03/02/2024
In a significant legal move, the UAE Federal Supreme Court has prohibited the use of compound interest in financial transactions, setting a new standard.
The ruling, dated January 10, 2024, case number 1254 of 2023, cites specific laws – Federal Decree-Law No. 23 of 2022 and Federal Law No. 50 of 2022.
Understanding the Decision:
The court’s decision relies on Article 121/4 of Federal Decree-Law No. 23 of 2022, which stops licensed financial institutions from applying compound interest on customer facilities. This emphasises following rules issued by the Central Bank for customer protection and fair financial practices. Article 88 of Federal Law No. 50 of 2022 supports this by stating creditors cannot claim interest on compounded interests.
Implications of the Ruling:
This decision affects how financial institutions calculate interest, moving away from compound interest. For borrowers, it ensures protection against financial strain caused by compound interest, ensuring repayments are more manageable.
Broader Legal and Economic Context:
The ruling strengthens rules for financial transactions, aiming to uphold fair lending practices and protect consumers. It may lead to more careful risk assessments by financial institutions but promotes responsible lending and borrowing.
Conclusion:
The UAE Federal Supreme Court’s decision creates a new legal standard by prohibiting compound interest, aligning the country with global fairness and transparency standards. It is expected to have a lasting impact, creating a more stable financial environment for institutions and consumers.
