaged in Islamic finance must ensure their practices strictly adhere to Sharia principles, particularly regarding the prohibition of interest, as courts will not enforce interest-based claims in Islamic financial transactions.

The decision aligns UAE judicial practice with the fundamental principles of Islamic finance and provides clear guidance for financial institutions, legal practitioners, and clients engaged in Islamic banking transactions.

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