The Federal Supreme Court has reaffirmed that financial institutions in the UAE cannot charge interest on accumulated or compound interest, and that the total interest payable must not exceed the original loan amount.
The ruling overturned a previous appellate court decision that had ordered a borrower to pay Dh1.553 million on a loan originally worth Dh700,000, and remanded the case to the Court of Appeal for reconsideration.
The dispute arose when a bank filed a lawsuit claiming Dh1.919 million plus 11.25% annual interest, alleging the borrower defaulted on two facilities, one for Dh634,000 and another for Dh66,000.
The bank maintained it had credited the full loan amounts to the borrower’s account, but the client failed to make repayments as agreed.
After initial litigation, the Court of First Instance ordered the borrower to pay part of the claimed amount, with interest capped at the principal value. The appellate court later ruled in favor of the bank, increasing the repayment to Dh1.553 million.
The borrower then appealed to the Supreme Court, arguing that the total interest charged amounted to compound interest, which is prohibited under UAE law.
The Supreme Court agreed, noting that the accrued interest of Dh860,147 exceeded the original loan of Dh700,000. 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 afterward.
It also emphasized that delay interest, intended as compensation for late payment, must not result in total debt exceeding the principal loan amount.
