A common concern among lenders is whether Qatari law allows
the payment of interest on loans.
The main concern derives from the fact that interest is
generally prohibited under the Islamic Shariah, which is
embedded in many provisions of law in Qatar. For instance,
article 1 of the Qatari Constitution provides that Islam is the
state's religion and the Islamic Shariah is the main source of
its legislation. Article 1 of Qatari Law No. 22 of 2004 (the
Civil Code) provides that in the absence of other legislation,
the judge must decide according to the requirements of the
Charging interest and, more generally, remunerating a
lender, is a concept that is generally considered as valid and
enforceable around the world. However, in Qatar, one needs to
differentiate between loans granted by licensed financial
institutions and loans granted by all other parties.
As a general rule, interest on loans other than loans
granted by licensed financial institutions is not permitted in
Qatar, pursuant to the provisions of the Civil Code.
Article 568 of the Civil Code provides that:
If the loan contract included remuneration in excess of
the lent monies under the contract, excluding the necessary
guarantees securing the lender's right, the remuneration
condition shall be void but the contract as a whole shall
Accordingly, assuming the absence of special banking laws
and regulations, loans must be interest free and the
restitution of the principal amount (in the case of a loan of a
sum of money) is the borrower's only obligation under the
However, article 268 of the Civil Code provides that:
If the obligation concerns an amount of money which the
debtor fails to pay after being notified and the creditor
proves that he has suffered damage as a result, the court may
order the debtor to pay damages observing the principles of
The court may therefore decide that the borrower must pay
damages as a result of its failure to repay its due debt.
While interest on loans is generally prohibited under the
Civil Code when the lender is not a licensed financial
institution, the situation is completely different when the
loan is granted by a local bank (or a branch of a foreign bank)
licensed to conduct banking activities by the Qatar Central
The QCB law No 13 of 2012 (QCB Law), allows banks to charge
interest in accordance with the QCB regulations.
The QCB Instructions to Banks (QCB Instructions) also
clearly state that licensed banks have the discretionary power
to apply or not to apply interest. Therefore, disregarding any
issues relating to banking monopoly rules in Qatar, a foreign
bank that does not have a branch licensed by the QCB to carry
out banking activities in Qatar, may find that the local courts
invalidate the interest applied on Qatari law-governed loans.
In order to mitigate this risk, foreign banks entering into
transactions with Qatari borrowers often choose a foreign law
to govern their loan documentation and submit any disputes that
arise in connection with their loan to international
Despite the QCB Law provisions and the QCB Instructions,
which authorise the application of interest on loans, the
Qatari courts have a conservative view in respect of interest
and default interest application, even for loans entered into
by licensed banks in Qatar.
This conservative view and refusal to admit the right to
apply interest and default interest for banks in Qatar, had
caused confusion in the banking sector for several years. This
confusion was resolved when the Qatar Court of Cassation, in
several rulings in 2010, overruled decisions of the Court of
Appeal which did not uphold the agreement of the parties in
respect of application of interest and default interest in a
loan transaction between a licensed bank and its customer.
In its decision, the Court of Cassation noted that loans
granted by banks in Qatar were to be considered as commercial
acts. It further noted that article 110 of law No. 33 of 2006
(the previous QCB Law), which states that 'the QCB has the
right to apply interest or revenue to be determined by the QCB
on scheduled credit facilities unless the agreement between the
lending financial institutions with its customers states
otherwise', clearly provided for a bank's right to apply
interest on loans.
The Court of Cassation also clarified that interest could
either be so-called compensatory interest or default interest.
According to the Court's definition, compensatory interest
applies in return for lending an amount of money to be used by
the debtor for an agreed maturity. Default interest applies if
the debtor fails to pay the due amount of the loan on its due
date. In this decision, compensatory interests refers to the
contractual interest payments agreed between the bank and its
The Court of Cassation has also clarified that banks have
the right to claim default interest in addition to compensatory
interest even if the agreement between the banks and their
clients did not stipulate for the application of such default
However, in 2012 the Court of Cassation rendered a judgment
upholding the Court of Appeal's ruling which granted the
claimant the full amount of the principal in addition to a lump
sum compensation of QAR 100,000 (approximately $27, 000).
The Court of Cassation refused the bank's argument regarding
the application of the default interest agreed upon in the loan
agreement. The Court of Cassation confirmed the Court of
Appeal's authority to deal with the issue of measuring damages.
Finally, the Court confirmed that the compensation amount of
QAR 100,000 had accounted for and included the date the
defendant fell behind on his repayments until the date the
judgment was issued. This timeframe, in the Court's estimation,
was valued appropriately.
The 2012 judgment has significant implications for
day-to-day transactional banking activities conducted in Qatar.
In considering this case the Court appears to have overlooked
the substance of the terms agreed between the parties regarding
the interest rate. In addition, the ruling contradicts the
Court of Cassation previous ruling of 2011, which confirmed the
enforceability of the interest rate stipulated in the loan
contract. As such, the interest associated with facility
agreements granted by banks in Qatar remains a grey area with a
lot of unpredictability.
Hani Al Naddaf