Executive Summary
Courts have been divided on whether section 44 of the Banking Act requires lenders to seek regulator approval before revising their loan interest rates. Lenders argue that where there is a contractual provision, Regulators should not interfere in the legal contract.
The specific conflict arises whether the section 44 which states “No institution shall increase its rate of banking or other charges except with the prior approval of the Minister.” includes loan interest rates when referring to “rate of banking”
The Supreme Court’s decision conclusively settled the matter in pronouncing that indeed, interest rates from loans fell within the scope of banking rates envisioned under section 44 of the Banking Act. This therefore means that all lenders require the permission of the Cabinet Secretary before adjusting their interest rates.
Background
The case spanning all three Superior Courts had its genesis as a loan agreement entered into by Santowels and Stanbic Bank in 1993. The Bank extended another facility to the Respondent which the latter continued to service. The loan agreement between the parties gave the bank the authority to review the interests rates, which it would inform Santowels of periodically and the latter would comply by making the requisite loan repayments.
Around 2002, the Respondent became apprehensive of the interest being claimed by the bank and paid all its outstanding debts and close its accounts with the Appellant. It then proceeded to secure the services of an auditor to audit its debt and interests with the Bank. It informed the bank of the new auditor and requested that their auditor be accorded cooperation. The results of the audit revealed that the Bank had overcharged the Respondents interest rates, which the Bank denied and the Respondent proceeded to institute a suite in the High Court.
In the High Court
The High Court determined three issues including whether the suit was time barred, whether excessive interest had been charged, and if so, how much refund was the Respondent entitled to.
The High Court agreed with the Respondent that the suit had been filed within time in accordance with the Limitations of Actions Act because it had noticed the discrepancies in 2002 upon conducting the audit. The Court disagreed with the Appellants claim that the action arose between 1993 and 1997 when the facilities were given.
On whether excessive interest was charged, the High Court stated that the operative law at the time was Section 39 of the Central Bank of Kenya Act which gave the Governor the discretion to set and cap interest rates. It also noted that upon its repeal, the regulation of interest rates was premised on section 44 of the Banking Act which mandated Banks to seek approval of the Cabinet Secretary before increasing its rate of interest. The High Court pointed out that the approval was not sought, and concluded that since operative rate was 16.5%, the Bank overcharged the Respondent to the tune of Kshs 8,498,764.03.
In the Court of Appeal
Both parties took issue with the High Court’s finding with the Respondent asserting that the Court ought to have found the amount due to be Kshs 68,986,536.28 based on the capped rate of interest.
The Bank on the other hand argued that the Court faulted in its judgement by stating that Bank’s required approval before amending its interest rates which went contrary to section 52 of the Banking Act that prevented the CBK from interring with lawful contracts. They further argued that the Section 44 that the High Court relied on, referred to other bank charges other than interest rates.
The Court of Appeal agreed with the High court to the extent that the Bank indeed required approval before revising their interest rates. They however found no legal basis for applying 16.5% as the capped rate because the relevant law had already been repealed. The Court of Appeal then proceeded to compute the over payment using the contractual figures and stated that the Bank had overcharged the respondent to the tune of Kshs 10,449,411.74
In the Supreme Court
Still aggrieved by the decision and insisting on their position that section 44 of the Act does not apply to interest rates, the Bank appealed to the Supreme Court seeking, inter-alia, an interpretation of the law.
The Supreme Court upheld the decision of the High Court and Court of Appeal in stating that Section 44 of the Banking Act mandates Banks and Financial Institutions to seek the approval of the Cabinet Secretary before updating their interest rates. It added that although Section 52 of the Act prohibited the CBK from interfering with the freedom of contracts of Banks and their customers, where those contracts included terms that departed from set rates, they still required the approval of the Cabinet Secretary.
The Supreme Court also upheld the refund price of Kshs 10,449,411.74 as stated by the Court of Appeal.
