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The Federal Supreme Court of the United Arab Emirates has reaffirmed a crucial financial principle — banks and financial institutions are not allowed to charge compound or accumulated interest that exceeds the original loan amount. In a landmark decision, the country’s highest court made it clear that the total interest payable in any loan dispute must never surpass the principal sum disbursed to the borrower.
The ruling came as the Supreme Court struck down an earlier appellate court decision that had ordered a borrower to repay AED 1.553 million on a loan originally worth AED 700,000. The top court has now sent the case back to the Court of Appeal for a fresh review, directing it to adhere to the clarified legal standards regarding loan interest limits.
Loan Dispute Returned to Appeal Court
The dispute began when a UAE bank filed a lawsuit against a client, claiming that the borrower had defaulted on two separate loan facilities totaling AED 700,000 — AED 634,000 under one facility and AED 66,000 under another. The bank alleged that while it had fully met its obligations by depositing the funds, the borrower failed to follow the agreed repayment plan.
In its initial filing, the bank demanded AED 1.919 million from the borrower, including the principal and accumulated interest calculated at an annual rate of 11.25%.
The trial court, however, sided partially with the borrower. It ruled that the recoverable amount must be capped at the value of the principal, noting that interest charges cannot legally exceed the borrowed sum. As a result, the court ordered only partial repayment based on simple interest calculations.
Unhappy with the outcome, the bank took the matter to the appellate court, which later enhanced the total amount payable to AED 1.553 million — a figure that included accumulated interest charges.
Supreme Court Steps In
The borrower then escalated the case to the Federal Supreme Court, arguing that the appellate court’s ruling effectively permitted compound interest, a practice prohibited under UAE law and financial regulations.
Upon review, the Supreme Court found merit in the borrower’s argument. The justices observed that the accrued interest — which amounted to AED 860,147 — had indeed exceeded the original principal of AED 700,000. This, they emphasized, constitutes a violation of settled legal and regulatory principles in the UAE.
Key Legal Clarifications
In its detailed judgment, the Supreme Court outlined clear parameters that all banks and financial institutions must follow when calculating interest on loans:
- Contractual Interest Permitted Before Account Closure
Banks are allowed to charge contractual or market-rate interest on outstanding balances before the loan account is officially closed, in line with the terms agreed upon by both parties. - Simple Interest Only After Closure
Once the loan account is closed, only simple interest can be applied on any remaining unpaid balance. Compound or accumulated interest cannot be added thereafter. - Default Interest Must Remain Within Limits
Any delay or default interest — typically levied as compensation for late repayment — must not cause the total amount owed by the borrower to exceed the principal loan value.
The court also highlighted that these rules are designed to protect borrowers from predatory lending practices while ensuring fair recovery for banks. By reaffirming this principle, the Supreme Court aims to strengthen transparency and integrity across the UAE’s financial sector.
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Implications for the Banking Sector
Legal and financial experts say the verdict sends a strong signal to banks, financial institutions, and borrowers alike. It reinforces the importance of ethical lending practices and clear contractual terms. Banks must now ensure that their loan recovery mechanisms comply strictly with the legal ceiling — meaning no borrower should ever be asked to pay more in total than the amount they originally borrowed.
For consumers, the judgment offers an added layer of protection against excessive interest charges and provides legal clarity in case of disputes. Borrowers facing similar issues may now have stronger grounds to challenge lenders who impose unfair or compounding interest rates.
The decision is expected to influence ongoing and future loan disputes, setting a precedent for courts to follow in upholding borrower rights and regulating fair financial conduct.
As the case returns to the Court of Appeal, it will likely serve as a benchmark for recalculating dues in similar cases, ensuring that the total payable amount — principal plus any permissible interest — aligns with the boundaries defined by the Supreme Court.
