Banks and financial institutions must seek the approval of the Cabinet Secretary for National Treasury before increasing interest rates on loans and facilities advanced to customers, the Supreme Court has held.
A bench of five judges of the apex court presided by Chief Justice Martha Koome also held that Sections 44 and 52 of the Banking Act do not contradict or prohibit banks and financial institutions and their customers from bargaining and entering into a mutual contract concerning interest rates that will be applied to loan facilities.
However, the judges said interest rates on loans are subject to the regulation under Section 44 of the Banking Act, which states that “No institution shall increase its rate of banking or other charges except with the prior approval of the Minister.”
According to the court, while a contract that is mutually agreed by parties might provide the bank with the discretion to alter or vary interest rates on loans, that discretion is not absolute or unlimited.
“In conclusion on this issue, we find that interest rates on loans and facilities advanced by banks or financial institutions are subject to the regulatory process under Section 44 of the Banking Act,” the judges said.
The court added the approval of the Treasury Cabinet Secretary before increasing interest rates ensures that there is some check and balance or oversight to ensure that consumers of the loan facilities are not exploited and that the rates are reasonable.
The Banking (Increase of Rate of Banking And other Charges) Regulations, 2006, states that an application for approval of an increase in the rate of banking or other charges under Section 44 of the Act, shall be submitted to the Minister through the Central Bank of Kenya Governor.
Other Supreme Court judges who made the ruling were Deputy Chief Justice Philomena Mwilu, Justices Mohammed Ibrahim, Smokin Wanjala, and Njoki Ndung’u.
The judges were deciding a long-running dispute between Stanbic Bank and Santowels Ltd, a manufacturer of sanitary towels.
The manufacturer said its relationship with the bank hit the rocks in 2002 when it began having doubts concerning the interest charged by the lender. The company consequently paid its outstanding debt and closed its accounts with the lender the same year.
Santowels later engaged Interest Rates Advisory Centre (IRAC) Ltd to recalculate the interest charged on the Stanbic loans. IRAC found that the bank had overcharged the manufacturer interest amounting to Sh68 million.
The firm moved to court seeking a refund of the overcharged interest.
The matter moved to the Supreme Court as parties sought the court’s interpretation of the two sections of the Banking Act.
The lender argued in the second appeal that there are various court decisions on whether provisions of Sections 44 and 52 of the Banking Act apply to other bank charges, commissions, and rates but also to interest.
Stanbic Bank argued that there is uncertainty in the law as there are several contradicting decisions from the courts, on the question of rate of banking and interest variation and when ministerial consent is required.
Stanbic argued that regulations cannot override the provisions of Section 52(1) of the Banking Act, in cases where contractual charges are already in place.
The section states that "For the avoidance of doubt, no contravention of the provisions of this Act or the Central Bank of Kenya Act shall affect or invalidate in any way any contractual obligation between an institution and any other person."
Santowels, however, argued that the maximum rate that banks were entitled to charge their customers by law and as gazetted by CBK was 16.5 percent per annum on a reducing balance.
The court ruled that the interest it was charged was above what had been set by the CBK in 1997, hence illegal.
The Supreme Court said the primary objective of the Banking Act is to regulate banking business in Kenya.
“Secondly, the overarching reason for interest rate capping and/or regulation is to protect consumers from exploitative rates, to increase access to finance, and make credit affordable,” the judges added.
The court held that the effect of the repeal of Section 39 of the CBK Act and Section 33B of the Banking Act did not completely liberalise the interest rates that banks and financial institutions can charge.
Rather, it meant that regulation through capped interest rates was no longer in force, the court said.
The government in September 2016 imposed legal caps on lending rates at four percentage points above the Central Bank’s benchmark — then prevailing at nine percent — and set the maximum borrowing rate at 13 percent.
The caps were scrapped in 2019 after they were found unconstitutional by the High Court.
The Supreme Court said the regulation through the capping of interest rates simply set the parameters within which banks and financial institutions and their customers can negotiate or interact on the issue of interest rates.
“Based on our analysis and finding with respect to Section 44 of the Banking Act, the provision plays a different regulatory role yet complementary to that which capped interest rates played,” said the judges.
The bank had been ordered to refund the manufacturer Sh10 million plus interest, an amount which was cleared while the case was pending.
