Banks may raise loan interest under a contractual clause tied to Central Bank rates and charge compound interest

The principle

The relationship between a bank and its customers is governed by freedom of contract, so the parties' rights are set by the contract unless it breaches public order, and clear contract wording must be applied as written. A bank that raises the interest rate under a loan clause linking it to Central Bank decisions acts on the parties' joint agreement, not its own will. Charging interest on accumulated interest, even beyond the principal, is a known banking usage. A loan is a commercial act for both bank and borrower, whatever the borrower's status or purpose.

The case and the decision

The appellant had taken a personal loan of AED 325,262.10 from the respondent bank in 2009 and later a second personal loan of AED 1,500,000 to repay the first and to finance maintenance works on an annex to his home. Repayments, with interest, were deducted each month from his pension, which was paid into his account at the bank. After an earlier action between the same parties, he sued in 2021 for an order that the loan be settled in full on payment of whatever the court found due, for a clearance certificate, for the deductions to stop and for the account to be closed. Relying on a banking expert, the lower courts found that a balance remained and refused the claims. In cassation the appellant disputed the commercial nature of the loan and the interest charged. The Court of Cassation held that the bank-customer relationship is governed by freedom of contract, the parties' rights being defined by the contract unless contrary to public order, and that a judge must apply clear contract wording without departing from it. Where a loan contract allows the bank to raise the agreed interest rate in line with Central Bank decisions, using that clause reflects the agreement of both parties, since the rate is fixed by the Central Bank and not by the lender's will alone. It is a matter of common knowledge that banks calculate interest on accumulated interest, even where it comes to exceed the principal. Under Articles 5 and 410 of the Commercial Transactions Law, loans are commercial for the lending bank and for the borrower, whatever his status or purpose. The commercial character of this loan had also been settled by a final earlier judgment between the parties. As the appellant had not paid the balance found by the expert, he was not entitled to a clearance certificate. The appeal was dismissed.

Laws applied

In the court’s words

“العلاقة بين البنوك وعملائها. خضوعها لمبدأ سلطان الإرادة. مؤداه. تحديد حقوق طرفيه بالشروط الواردة بالعقد ما لم تكن مخالفة للنظام العام.”

Short quotation from the judgment as published by the court. The full judgment is on the court’s official service.

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