Nisna K Muhammed

Senior Legal Correspondent

Commercial Case No. 595/2025 | Judgment dated 8 July 2025

In a pivotal decision set to redefine the contours of Islamic finance in the UAE, the Dubai Court of Cassation has ruled that Islamic banks and Takaful companies operating under Sharia principles are strictly prohibited from imposing late payment interest or charges in any form. This judgment, issued on 8 July 2025 in Commercial Case No. 595/2025, is now considered binding on all lower courts in Dubai and has far-reaching implications for Islamic finance contracts.

The Court held that any contractual provision seeking to impose penalties, interest, or financial compensation for delayed payments is null and void if the financial institution is operating under Sharia compliance. This applies irrespective of the terminology used, whether described as “penalty interest,” “compensatory charge,” or “delay fees.” The Court’s decision was grounded in Article 473 of Federal Law No. 50 of 2022 (the UAE Commercial Transactions Law), which prohibits Sharia-compliant institutions from charging interest on late payments.

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The case arose from a dispute between an Islamic bank and a client, in which the bank sought to recover late payment charges in addition to the principal sum. While the court of first instance dismissed the interest claim in line with Article 473, the Court of Appeal reversed the ruling. The Court of Cassation, however, reinstated the original judgment, reaffirming the inviolability of Sharia in financial dealings and underlining that Sharia compliance is not merely a label, but a substantive legal and ethical obligation.

Legal experts have hailed this decision as a landmark clarification on the enforceability of Sharia principles within Dubai’s commercial judicial framework. The Court emphasised that the prohibition on interest by Islamic financial institutions is a matter of public order; therefore, no agreement or practice, even if accepted by both parties, can override this legal mandate.

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For Islamic banks and Takaful operators, the ruling necessitates a comprehensive review of all contract templates and internal policies. Clauses imposing late payment charges must be removed or revised to avoid future invalidation. For clients, this opens the door to potential restitution of previously imposed charges, especially in Murabaha financing arrangements and Takaful policies.

As Dubai continues to strengthen its reputation as a leading hub for Islamic finance, this judgment ensures greater alignment between regulatory practice and Sharia principles, reinforcing the ethical foundations of Islamic financial services in the UAE.