Compound interest is a well-known economic factor that significantly increases the cost of loans, often leading to repayment difficulties and individuals accumulating substantial debt. This high interest raises borrowing costs for businesses, thereby, hindering competition and reducing opportunities for equitable growth. In response to these issues, the United Arab Emirates (UAE) Federal Supreme Court issued a ruling prohibiting the calculation of compound interest (interest on accumulated interest) under the Commercial Transactions Law and the UAE Central Bank Law.
Furthermore, to prevent obstacles to development, the total interest charged must not exceed the principal amount of the loan itself. The court also banned indirect usury, recognizing that ‘interest’ creates a deficit for the debtor when debt servicing surpasses their repayment capacity. Therefore, this decision helps develop the economy, a goal it has achieved, leading to increased commercial activity and projects. In this regard, the Kingdom of Saudi Arabia has long implemented a moratorium on interest on loans, particularly compound interest. When the case reaches court, the interest meter stops, and the principal amount is sufficient. Compound interest is also inconsistent with the philosophical foundation of the laws in force in the Arab and Islamic worlds, derived from Sharia law, particularly in the Gulf and other Arab countries.
The essence of compound interest is to incapacitate, impoverish and monopolize. This is why most countries around the world have abandoned it, developing their economies in a manner consistent with equality of opportunity and a commitment to unhindered innovation. Hence, creditors’ reliance on this principle in Kuwait is based on a corrupt principle that is inconsistent with the Constitution and the laws prohibiting usury. Moreover, circumventing the text is not in the interest of the creditor, as compound interest in this case renders the borrower insolvent and potentially leads to bankruptcy to avoid claims. The loss falls more heavily on the financial institution or the creditor than on the borrower, who is freed from the bondage of debt.
In contrast, the law empowers judges to impose a onetime, not compound, seven percent interest rate based on a restriction to prevent the loan from becoming usurious, while protecting the debtor from exploitation and the economic system from exorbitant interest rates. However, the matter does not end there. Bank transactions are exempt from this restriction, and here lies the problem for borrowers, which prompted many of them to declare bankruptcy.
The Central Bank must address this pressing issue for the public. The current situation, marked by stringent legal action, made debt repayment difficult for borrowers. As a result, lenders also suffered, experiencing a doubling of their losses rather than having any benefit. Based on this, the legal maxim, “the penalty is on the one who exceeds the limit,” was established.
In both cases, there is a double loss for the debtor and the creditor, as well as disruption of the economy. To foster economic growth, it is imperative that the relevant authorities and the judiciary address the issue of compound interest by following the examples of Saudi Arabia, the UAE and most other nations that have prohibited it. Interest payments should not exceed the principal amount of the debt. This approach will consider the circumstances of the people and stimulate the economic development of the country.
