Published: Jan 5, 2023

New UAE Laws – Part 1: The Effect of the New Commercial Transactions Law on the Islamic Finance Industry

The UAE cabinet has approved Federal Decree by Law No. (50) of 2022, Promulgating the Commercial Transactions Law (“Commercial Transactions Law“). The Commercial Transactions Law came into effect on 2 January 2023. 

Commercial Transactions of Islamic Finance Institutions

The UAE is a key hub for Islamic finance with substantial growth expected in the market. In light of this, the UAE government has sought to develop and expand the laws governing the Islamic finance industry.

Against that background, the new Commercial Transactions Law includes various provisions which specifically address and impact the Islamic finance industry. This includes consideration of the common structures utilised in Islamic finance, including Murabaha, Istisna, Ijarah and Salam. We look at some of the main highlights in this alert. 

Recognition of UAE Central Bank and Higher Sharia Authority

There is an acknowledgement in the Commercial Transactions Law of the role of UAE Central Bank and Higher Sharia Authority with respect to Islamic finance, including the ability to issue regulations pertaining to the relevant sections of the law as contemplated by the UAE Banking Law (Law No 14 of 2018).

Scope of the changes

The Commercial Transactions Law applies to, amongst others, Islamic finance institutions. An Islamic finance institution means any institution that states in its Articles or Memorandum of Association that it shall carry out its business or activities in accordance with the rulings of Islamic Sharia. This includes financial institutions that carry out some of their business in accordance with Islamic Sharia. Accordingly, conventional banks with Islamic subsidiaries, branches or windows offering Sharia compliant products and services will be bound by the relevant provisions of the Commercial Transactions Law.


Of note, Article 473.1 of the new Commercial Transactions Law, details provisions which are out of scope for Islamic finance institutions. Article 473.1 provides that Islamic financial institutions are not permitted to borrow or lend with interest or benefit by any means nor to accrue or charge interest or benefit on any overdue debt including delay interest even by way of compensation.

The prohibition of charging interest in Islamic finance is deeply rooted in the principles of Sharia. However, the new Commercial Transactions Law appears to expand the prohibition to also include a prohibition on charging delay interest by way of compensation. Accordingly, any claim made by an Islamic finance institution against a debtor must be for no more than the actual and direct expenses incurred by the finance institution and cannot include any opportunity costs.

Promises in Islamic finance

Article 475 of the Commercial Transactions Law details the consequences applicable if a party reneges on a promise to contract. A promise to contract is an undertaking by one of the contracting parties to conclude a specific contract in the future. If a promisor reneges on performing what was promised without a reasonable excuse, the promisor will be required to compensate the promisee. In such event, the compensation will be restricted to the amount of the actual and direct damage sustained by the promisee.

Passing on expenses

The Commercial Transactions Law, notably at Article 495 (3), deals with insurance and basic maintenance of leased assets (ijarah). The provisions provide that the expenses of basic (ordinary) maintenance of a leased asset and the insurance costs will be borne by the lessor. The lessor is not permitted to charge them to the lessee or to have an agreement to add such costs automatically to the rent, with any such agreement being void. This will likely necessitate financial institutions to consider how such expenses are dealt with in their ijarah products.


The provisions in the new Commercial Transactions Law recognise the importance of Islamic finance within the UAE ensuring common structures and issues are addressed. While alignment has arguably occurred under the supervision of the UAE Central Bank and Higher Sharia Authority, it will be interesting from a legal perspective to see how the provisions will be interpreted and applied in the UAE.

How can we help?

Al Tamimi & Company’s Banking and Finance team regularly advises Islamic finance institutions and has unrivalled experience in the Middle East and North Africa (MENA) region. If you require any further information, please contact us.