When conducting commercial business in Egypt, businesses should be wary of a common misconception of the law, whereby, contracts may include clauses that are contrary to the law by confusing the types of interest applicable and exceeding the maximum permissible rate that may be agreed upon.
There are two types of interest, firstly moratory interest, namely, compensation due to the debtor's delay in fulfilling an obligation of payment. The law does not require proving the damage caused to the creditor as a result of this delay to be entitled to this type of interest.
Secondly, compensatory interest is interest payable due to the debtor's use of an amount of money stipulated in the contract, and whereby the debtor is obliged to pay interest as long as the debt remains owed by him until its maturity (i.e. until interest due by the borrower is paid, or deposited as a trust in any bank).
According to the law, the moratory interest rate is 4% in civil matters and 5% in commercial matters, and in all cases, it may not exceed 7%. The reason for this rule is the legislator's tendency to restrict extortion. On the other hand, the legislator excluded banking operations from being restricted by the maximum interest rate, since banking operations must be flexible, and in line with the policy of the state.
The basic principle is that the total interest received by the creditor must not exceed the capital. Commercial transactions are excluded from this principle (which concerns civil transactions) since a fixed interest may be applied.
We refer below to one of the cases initiated by our office, in which the Cairo Court of Appeal ruled for the nullity of an agreement between two companies as a result of the moratory interest exceeding 7%. The court stipulated that the creditor's agreement with the debtor which included a moratory interest rate exceeding 7%, was prohibited by article 227 of Civil Law and that the legislator obligates the creditor to reduce the interest to the applicable limit permitted by the law, while simultaneously prohibiting the creditor from receiving the excess monies and obligating him to refund them. The Court of Cassation later upheld this ruling.
Finally, the purpose of this article is to eliminate the confusion between moratory interest and compensatory interest, while emphasizing that any agreement on a moratory interest exceeding 7% is null and void and not permitted due to the public.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.