Why banks are not free to raise interest rates on loans
Chief Justice Martha Koome during the swearing in of Samson Omwanza Ombati as LSK male representative to The Judiciary Service Commission in Nairobi on May 14, 2024.
What you need to know:
- Supreme Court judges decided a long-running dispute between Stanbic Bank and Santowels Ltd.
- Matter moved to the apex court as parties sought interpretation of two sections of the Banking Act.
Banks and financial institutions must seek the approval of the Cabinet Secretary for National Treasury before increasing interest rates on loans and facilities advanced to customers, the Supreme Court has held.
A bench of five judges of the apex court presided by Chief Justice Martha Koome also held that Section 44 of the Banking Act does not contradict Section 52 of the Banking Act or prohibit banks and financial institutions and their customers to bargain and enter into a mutual contract concerning interest rates that will be applied to loan facilities.
However, the judges said interest rates on loans are subject to the regulation under Section 44 of the Banking Act.
Interest rates on loans
According to the court, while a contract that is mutually agreed by parties might provide the bank with the discretion to alter or vary interest rates on loans, that discretion is not absolute or unlimited.
“In conclusion on this issue, we find that interest rates on loans and facilities advanced by banks or financial institutions are subject to the regulatory process under Section 44 of the Banking Act,” the judges said.
The court added the approval of the Cabinet secretary before increasing interest rates ensures that there is some check and balance or oversight to ensure that consumers of the loan facilities are not exploited and that the rates are reasonable.
Other judges were Deputy Chief Justice Philomena Mwilu, Justices Mohammed Ibrahim, Smokin Wanjala, and Njoki Ndung’u.
Long-running dispute
The Supreme Court judges decided a long-running dispute between Stanbic Bank and Santowels Ltd, a sanitary towels maker. The matter moved to the apex court as parties sought its interpretation of the two sections of the Banking Act.
The lender argued in the second appeal that there are various court decisions on whether provisions of Sections 44 and 52 of the Banking Act apply to other bank charges, commissions, and rates but also to interest.
Stanbic said there is uncertainty in the law as there are several contradicting decisions on the question of rate of banking and interest variation and when ministerial consent is required.
Section 44 of the Act says, “No institution shall increase its rate of banking or other charges except with the prior approval of the minister.”
