Qatar: Charging interest
A common concern among lenders is whether Qatari law allows the payment of interest on loans
Hani Al Naddaf
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 Islamic Shariah.
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 remain valid.
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 loan.
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 justice.
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 Bank (QCB).
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 arbitration.
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 customers.
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 interest.
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