Welcome to Lawgical with Ludmila, where we untangle the legal knots so you do not have to. I am Ludmila Yamalova, a United States-qualified lawyer based in Dubai. In each episode, we break down complex law into clear, practical insights you can actually use.
Today, we are diving into one of the UAE’s most underestimated legal traps: loaning money with interest. Why is this important? Because here in the UAE, as many of you know, private lending is everywhere.
Whether it is between friends, family members, business partners, or even companies helping others with temporary liquidity, it is incredibly common. And often, that help comes with strings attached—specifically interest. It is not unusual to see business owners lending each other money while waiting on invoices, or shareholders injecting temporary funds into companies.
Or individuals loaning large sums with 12%, 18%, or even 36% interest, and free zone companies lending to onshore parties in informal arrangements. But while this may be common in practice, it is not necessarily legal. The case we are discussing today is a perfect illustration of how something that feels practical can turn into something very legally explosive.
Private Lending in Practice
Before we discuss the case, let me share some real-world examples from my practice. Over the last year or two, I have seen at least five to ten such private lending arrangements.
For example, a yoga teacher invested his hard-earned savings with a company recommended by friends and associates who had been investing with it for years. The draw? A promised return of 25%.
Now, why would someone agree to loan money at 25% interest to a non-bank entity? The answer is simple: banks do not offer that kind of return. At best, a bank might give you 5–7% under very specific conditions, but usually it is 1–2%. So when you compare that to 25%, the appeal is obvious. Add to that the reassurance that friends and colleagues have done it successfully, and it starts to feel secure—even though it is not.
The problem is that in such cases, people often do not perform proper due diligence. They do not check trade licenses, shareholder structures, or even whether the person signing documents is legally authorized to do so. They rely on trust, reputation, and hype.
Fast forward a few months in that example, and the company suddenly closed its doors. The investor had nothing more than a few loose documents and WhatsApp messages. He lost nearly 100,000 dirhams and had no real legal recourse.
The Legal Framework
Private lending with interest is not a casual activity in the UAE—it is a regulated financial service.
When you loan money, you usually draft an agreement outlining the repayment of the principal and interest. However, the enforceability of that agreement depends on legality. If the lender is not licensed by the proper authorities—such as the UAE Central Bank, the DIFC regulator, or other financial authorities—the entire agreement can be deemed invalid.
This is not just a civil issue. Lending money with interest without proper licensing is a criminal offence under the UAE Penal Code. It carries penalties of at least one year in jail and a minimum fine of 50,000 dirhams.
That is exactly what happened in the case I am discussing today.
The DIFC Case: Freddie Inc. v. Sunnyside Up
In this real case, a free zone company, which we will call Freddie Inc., loaned around 1.5 million dollars to a UAE resident, whom we will call Mr. Sunnyside Up.
The agreement was subject to DIFC jurisdiction and included 24% interest plus a 35% default penalty. Freddie Inc. believed that because the DIFC is a business-oriented court staffed by senior foreign judges, the agreement would be enforceable.
Initially, Mr. Sunnyside Up paid interest, but eventually defaulted. Freddie Inc. filed a case in the DIFC court seeking repayment of both the principal and the agreed interest.
To their surprise, the DIFC court dismissed the entire agreement as invalid.
Why? For two main reasons:
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Licensing Violations: Freddie Inc.’s free zone license did not permit it to transact with UAE residents outside its free zone. By loaning money to an onshore individual, it had already broken the law.
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Unlicensed Financial Activity: Lending money with interest is a regulated financial service. Freddie Inc. was not licensed by the Central Bank or any other regulator to conduct such activity. That made the entire transaction unlawful.
Because the agreement was deemed void, the court did not even bother assessing whether the 24% or 35% interest rates were fair. The agreement simply did not exist in law.
Freddie Inc. not only lost its claim to the principal and interest but also had to pay significant court and legal fees.
Lessons and Legal Nuances
The human element here is clear: everyone is tempted by quick, high returns. A 25% interest rate sounds like a dream compared to 5% at the bank. But legally, it is a nightmare.
If something seems too good to be true, it usually is. And in the UAE, if you loan money with interest without being licensed, you are not just risking your investment—you are exposing yourself to criminal liability.
The only potential recourse for Freddie Inc. was to pursue the principle of unjust enrichment in local courts, arguing that Mr. Sunnyside Up unfairly benefited from the money. But even then, only the principal could be recovered—not the interest or penalties.
Key Takeaways
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Lending money with interest in the UAE is a regulated activity.
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If you are not licensed, any agreement you sign is invalid.
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Courts will not enforce interest or penalties from such agreements.
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At best, you may recover your principal through a separate unjust enrichment claim.
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The UAE legal system prioritizes regulation and consumer protection over informal lending practices.
Conclusion
This case is a wake-up call for anyone who thinks lending money with interest is a simple handshake deal. In the UAE, the legal framework is crystal clear: you must be licensed to engage in such activities. Otherwise, your agreement is worthless in court.
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Until next time—stay informed, stay safe, and keep things Lawgical.
