Kenya’s Apex Court Clarifies Position on Interest Rates Increase by Banks and Financial Institutions

Interpreting Section 44 of the Banking Act
The Kenya Supreme Court [“the Court”], on 28 June 2024, issued a binding Judgment to the effect that banks and financial institutions regulated under the Banking Act are barred from increasing interest rates on loans without the approval of the Cabinet Secretary – Finance. Through its decision, the Court affirmed the applicability of Section 44 of the Banking Act [“the Act”] which states thus:

“No institution shall increase its rate of banking or other charges except with the prior approval of the Minister.”

One of the questions before the Court was whether or not, “rate of banking” under Section 44 of the Act had the same meaning, or included in its meaning, interest rates on loans - noting that the phrase is not defined under the Act. The Court applied a purposive interpretation of Section 44 to come to the finding that interest on loans fell within the term “rate of banking’ and increasing such interest was, therefore, subject to the approval of the Cabinet Secretary.

Justifying Regulation of Interest Rates
In reinforcing the importance to regulate interest rates, the Court considered a myriad of issues. This included, one, the contention that most developed and developing economies regulate interest rates. Two, that bank customers and other consumers of banking facilities have a right to consumer protection. Three, that loans ought to be affordable with the view to allow for access to financing. These reasons, among others, according to the Court, justified the position that interest rates cannot be liberalised or allowed to remain at the banks’ or financial institutions’ sole discretion. Further, the Court relied upon the Banking [Increase of Rate of Banking and Other Charges] Regulations which provides for the process through which a bank or financial institution can apply for the altering of its interest rates upwards to the Cabinet Secretary.

Parties’ Freedom to Contract
The Court also considered whether Section 44 of the Act, which required approval by the Cabinet Secretary before financial institutions could increase their banking rate [read interest rate for this purposes] , contradicted Section 52 of the Act which safeguards a bank’s freedom to contract with its customer[s]. Section 52[1] states thus:

“For the avoidance of doubt, no contravention of the provisions of this Act or the Central Bank of Kenya Act (Cap. 491) shall affect or invalidate in any way any contractual obligation between an institution and any other person.”

The Court held that the need to seek the Cabinet Secretary’s approval before altering loan interest rates did not contradict, in any way, the right of banks and their customers to enter into a contract on the applicable interest rates in respect of loan facilities. What Section 44 sought to safeguard against was the arbitrary and or unilateral increase of said agreed interest rates without the approval of the Cabinet Secretary as required under Section 44 and the aforesaid regulations.

Conclusion
Noting that the Supreme Court is the apex court in Kenya, its recent decision has far reaching implications on the manner in which interest rates on loan facilities may be increased by banks and/or financial institutions regulated under the Act going forward.

The Decision also gives banks a reason for pause to reflect and interrogate its implications in so far as past loan facilities issued to their clients (whether subsisting or otherwise) is concerned and particularly where said banks have increased their interest rates on said facilities based off changes to their base lending rates which in turn is based off changes to the Central Bank Rate. 

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This alert serves the purpose of general guidance and is not intended to constitute specific legal advice. For further legal advice with respect to this alert, please contact our Partner George.Muchiri@CMS-DI.com.

*Contributors
Zeus Ombeva, Principal Associate