Sharia law shapes the legal frameworks in the Middle East. Traditionally, it was the primary uncodified source of law in the region. However, throughout the 20th century, many Middle Eastern countries developed their own Civil Codes, which continue to be rooted in Sharia principles. One of the key areas where Sharia law exerts substantial influence is in the banking and financial sectors. Consequently, several jurisdictions in the Middle East forbid the recovery of interest in civil cases, and the ability to claim interest in arbitrations is closely tied to the governing law of the dispute.
This note provides an overview of the possibility of claiming interest in arbitration in the Middle East, focusing on Saudi Arabia, the United Arab Emirates (UAE), Egypt, and Bahrain. Each country demonstrates a different interpretation and application of Sharia principles. Understanding these differences is crucial for legal professionals navigating arbitrations in the Middle East, especially given the region’s growing significance as a global economic hub
Islamic Law and Interest
Most legal frameworks in the Middle East derive from Sharia law (Islamic Law). Traditionally, uncodified Sharia law served as the principal legal source across the region. Nonetheless, during the 20th century, Middle Eastern countries started to issue their own Civil Codes, which were still grounded in the principles of Sharia law.[1]
The banking sector is significantly influenced by Sharia law, which prohibits riba (interest) and gharar (excessive uncertainty) as outlined in the Quran.[2] Since Middle Eastern Civil Codes are derived from Sharia law, several jurisdictions forbid the recovery of interest in civil cases. Consequently, the ability to claim interest in arbitration hinges on the applicable law governing the dispute.
Country-Specific Perspectives
Saudi Arabia
Saudi Arabia has taken a strict approach to riba. As Saudi law is based on Sharia law, the rights and obligations of parties to a dispute must be viewed through the lens of compliance with Sharia, which might create complexities for foreign investors engaged in arbitration in Saudi Arabia.[3]
The new 2023 Saudi Civil Code lacks specific provisions on interest, suggesting that the legislation retains the prevailing, sharia-based position forbidding the charging of interest. The new Civil Code further bans the fixing of pecuniary penalties in a contract.[4] Consequently, as a result of Saudi strict interpretation of Sharia law, claiming interest in international arbitration is not possible.
The United Arab Emirates (UAE)
The entitlement to claim interest for delayed payments is ambiguous due to the intricate nature of Sharia law and its interpretations. Notably, Chapter Five of the UAE Penal Code adopts a strict view on interest by penalizing all forms of interest that are not provided in exchange for consideration.
Every commission or benefit of any kind stipulated by a creditor shall he be considered as a disguised interest if it is established, that such commission or benefit is not met by a consideration consisting of a genuine and licit benefit or service given or rendered by the creditor.[5]
In line with the provisions of the Penal Code prohibiting any interest that is not paid against consideration, the UAE Civil Code provides that if a loan is conditioned upon paying a benefit that exceeds the contract requirements, other than guaranteeing the borrower’s right, the condition is void while the contract remains valid.[6]
The situation is different when the interest is applied to a delayed payment. Pursuant to the UAE Commercial Code, interest on commercial loans is permitted as per the rate stipulated in the agreement, or at the rate prevailing in the market, as long as it is below 9% per annum.[7] Similarly, if the parties have agreed on the interest rate applicable, the same rate should be applied when the debtor defaults on payment. According to the Commercial Code, such interest may be charged to the debtor as a form of compensation for delays.[8]
Consequently, while there is a general prohibition of interest in the United Arab Emirates, claiming interest in arbitration in the UAE is possible as long as it is calculated at an appropriate rate and is a form of compensation for delays.
Egypt
Egypt has taken a relaxed position on interest, which is payable at the rate set by the Central Bank of Egypt in relation to (1) commercial loans and (2) amounts or expenses pertinent to the trader’s trade:
1. The loans concluded by the trader for affairs connected with his trading works shall be considered commercial loans.
2. [I]f the trader’s profession necessitates paying some amount or expenses for the account of his client, he may claim from them an interest thereon from the date of paying these amounts, unless otherwise agreed upon.
3. The interest shall be calculated according to the rate with which the Central Bank deals, unless otherwise agreed upon.
4. The interest shall be paid at the end of each year, if the debt is deferred for more than one year, and on the maturity date if the debt is deferred for one or less than one year, unless otherwise agreed upon, or the practice runs differently.[9]
Therefore, claiming interest in international arbitration in Egypt is possible, provided that the delayed payment causes actual costs.
Bahrain
Similarly, Bahrain also has taken a relaxed approach to riba. Pursuant to Article 76 of the Law of Commerce, interest on commercial loans can be charged at a legally applicable rate determined by the Bahrain Monetary Agency or at a rate agreed on by the parties, provided that it does not exceed the legally applicable rate.[10]
The Law of Commerce also stipulates that a party may claim interest for delay of payment of commercial debts:
1. Interest for delay of payment of commercial debts shall accrue upon maturity unless the Law or an agreement stipulates otherwise.
2. In no case shall the total interest payments charged by the creditor be in excess of the principal debt amount on the basis of which interest has been charged in the case of debts the re-payment period of which exceeds seven years. Every agreement to the contrary shall be null and void.
3. The provisions of paragraph 2 shall not be applicable to interest for debts arising from transactions concluded in a foreign currency.
4. A creditor shall have the right to claim complementary damages to be added to the delay interest without the need for proving that the damages in excess of such interest have been caused by the debtor’s deceit or gross failure.[11]
Consequently, parties are allowed to claim interest in international arbitration in Bahrain.
Conclusion
While the prohibition of riba presents challenges, the region’s evolving legal landscape provides avenues for awarding interest in commercial disputes. By understanding the legal frameworks, regional variations, and practical considerations, practitioners can navigate this terrain effectively.
[1] BIICL, Introduction to Islamic Law, p.2
[2] U.F. Moghul, Esq., Introduction to Islamic Finance, Federal Reserve Bank of Boston, p. 3.
[3] Herbert Smith Freehills, Inside Arbitration: The Undeniable Rise of Arbitration in Saudi Arabia, 27 September 2023.
[4] Pinsent Masons, Saudi Arabia’s Civil Code: Entitlement to Interest in Construction Projects, 7 February 2024.
[5] UAE Penal Code, Chapter Five, Article 409.
[6] UAE Civil Code, Article 714.
[7] UAE Commercial Code, Article 72.
[8] UAE Commercial Code, Article 84.
[9] Commercial Code of Egypt, Article 50.
[10] Law of Commerce of Bahrain, Article 76.
[11] Law of Commerce of Bahrain, Article 81.
