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Abu Dhabi, UAEMonday 19 November 2018

UAE legal Q&A: can a bank increase my loan interest rate?

A reader asks if it is legal for a bank to change the interest rate on a loan two years into the payments

I was offered a loan with a 4.7 per cent interest rate at a bank, which I accepted. After two years of paid instalments, the bank changed the interest rate to 10.7 per cent under the claim that the owner of my employing company has changed. Is that legal? If not, what can I do?

I am assuming that the interest was contractually fixed on 4.7 per cent and agreed between the customer and the bank on the loan documents to be paid in installments. If that is the case, then the basis of charging the interest condition was contractual and it binds the bank during the whole loan period.

Changing the owner of the employer company is not a valid and legal justification for the bank to change and increase the interest. If the bank did this, then this is a clear breach of the contract and the laws.

As the regulator and supervisor of all banks in UAE, this is governed by the Central Bank's rules. Under UAE law, the customer has the right to do the following:

  1. Raise a complaint against the bank with the relevant departments, like the Legal and the Compliance Sections.
  2. File a complaint with the UAE Central Bank.
  3. Seek the legal procedures before the court.

The above legal concepts are governed by the Article 409 of the Federal Law No. (18) of 1993 Issuing the Commercial Transactions Law, which states “A bank loan is a contract according to which the bank delivers to the borrower a sum of money as a loan or enters such sum in the credit side to his account with the bank according to the conditions and time limits agreed.”

The article also states that the borrower shall be bound to repay the loan and its interests to the bank within such time limits and according to such conditions as are agreed.

Bank loans are also governed by the Article 125 of the Federal Law No. (5) of 1985 On the Civil Transactions Law of the UAE, which states “a contract is the meeting of an offer issued by one of the contracting parties with the acceptance made by the other party and their concordance in such a manner as to produce their effect on the object of the contract and results in a binding obligation on each party in consideration of the obligation of the other party.”

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