Banks to Seek Treasury CS’s Approval Before Increasing Interest Rates – Court 

Banks and financial institutions are required to seek approval of Treasury Cabinet Secretary before increasing interest rates on loans and facilities advanced to customers, the apex court has ruled. 

This is in accordance with section 44 of the Banking Act.

The seven judge bench presided by Chief Justice Martha Koome also held that section 52 of the Banking Act does not conflict with section 44 and does not prevent banks and customers from negotiating and agreeing on interest rates for loan facilities.

Even if a mutually agreed contract allows the bank to change the interest rates, they say, the bank’s discretion is still subject to the regulations under section 44, meaning it is not absolute or unlimited.

‘’The court’s interpretation of section 44 of the Banking Act neither contradicts section 52 of the banking act nor prohibits banks/financial institutions and their customers to bargain and enter into a mutual contract with respect to interest rates that will be applied to loan facilities. However, the interest rates on loans/facilities are subject to the regulation under section 44 of the banking act,’’ the court ruled.

CJ Koome, lady Justice Philomena Mwilu, Justices Mohamed Ibrahim, Dr Smokin Wanjala, Njoki Ndungu, Isaac Lenaola and William Ouko said that the loans and facilities advanced by banks fall within the banking business.

According to them, the banking business is the accepting from members of the public of money on deposit repayable on demand or at the expiry of a fixed period or after notice.

They further say a bank or financial institution should disclose all the interest rates charged, applied by banks on loans and facilities advanced before granting a loan to a borrower.

“The regulation through the capping of interest rate simply set the parameters within which banks and financial institutions and their customers can negotiate or interact on the issue of interest rate.’’

‘’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,’’ ruled the court.

The ruling follows a case between Stanbic Bank and Santowels Limited on the premise of a relationship between a banker and customer.

The dispute was centered on whether the interest rates were subject to regulation under the Central Bank of Kenya (CBK) and the Banking Act or were entirely subject of the parties’ contract.

Stanbic Bank had advanced a loan and overdraft facilities to Santowels limited between 1993 and 1997, with terms allowing for interest rate variations.

However, a disagreement over the applied interest rate led to litigation.

Both the High Court and Court of Appeal found that banks must seek approval of the CS national treasury before increasing the rate of interest as stipulated under section 44 of the Banking Act.

Dissatisfied with the court of appeal’s ruling, Stanbic Bank moved to the Supreme Court, arguing that the interpretation of section 44 and 52 of the banking Act was of general public importance.

The Supreme Court however dismissed both stanbic bank’s appeal and Santowels Limited’s cross-appeal which contested the amount of overcharged interest awarded by the court of appeal

‘’A declaration do hereby issue 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 that, such 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,’’ ruled the Apex court.