UAE Supreme Court Rules Interest Cannot Exceed Principal in Loan Disputes

UAE Federal Supreme Court: financial institutions may not accrue interest in excess of principal amount

The UAE Federal Supreme Court recently reaffirmed that financial institutions in the UAE are not permitted to accrue additional interest on accrued or compounded interest, and that the total amount of interest payable by the borrower must not exceed the principal amount of the loan. The ruling stems from a loan dispute in which the court overturned a previous Court of Appeal judgement and remanded the case for a new trial.

The dispute centred on a loan dispute between a bank and the borrower. The bank had sued the borrower, claiming that the other party had defaulted on two loans totalling Dhs700,000 (Dhs634,000 and Dhs66,000, respectively), and demanded repayment of Dhs1,919,000 (inclusive of principal and interest accrued). The bank claimed that the full amount had been lent to the borrower's account, but the other party failed to make the agreed repayments.

After several rounds of litigation, the Court of First Instance was the first to rule that the borrower was required to pay a portion of the claim, with interest capped at no more than the principal amount. Both parties appealed the decision, and the Court of Appeal eventually upheld the bank's claim, increasing the amount due to Dh1.553 million. The borrower then appealed to the Supreme Court, arguing that the interest accrued was compound interest, which is prohibited under UAE law.

The Supreme Court upheld the borrower's claim, clarifying that the accrued interest of Dh860,147,000 exceeded the original loan amount of Dh700,000, in compliance with the "prohibition of compounding" in the law.

The Court also emphasised that late payment charges as compensation for late payment must not result in a total debt exceeding the original loan principal, further clarifying the compliance boundaries for interest accrual by financial institutions.