Legal alert: Court issues orders to banks on rates of interests

Legal alert: Court issues orders to banks on rates of interests

REGULATION OF INTEREST RATES IN BANKING IN KENYA: THE CASE OF STANBIC BANK KENYA LIMITED V SANTOWELS LIMITED

Brief Facts of the Case

On 28^th June 2024, the Supreme Court in Petition No. E005 of 2023 Stanbic Bank Ltd -vs- Santowels Limited held that banks/financial institutions are required to seek the approval of the Cabinet Secretary responsible for matters relating to finance prior to increasing interest rates on loans and facilities advanced.

Stanbic Kenya Limited (the Appellant) and Santowels Limited (the Respondent) had a banking relationship where Stanbic provided various facilities to Santowels between 1993 and 1997. The terms included the ability to renew or extend the facilities and interest rates on the facility. Subsequently, Santowels began questioning the interest charges and upon engaging a Research Bureau, decided to move to Court claiming a refund for the alleged overpayment of interest.

The matter was canvassed all the way to the Supreme Court which set out the following issues for determination:

1. What is the correct interpretation of Sections 44 and 52 of the Banking Act?
2. What orders can issue?

Analysis

Section 44 of the Banking Act provides as follows;

44 “No institution shall increase its rate of banking or other charges except with the prior

     approval of the Cabinet Secretary.” (emphasis mine)

Section 52 on the other hand provides as follows;

 52 “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.”

Over time, there have been two schools of thought which have triggered different pronouncements by Courts of Law. On one hand, some of the decisions of the superior courts are to the effect that banks and financial institutions are required to obtain the Cabinet Secretary’s approval under Section 44 of the Banking Act prior to increasing the rate of interest on loans/facilities. On the other hand, is the position that banks/financial institutions do not require the Cabinet Secretary’s approval since the approval envisaged under Section 44 of the Banking Act does not apply to interest rates on loans.

In a bid to discern the intention of the legislature, the Supreme Court used the purposive approach to interpret the meaning of the phrase “rate of banking”. The court began by assessing the legislative intent of the Banking Act by looking at the preamble of the Banking Act which states that it is a law intended to “regulate the business of banking in Kenya” and for connected purposes.

The Court further relied on Section 2 of the Banking Act which defines banking business as entailing employing money held on deposit or on current account, or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money. Based on the foregoing, the Court decided that loans and facilities advanced by banks fall within the banking business. Based on the definition of rate as amount paid or charged for a good or service, the Court held that that the rate of banking relates to charges for the banking business/service offered by a bank/financial institution.

Does section 44 of the Banking Act conflict with Section 52 of the Banking Act?

In concluding this issue, the Court found that their interpretation of Section 44 resonates with Section 52 in that it does not prohibit or prevent banks/financial institutions to bargain and enter into a mutual contract with respect to interest rate that will be applied to loan facilities, however, such agreements ought to follow the provisions of Section 44 of the Act.

Conclusion

In conclusion, the Court noted that interest rates on loans and facilities advanced by banks/financial institutions are subject to the regulatory process under Section 44 of the Banking Act. In addition, that such banks/financial institutions are required to seek the Cabinet Secretary’s approval under Section 44 of the Banking Act prior to increasing interest rates on loans and/or facilities advanced to its customers.

Implications.

The Supreme Court puts to rest the highly contentious issue on the correct interpretation of “rate of banking” as to include interest charged on facilities advanced by the bank to borrowers. As such, an upward review of interest advanced on loans has been subjected to the provisions of Section 44 of the Banking Act and The Banking (Increase of Rate of Banking and other Charges) Regulations. Going forward, the Banks will be required to make an application submitted to the Cabinet Secretary for Treasury through the Governor of the Central Bank of Kenya.

On the applicability of this decision to pending and yet to be filed cases, the Supreme Court has previously held that a decision in principle applies retrospectively to all persons who, prior to the decision, suffered the same or similar wrong, whether as a result of the application of an invalid statute or otherwise, provided of course they are entitled to bring proceedings seeking the remedy in accordance with the ordinary rules of law such as a statute of limitations. It will also apply to cases pending before the courts i.e. matters or cases not yet finally determined. But the retrospective effect of a judicial decision is excluded from cases already finally determined.

There is therefore a possibility of fresh disputes between banks and their customers who might be challenging the interest rates and seeking refunds and/or damages. The decision is also likely to trigger other customers to review their loan agreements and also interest rates which may also lead to increased litigation.

Remedies Available

We recommend that the Bank should consider conducting a legal review of their existing loan agreements with their customers. This will help them understand the specific clauses related to rate changes and whether these clauses conflict with the new regulatory requirements. Depending on the findings of the legal review, banks may consider negotiating amendments to existing agreements with borrowers. However, in any event, the Bank can always engage us to provide a comprehensive legal opinion on the effect of the judgement on the Bank’s operations. In the event of any legal action been initiated, Karanja-Njenga Advocates is also well equipped to defend the interests of the Bank.

Share!