Court Ruling: No Legal Interest on Murabaha Contracts at Islamic Banks

Expatriates and residents who finance a car, home fit-out, or business purchase through an Islamic bank in the United Arab Emirates often assume the product is simply a “Sharia-compliant loan.” In practice, the label and the legal structure matter. A murabaha facility is typically framed as a sale with a disclosed profit and a deferred price, not as a conventional interest-bearing loan ]. When payment is late, disputes can arise over whether the bank may also claim legal interest, default interest, or “compensation for delay” on top of the agreed murabaha price.

This article explains—at a high level—a developing UAE judicial approach to that question: how murabaha differs from conventional interest; why legal/default interest on Islamic facilities has been debated; how recent Dubai Court of Cassation commercial-appeal context and General Assembly direction relate to Islamic financial institutions (IFIs) ]; how Federal Commercial Transactions Decree-Law No. 50 of 2022 speaks to Islamic IFIs ]; and how Alya Salem Al Nuaimi Law Firm handled an Abu Dhabi Court of Cassation matter consistent with that emerging approach case ref 1010/2025].

This page is general information from our Abu Dhabi practice. It is not case-specific advice, not a prediction of outcome in your file, and not a claim that every Islamic facility or every emirate court will treat facts identically. Case numbers, article citations, and bright-line holdings below are flagged ] and should be confirmed against official judgments and the current statute text.

What murabaha is (and is not)

In Islamic finance, murabaha is commonly structured as a cost-plus sale: the financier acquires (or arranges acquisition of) an asset at the customer’s request, then sells it to the customer at a higher price that discloses a profit margin, with payment deferred in instalments ]. The customer’s obligation is framed as paying that known deferred sale price, not as repaying a principal loan plus accruing interest in the conventional sense.

By contrast, a conventional interest loan typically prices money over time: principal plus contractual interest, often with further default interest if the borrower is late ]. The economic cash-flow may look similar to an outsider—monthly payments for a car or equipment—but the contract type, documentation, and remedies can differ under UAE commercial and Islamic-finance rules.

For expatriates, practical checkpoints include:

• Does the paperwork clearly say murabaha / Islamic sale (or another named Islamic product), or does it read like a conventional loan with “profit” substituted for “interest”?
• Is the profit rate or markup stated up front as part of the sale price?
• Are late-payment clauses labelled as fees, penalties, legal interest, or delay compensation—and do they sit comfortably with the Islamic product description ]?

Ambiguous drafting is a frequent source of later litigation.

Why “legal interest” on Islamic facilities became contested

For years, UAE commercial practice recognised forms of legal interest or court-awarded delay compensation in many commercial debts, alongside contractual default interest in conventional facilities ]. Banks and customers disputed whether the same tools could attach to Islamic murabaha and similar facilities when instalments fell overdue.

Arguments on one side treated late-payment awards as compensation for delay, not as riba (usury) in the classical sense ]. Arguments on the other side treated any extra increase on a deferred Islamic sale debt—however labelled—as inconsistent with the nature of murabaha and with Sharia-based financing constraints ]. Some institutional workarounds historically channelled court-awarded amounts into charitable uses; that did not end the underlying legal debate ].

The practical stakes are concrete: adding percentage “legal interest” on top of an already profit-inclusive murabaha balance can change the total payable, while IFIs face product-integrity and pleading consequences.

Dubai Court of Cassation context and General Assembly direction ]

Public discussion of a unifying commercial approach in Dubai has focused on Court of Cassation treatment of claims by Islamic financial institutions for legal interest or delay compensation on Sharia-based facilities case nos/dates]. Reporting describes a commercial-appeal setting in which Islamic IFIs are treated as unable to claim legal/default interest (or equivalently labelled delay compensation) on Islamic financing debts, with the restriction discussed in public-order terms—so courts may apply it even if parties do not raise it ].

A related General Assembly direction is described as confirming that Islamic IFIs (and Sharia-based financing entities) should not be awarded legal interest or delay compensation—whatever the label—on debts arising from Sharia-governed transactions when the debtor is late decision number/year]. Treat case numbers, dates, and operative wording as ] against official reports. This article does not invent verbatim judicial quotes; paraphrases are high-level only ].

Federal Commercial Transactions Decree-Law No. 50 of 2022 ]

Federal Decree-Law No. 50 of 2022 on commercial transactions includes provisions addressing Islamic financial institutions and restrictions on interest/benefit in their lending and borrowing article numbers]. Commentary commonly cites texts that, in substance, restrict Islamic IFIs from borrowing or lending on interest or benefit, and from arranging or collecting interest or benefit—including delay interest or delay compensation—on overdue amounts arts. 468, 472, 473 and related articles such as 121 bis].

How far those texts close the older debate over court-awarded “legal interest” as mere compensation remains part of the developing analysis ]. Counsel should read the Arabic statute for your facility type—murabaha, ijara, musharaka, or another named product—rather than assume one English paraphrase covers every product and emirate.

Abu Dhabi Court of Cassation matter handled by the firm 1010/2025]

Alya Salem Al Nuaimi Law Firm, based in Abu Dhabi, acted for a client in an Abu Dhabi Court of Cassation matter challenging legal interest claimed on a murabaha facility case ref 1010/2025]. High-level reporting describes an Islamic bank seeking a murabaha sum plus legal interest, with the defence arguing that murabaha should not be re-characterised as a conventional loan attracting legal interest, and that imposing interest conflicts with the facility’s Islamic nature ]. Public summaries also mention restructuring / repayment-capacity themes for a retired customer and central-bank-related expectations ]—always evidence-dependent.

The firm’s role should be stated accurately: it handled an Abu Dhabi cassation matter consistent with the emerging approach. This page does not claim the firm drives a nationwide change of law, nor that one judgment rewrites every Islamic banking dispute. Outcomes depend on pleadings, documents, and the competent court’s reading of statute and precedent ].

Practical takeaways for customers of Islamic banks

If you hold—or are being sued on—an Islamic facility in Abu Dhabi or elsewhere in the UAE:

• Read the contract label. Confirm whether the product is expressly murabaha (or another Islamic structure) versus a conventional interest loan with Islamic branding ].
• Check profit clarity. The disclosed profit / markup and deferred price should be understandable from the documents.
• Scrutinise late-payment wording. Clauses that add “legal interest,” “delay interest,” or open-ended delay compensation deserve legal review in light of current statute and court practice ].
• Keep the full file. Facility agreements, schedules, payment histories, restructuring requests, and bank correspondence matter when interest-type claims are challenged.
• Do not ignore a claim. Default judgments and enforcement can move quickly relative to informal negotiation; early assessment preserves options.
• Separate product types. Rules discussed for Islamic IFIs do not automatically erase conventional interest on non-Islamic commercial loans ].

Expatriates should also plan for Arabic pleadings, certified translations, and emirate venue (Abu Dhabi versus Dubai or other courts) when the bank, collateral, or residence points to a particular forum.

How Alya Salem Al Nuaimi Law Firm can help

Alya Salem Al Nuaimi Law Firm in Abu Dhabi advises on banking and commercial disputes, including Islamic-finance recovery claims and related cassation-stage issues where facts and procedure allow. Support may include document review, defence strategy on interest-type claims attached to murabaha and similar facilities, pleadings, and representation through commercial litigation stages ] for your venue. We explain assumed terms for expatriate clients and verify statute and judgment text before bright-line assertions.

Book a meeting or send your details

If an Islamic bank has claimed legal interest, delay interest, or delay compensation on a murabaha (or similar) facility—or you are reviewing Islamic financing documents before signing—speak with counsel before you admit liability or settle terms you do not understand.

• Book an appointment: Schedule a consultation
• Enquiry form: Submit the form

Abu Dhabi phone: 050 600 2013

FAQ

What is a murabaha contract at an Islamic bank?

It is commonly a cost-plus sale: the bank (or financier) sells an asset to the customer at a disclosed profit with deferred payment, rather than advancing a conventional interest-bearing loan ]. Exact documentation controls.

Is “profit” the same as “interest”?

Not in legal characterisation. Murabaha profit is usually built into the agreed sale price; interest (including legal or default interest) is a different pricing and remedy concept that has been contested when claimed on Islamic facilities ].

Can an Islamic bank claim legal interest if I am late?

Recent Dubai Court of Cassation commercial context and General Assembly direction, together with related Abu Dhabi cassation treatment, are discussed as restricting Islamic IFIs from claiming legal/default interest or equivalently labelled delay compensation on Sharia-based facilities case nos/dates]. Confirm current authority for your emirate, product, and pleadings.

Does Federal Decree-Law No. 50 of 2022 matter?

Yes—provisions addressing Islamic IFIs and restrictions on interest/benefit are part of the statutory backdrop commonly cited in this debate article numbers]. Read the official text with counsel.

Did the firm create this rule nationwide?

No. Alya Salem Al Nuaimi Law Firm handled an Abu Dhabi Court of Cassation matter challenging legal interest on murabaha 1010/2025], in a manner consistent with the emerging multi-emirate approach. Broader development rests with courts and statute.

What should I bring to a consultation?

The facility agreement and schedules, payment history, demand letters or claim documents, any restructuring correspondence, and a clear timeline of default and bank claims.

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*Alya Salem Al Nuaimi Law Firm — Abu Dhabi, United Arab Emirates. General information only; case citations, article numbers, and holdings must be verified against official sources for your circumstances.*