Interest legal under Sharia, court rules

Lower courts made legal error when they found that interest debt of Dh200,000 was in breach of Islamic law, Chief Justice says.

ABU DHABI // Two courts made a mistake when they exempted a borrower from the interest he owed on delayed loan repayments on the grounds that it was forbidden by Sharia, the Supreme Court has ruled.

The judgment, in court documents released yesterday, involved an unidentified bank owed more than Dh200,000 in interest by a man from Umm al Quwain. The bank's demands for interest were rejected by two lower courts on the grounds that charging interest violated Islamic law.

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On appeal, the Supreme Court ruled that the bank's right to charge interest was in line with both UAE secular laws and Sharia.

"As a rule, interest, whether simple or compound, is prohibited by Sharia," Chief Justice Amin al Hajeri wrote. "But it has been made necessary for banks to accept simple interest. As long as the necessity persists, and until an economic alternative is established to replace the current banking system, interest is lawful."

The chief justice based his ruling in this case on a hadith stating that "a rich man's delay in payment is an injustice". He ruled that the delay in payment incurred damages, which are governed by Sharia.

"In line with the hadith, ordering the borrower to pay interest for late payments can be considered a sort of damages, which is compliant with both the UAE law and Sharia," the chief justice ruled.

"The verdict which is appealed against did not grant interest to the bank claiming it was not sanctioned by Sharia, without discussing the decision in light of the existing laws and the Sharia rulings and their exceptions," Chief Justice al Hajeri wrote. "For those reasons, the decision must be overturned."

The bank initially filed a lawsuit against the man in April, demanding payment of money he had borrowed in addition to interest charged 11.5 per cent from December 1, 2007. The bank provided the Fujairah Court of First Instance with a contract, signed by the man on January 22, 2004, stating that he would pay interest at that rate in the event of delayed payments.

The court ruled the man should pay the borrowed money, but exempted him from paying any interest because it was not sanctioned by Sharia. The bank appealed, but the appeals court upheld the lower court's decision on May 3.

The bank then appealed to the Supreme Court. It argued that the lower courts had erred in law because under commercial law Article 76 banks had the right to charge interest based on a signed contract. The bank said the contract with the man clearly stated he should pay 9.5 per cent, increasing to 11.5 per cent if he were late in paying.

The Supreme Court approved the bank's argument and sent the case back to the appeals court for a retrial under a new panel.