Private lending may seem like an easy solution when someone needs quick access to cash, but in the UAE, this area of law comes with hidden traps. What many people assume is a simple financial arrangement can turn into a major legal problem, especially when interest is involved. This article will walk you through what private lending with interest really means under UAE law, its impact on lenders and borrowers, the key provisions you should know, the penalties for breaking the law, and what you can do if a lending dispute arises. Finally, we’ll explain how LYLAW can support you with proper legal representation in these sensitive cases.

What is Private Lending with Interest in the UAE?

Private lending with interest refers to individuals, companies, or entities loaning money while charging a percentage fee on top: he “interest.” It’s common in practice, especially between friends, business partners, and companies seeking temporary liquidity. You’ll often see:

• Business owners lending to cover unpaid invoices.
• Shareholders injecting short-term funds into their companies.
• Individuals lending at steep rates like 12%, 18%, or even 36%.
• Free zone companies informally lending to onshore parties.

However, legality is a different matter. While interest-based lending may feel practical, UAE law tightly regulates it. Unless done through licensed channels, these arrangements are usually invalid in the eyes of the courts.

 

What is the impact of these lending rules?

The impact is huge, both financially and legally. For lenders, it means that even carefully written agreements can be struck down if they weren’t set up through authorized channels. For borrowers, it creates protection against unlicensed interest-heavy contracts.

One real-life case illustrates this clearly: A free zone company lent over USD 1.2 million to a UAE resident at 24% interest, plus 35% default interest. While the borrower admitted to owing the principal, the court threw out the interest claim entirely. The reason? The lender lacked the legal authority to lend with interest.

This shows the ripple effect of the law: protecting borrowers from predatory rates, while reminding lenders that shortcuts in licensing and structure don’t hold up in court.

 

Key Provisions Governing Private Lending in UAE Law

The UAE has drawn sharp boundaries around lending with interest. The main provisions include:

• Regulation by Central Bank: Lending with interest is considered a financial activity that requires Central Bank licensing.
• Restrictions on Free Zone Companies: Free zone entities generally cannot lend to UAE residents without specific approvals.
• Contracts Without Authority are Void: Courts view loan agreements entered without lawful capacity as null from the start.
• Criminal Penalties for Unauthorized Lending: Lending with interest without proper licensing isn’t just unenforceable, it’s a criminal offense under the Penal Code.

 

What are the penalties for non-compliance?

The UAE Penal Code makes unauthorized lending with interest a punishable crime. Penalties include:

• Imprisonment: Minimum of one year behind bars.
• Fines: At least AED 50,000, with potential for higher amounts depending on severity.
• Invalid Contracts: Agreements charging interest without authorization are declared void, meaning lenders can’t enforce interest repayment.
• Reputational Damage: Companies or individuals caught in these arrangements risk regulatory scrutiny and permanent credibility issues.

These aren’t light slaps on the wrist. They’re designed to make sure financial activity stays under official oversight.

 

How to resolve lending disputes legally?

If a borrower doesn’t admit the debt, lenders still have some legal recourse. One of the most common remedies is unjust enrichment. This principle requires someone who has received money or benefit unfairly at another’s expense to return it, even if there’s no enforceable contract.

However, even with unjust enrichment, the key takeaway is this: you might recover the principal, but not the interest, if the loan was structured illegally.

 

How can LYLAW help with lending disputes?

Cases involving private lending and interest often feel straightforward at first, but as this article highlights, they quickly become legally explosive. That’s where legal representation matters.

At LYLAW, we specialize in analyzing lending agreements, identifying risks, and advising on whether a contract is enforceable. We also help clients navigate disputes,whether you’re a lender seeking to recover funds or a borrower defending against unfair claims.

If you’re dealing with a lending dispute or want advice before entering into a financial arrangement, contact us. Protecting your position legally now could save you significant losses later.