The Supreme Court has ruled that banks and financial institutions must seek the approval of the National Treasury before increasing interest rates on loans and facilities provided to customers.
A five-judge bench of the Supreme Court headed by Chief Justice Martha Kom also held that Sections 44 and 52 of the Banking Act do not conflict with or prohibit banks, financial institutions and their customers from bargaining and entering into a mutual contract on the interest rates to be applied on loan facilities.
However, the judges said that interest rates on loans are subject to regulation under Section 44 of the Banking Law, which states that “no institution may increase the rate of its banking or other fees except with the prior approval of the Minister.”
According to the court, while a contract mutually agreed upon by the parties may provide the bank with the freedom to change or alter interest rates on loans, this discretion is not absolute or unlimited.
The judges said: “In conclusion on this issue, we find that interest rates on loans and facilities provided by banks or financial institutions are subject to the regulatory process under Article 44 of the Banking Law.”
The court added that the Treasury Secretary’s approval before raising interest rates ensures that there is some degree of checks and balances or oversight to ensure that consumers of loan facilities are not exploited and that prices are reasonable.
The Banking (Increase in the Rate of Bank Charges and Other Charges) Regulations 2006 provide that an application for approval of an increase in the rate of bank charges or other charges under Section 44 of the Act must be made to the Minister through the Central Bank of the Governor of Kenya.
Other High Court judges who delivered the ruling included Deputy Chief Justice Philomena Mwilu, Justices Mohammed Ibrahim, Smokin Wangala and Njoki Ndung’u.
The judges were settling a long-running dispute between Stanbic Bank and Santophiles Ltd, a sanitary towel manufacturer.
The manufacturer said its relationship with the bank hit the rocks in 2002 when it began to have doubts about the interest the lender was charging. Consequently, the company paid its outstanding debts and closed its accounts with the lender in the same year.
Santwells subsequently contracted the Interest Rate Advisory Center (IRAC) to recalculate the interest charged on the Stanbic loans. The Interest Rate Advisory Center found that the bank overcharged the manufacturer interest amounting to Sh68 million.
The company moved to court to seek recovery of the excess interest.
The matter went to the Supreme Court where the parties sought the court’s interpretation of the two sections of the Banking Act.
The lender claimed in the second appeal that there were different judicial decisions on whether the provisions of Articles 44 and 52 of the Banking Law applied to other banking fees, commissions and rates but also to interest.
Stanbic Bank said there is uncertainty in the law as there are several contradictory decisions issued by the courts, on the issue of bank interest rate, interest rate changes and when ministerial approval is required.
Stanbic claimed that the regulations could not override the provisions of Section 52(1) of the Banking Act, in cases where contractual charges were already in effect.
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 in any way affect or invalidate any contractual obligation between an institution and any other person.”
However, Santofiels said the maximum rate that banks have the right to charge their customers under the law and as published by the Central Bank of Kuwait in the Official Gazette is 16.5 percent per annum on the reducing balance.
The court ruled that the interest charged was higher than the interest set by the central bank in 1997 and was therefore illegal.
The Supreme Court said the primary purpose of the Banking Act was to regulate banking in Kenya.
The judges added that “the main reason for capping and/or regulating interest rates is to protect consumers from predatory rates, increase access to finance, and make credit more accessible to all.”
The court found that the effect of repealing Article 39 of the Central Bank of Kuwait Law and Article 33B of the Banking Law did not fully liberalise the interest rates that banks and financial institutions could charge.
This means that regulation through fixed interest rates no longer applies, the court said.
In September 2016, the government imposed legal limits on lending interest rates at four percentage points above the central bank’s benchmark – which was then prevailing at 9 percent – and set the maximum borrowing rate at 13 percent.
These restrictions were overturned in 2019 after the Supreme Court found them unconstitutional.
The Supreme Court said that regulation by setting a ceiling on interest rates simply sets the parameters within which banks, financial institutions and their customers can negotiate or interact on the issue of interest rates.
“Based on our analysis and findings regarding Article 44 of the Banking Law, this provision plays a different but complementary regulatory role to that played by interest rates,” the judges said.
The bank was ordered to refund the manufacturer Sh10 million plus interest, an amount that was settled while the case was pending.