Interest Claims and Arbitration in the Middle East Jurisdictions.

Sharia Law and Interest in the Middle East

Sharia law plays a significant role in shaping the legal frameworks of the Middle East. Traditionally, it has been the primary uncodified source of law in the region. However, throughout the 20th century, many Middle Eastern countries developed their own Civil Codes, which are still grounded in Sharia principles.

One area where Sharia law exerts considerable influence is in the banking and financial sectors. Consequently, several jurisdictions in the Middle East prohibit the recovery of interest in civil cases, and the ability to claim interest in arbitrations is closely linked to the governing law of the dispute.

Interest Claims - Arbitration in the Middle East

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 exhibits a different interpretation and application of Sharia principles. Understanding these variations 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 are derived from Sharia law (Islamic Law). Traditionally, uncodified Sharia law served as the principal legal source across the region. Nonetheless, during the 20th century, many Middle Eastern countries began to issue their own Civil Codes, which remain rooted in Sharia law.

The banking sector is heavily influenced by Sharia law, which prohibits riba (interest) and gharar (excessive uncertainty) as outlined in the Quran. Since many Middle Eastern Civil Codes are based on Sharia law, several jurisdictions forbid the recovery of interest in civil cases. As a result, the ability to claim interest in arbitration depends on the applicable law governing the dispute.

Country-Specific Perspectives

Saudi Arabia

Saudi Arabia maintains a strict approach to riba. Since Saudi law is based on Sharia, the rights and obligations of parties in a dispute must be viewed in light of Sharia compliance, which can complicate matters for foreign investors engaged in arbitration.

The new 2023 Saudi Civil Code lacks specific provisions on interest, reinforcing the prevailing sharia-based prohibition against charging interest. Additionally, it bans the imposition of pecuniary penalties in contracts. Consequently, due to Saudi Arabia's strict interpretation of Sharia law, claiming interest in international arbitration is not permitted.

United Arab Emirates (UAE)

The entitlement to claim interest for delayed payments in the UAE is somewhat ambiguous, given the intricate nature of Sharia law and its interpretations. Notably, Chapter Five of the UAE Penal Code adopts a strict view on interest, penalizing all forms that are not provided in exchange for consideration. Any commission or benefit stipulated by a creditor is considered disguised interest if it is not supported by a genuine and lawful benefit or service provided by the creditor.

In line with the Penal Code’s provisions prohibiting interest not backed by consideration, the UAE Civil Code states that if a loan is contingent upon paying an excess benefit beyond the contract's terms, that condition is void while the main contract remains valid. However, a different situation applies to delayed payments.

Under the UAE Commercial Code, interest on commercial loans is permitted at a rate specified in the agreement or at the prevailing market rate, provided it does not exceed 9% per annum. If the parties agree on an interest rate, that same rate applies when the debtor defaults on payment. Consequently, while there is a general prohibition of interest in the UAE, claiming interest in arbitration is possible if it is calculated appropriately and serves as compensation for delays.

Egypt

Egypt adopts a more relaxed position on interest.

Interest is payable at the rate set by the Central Bank of Egypt for (1) commercial loans and (2) amounts related to a trader's operations:

1. Loans taken out by traders for their business affairs are considered commercial loans.

2. If a trader incurs expenses on behalf of a client, they may claim interest from the client from the date of payment, unless agreed otherwise.

3. Interest is calculated based on the Central Bank's rate unless other arrangements are made. 4. Interest is paid at the end of each year.

If the debt is deferred for over one year, the relevant provisions apply. Understanding these country-specific perspectives is essential for legal professionals engaged in arbitration across the region.

Bahrain:

Bahrain's approach to interest, or riba, particularly in commercial contexts, offers a framework for charging interest on commercial loans, guided by the Law of Commerce. Here are the key points from your summary:

1. Interest on Commercial Loans: Interest can be charged at a rate set by the Bahrain Monetary Agency or as mutually agreed upon by the contracting parties, ensuring it does not exceed the legally applicable rate.
2. Delay Interest on Commercial Debts:
3. Claims for Damages: Creditors can claim additional damages along with delay interest without needing to prove that excessive damages resulted from the debtor's negligence or deceit.
4. International Arbitration: Parties are allowed to claim interest in the context of international arbitration, reflecting Bahrain's readiness to engage in global financial practices.

This legal framework supports both creditors and debtors in commercial transactions while maintaining a balance aligned with Bahrain's regulatory standards on financial practices. If you have more specific questions or need further information on related topics, feel free to ask!