BY SAM ALFAN.
Interest rates charged on bank loans and overdrafts must be approved by the Treasury Cabinet Secretary.
The Supreme Court has declared that all bank charges, including interest rates, are subject to regulation to protect customers from exploitation.
However, banks and financial institutions are at liberty to negotiate chargeable interest with customers on condition that any increase must receive government permission.
The five-Judge bench, chaired by Chief Justice Martha Koome, ruled that interest charges on loans and other financial facilities were not ‘liberalised” but subject to scrutiny under the Banking Act and the Central Bank of Kenya (CBK) Act.
The main purpose of the restrictions imposed on banks was to provide oversight to ensure charges were reasonable and to protect customers from exploitation, the court pointed out in the unanimous decision.
“We find that interest rates on loans and facilities advanced by banks and financial institutions are subject to the regulatory process under Section 45 of the Banking Act. In addition, such banks and financial institutions are required to seek approval of the Treasury Cabinet Secretary prior to increasing interest rates on loans and facilities advanced to customers,” the court observed.
Under the law, the court pointed out, the CBK Governor has power to regulate bank charges, including interest rates.
The restrictions were meant to provide checks and balances in the banking industry to safeguard a level playing field, the court reasoned.
The elaborate regulatory process, involving the CBK Governor and the Treasury Cabinet Secretary, was to streamline government policy and inflation rate, among other considerations, the court said.
“Our interpretation of Section 44 of the Banking Act does not prohibit or prevent banks and financial institutions to bargain and enter into a mutual contract with respect to interest rates that will be applied to loan facilities. However, interest rates on loans and financial facilities are subject to regulation under Section 44 of the Banking Act.
“This means that while a contract that is mutually agreed by parties might provide the bank with the discretion to alter or vary interest on loans, that discretion is not absolute or unlimited,” Justices Koome, Deputy Chief Justice Philomena Mwilu and Justices Mohamed Ibrahim, Wanjala and Njoki Ndung’u said.
They dismissed an appeal lodged by Stanbic Bank challenging the judgment by Appellate Judges Hannah Okwengu, Milton Asike-Makhandia and Jamila Mohamed in favour of Santowel Ltd.
The appellate bench, in it’s decision made on April 28,2022 had upheld the judgment by High Court Judge Olga Sewe that Stanbic Bank had overcharged the firm interest rates on loans despite their mutual contract. Section 52(3) of the Banking Act prohibited the parties from entering into a contract that offended the Banking Act and the CBK Act, the Judge had said in the judgment rendered on March 22, 2018.
The Supreme Court affirmed the refund of Sh10,499,411 by Stanbic Bank to Santowels Ltd that was overcharged interest rates on several facilities between 1993 and 1997.
