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Is it true that Saudi Arabia prohibits charging interest? What about UAE? Are there any states actually prohibit interest rates?

  • The second paragraph is kind of irrelevant to your question. Whether you individually think anything is "wrong" with interest rates has nothing to do with whether a country bans it. Perhaps consider removing it? – Thunderforge Jun 20 '18 at 19:06
  • While not precisely on point, there is a concept called "Islamic banking" which establishes transactions which are roughly equivalent to simple interest without compounding, but not to compound interest, that involve owning percentage interests in property or businesses that increase as more ownership units are bought over time, and renting the part that is not yet owned. – ohwilleke Jun 21 '18 at 2:51
  • A muslim friend, not me, told me that it's illegal in Arab Saudi because islamic laws prohibit it. I wanted to verify if it's true. – user4951 Jun 25 '18 at 6:26
  • See the Wikipedia articles on riba, usury and Islamic banking. – sjy Jun 25 '18 at 8:42
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In Saudi Arabia, it is legal to charge (and pay) interest. However, according to this source, a contract clause requiring interest is not enforceable. An interest clause is severable, so the contract is not at risk if interest is charged. This source indicates an exception, that the Saudi Arabian Monetary Authority Banking Disputes Settlement Committee may enforce interest clauses in banking transactions. In UAE, Article 204 of the UAE Civil Code says

If the subject matter of the disposition or the consideration therefor is money, its amount and type must be specified without any increase or decrease in the value of that money at the time of payment having any effect.

and Art. 714 says

If the contract of loan provides for a benefit in excess of the essence of the contract otherwise than a guarantee of the rights of the lender, such provision shall be void but the contract shall be valid.

Art. 76 of the Commercial Code explicitly allows charging interest for commercial transactions

A creditor shall have the right to demand interest on a commercial loan in accordance with the rate stipulated in the contract. If the rate of interest is not stipulated in the contract it shall be calculated in accordance with the rate prevailing in the market at the time of the transaction on condition that in this case it should not exceed (12%) per cent, until full settlement is made.

This article from 2002 (behind the paywall, sorry) provides further analysis for Abu Dhabi. This page discusses similar rules for Kuwait, where again commercial transactions are exempt from the civil prohibition against interest. It is not clear where the line is drawn, but I think "commercial" refers to borrowing money for a business purpose, as opposed to buying your house.

  • You talked about Arab Saudi. Then you talk about UAE. So is interest rate allowed in Saudi Arabia or not? – user4951 Jun 28 '18 at 1:15
  • As I say, it is legal to charge interest in KSA (and UAE), but the court will not enforce such a provision: except if it falls under the category of commercial transactions. – user6726 Jun 28 '18 at 2:00

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