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The End of Compound Interest: What UAE’s Supreme Court Ruling Means for you as Borrower

Overview of UAE’s Ruling

On January 10, 2024 the UAE Federal Supreme Court decided on a groundbreaking ruling determining that the use of compound interest on financial transactions is no longer legally allowed. In the following, we will explain everything you need to know about the impact of this decision and how this might affect you as a customer. 

What impact does this ruling have on current legal situation?

This ruling has far-reaching implications, particularly for financial institutions and borrowers alike.

Financial institutions are now mandated to refrain from applying compound interest on customer facilities, including loans, credit lines, and other financial services. By disallowing the accumulation of interest on interest, the ruling aims to make borrowing more accessible and repayments more manageable for customers. Moreover, the ruling restricts financial institutions from charging compound interest on the funds that have already been borrowed by their customers. 

What are the Consequences for a you as a borrower?

By disallowing compound interest, borrowers are protected from the financial strain that often accompanies compound interest calculations. For instance, imagine a borrower who takes out a loan which is subject to compound interest. Without the protection provided by this ruling, the borrower’s debt could quickly spiral out of control as interest increases exponentially over time. However, with the prohibition of compound interest, borrowers can rest assured that their repayments will not skyrocket unexpectedly, allowing for greater financial stability and peace of mind.

What changes on the side of the financial institution?

Consequently, financial institutions must adapt their interest calculation methods and risk assessment processes to comply with the new regulations. This entails placing greater emphasis on alternative risk factors to decide in loan evaluations, such as credit history, income stability, and collateral. Thus, borrowers can expect financial institutions to be more careful and detailed in their lending practices compared to before the ruling. Moreover, the prohibition of compound interest is likely to prompt changes in the availability and structure of current loan products. Financial institutions may need to restructure existing loan offerings or introduce new ones that align with the prohibition. This could involve adjusting interest rate calculation methods or introducing alternative interest rate models, such as simple interest or fixed-rate loans.

How we at Lawbridge can support you

Understanding how financial institutions will adapt their risk assessment processes in light of the prohibition of compound interest is important for assessing the likelihood of loan approval and the associated terms.

In conclusion, navigating the implications of the prohibition of compound interest requires careful consideration. If you are considering borrowing money in light of these changes, it is advisable to seek professional advice or assistance to navigate the implications effectively. By doing so, you can make informed decisions and ensure your financial well-being in the changing landscape of lending practices. With our team of licensed expert lawyers, we guide you through this process, so you don’t have to worry and can focus on your daily business. Book your free consultation here!




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