10 Dec 2020

Shari’a Law and the Legality of Charging Interest

With Shari’a law being a primary source of legislation in Bahrain, how does the law allow for the charging of interest?

Article 2 of the Constitution of Bahrain states that Islamic Shari’a is a principal source for legislation. But is it the only source? And how does Bahraini law allow for charging interest – a patently non-Shari’a compliant act – if Shari’a law is to be applied?

In one of its key judgments, the Court of Cassation concluded that article 2 of the constitution represents guidance to the legislative branch that Shari’a shall be considered as a principal/main source in respect of the issued laws. In other words, Shari’a is not the only source of legislation.

The Court of Cassation justified charging of interest in commercial debts as an exception to the Shari’a rule which normally prohibits charging interest. The Court of Cassation further indicated that the restriction on charging interest in civil debts as per Article 228 of the Civil Code represents an application of Shari’a law in this regard.

Article 228 of the Civil Code is a matter of public policy; As such, the court, may, at its discretion nullify any agreed or charged interest. For instance, the Court of Cassation nullified the interest charged by a law firm in respect of its outstanding professional fees on the basis that the practice of law does not fall under “commercial activities”.

It is important to highlight that the Court of Cassation does not allow combining pre-agreed interest on the loan amount with the delay interest.

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