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In the years between 1991 and 1997 and more recently between September 2016 and November 2019, Kenya implemented interest rate caps to respond to concerns raised by the public regarding the high cost of credit.
During the periods in which a limit was set by statute, financial institutions were required to keep their lending interest rates within the prescribed statutory regulated limits and a failure to do so was unlawful.
In this alert, we discuss a recent case where the Court of Appeal, on 28 April 2022, pronounced itself on whether the amounts charged to borrowers over and above the statutorily prescribed interest rate limit, which was deemed to be unlawful, were recoverable.
Summary of the Case
1.Facts of the Case
The Appellant/Company appointed the Respondent/Bank as its banker back in 1993. Between 1993 and 1997, the Company applied for overdraft facilities from the Bank. In a contract between the two parties, it was agreed that the Bank would reserve the right to provide the facilities at a variable interest rate above its base lending rate (contractual interest rate). In addition to this, the Bank also retained the right to vary the base rate. From the facts, it is not disputed that every time the Bank varied the base rate, it notified the Company of having done so.
At the time, the Central Bank of Kenya (the CBK) pursuant to Section 39 of the Central Bank of Kenya Act, had capped the rate of interest to be charged by banks (statutory interest rate) and any bank seeking to increase its rate was required to seek the permission of the Minister of Finance.
Despite the cap, the Bank went ahead to charge the Company contractual interest rates that were higher than the statutory interest rate and therefore in contravention of the law. In September 2003, the discrepancy between the contractual interest rate and the statutory interest rate came to the attention of the Company who brought it to the attention of the Bank and asked the Bank to recalculate the interest in line with the statutory maximum. Initially, the Bank agreed to the recalculation but failed to follow through with this.
The Company then sought the services of interest recalculation and verification consultants. The findings by the consultants were that:
As regards to the first scenario, the consultants found that the Bank owed the Company more than KES 65 million (approx. USD 544,000) for charging interest over and above the statutory interest rate and in the second scenario, the results of the recalculation also indicated that the Bank owed the Company more than KES 10 million (approx. USD 84,000) for the miscalculation of the contractual interest rate. The parties tried but were unable to settle the matter amicably which resulted in the Company filing a suit against the Bank at the High Court in November 2004. The matter was first heard in the High Court and later, before the Court of Appeal.
2. The Case at the High Court
In the High Court, the three main issues for determination were:
Pursuant to the Limitation of Actions Act, actions founded on contract may not be brought after the lapse of six years from the date on which the cause of action arose. According to the Bank, the suit was based on a contract that spanned between 1993 and 1997. The Company had filed the suit in 2004 but the six-year period had lapsed in 2003.
On this issue, the Court found that the Bank and the Company were still in communication in August 2003 with respect to the verification of the period of interest. The Bank’s letters to the Company also showed that the Bank had severally requested for more time to retrieve its data which meant that the issue could not be resolved for some time. Furthermore, the Company had only become aware of its being overcharged interest in 2003. The Court therefore resolved that the suit was not time barred.
Up until its repeal by the Central Bank of Kenya (Amendment) Act 1996 (the CBK Act), Section 39 of the CBK Act allowed the CBK to determine and publish the maximum and minimum interest rate. After Section 39 was repealed, the only provision left to guide banks on how to treat their respective rates of banking, was section 44 of the Banking Act. This section provided that a bank could not increase its rate of banking or other charges without the approval of the Minister (in practice this mandate was carried out through the CBK). In the event that a bank increased its interest rates, the burden to prove that they had sought consent from the Minister fell upon it. The Court determined that the Bank had failed to prove that it had obtained consent of the Minister to charge interest above the statutory interest rate and had thus acted in an unlawful manner.
Further, pursuant to Section 52 of the Banking Act, no institution could be permitted to recover in any court of law interest and other charges which exceeded the maximum permitted under the provisions of the Banking Act or the Central Bank of Kenya Act. Therefore, the Court reasoned that the Bank should not be allowed to retain the sums that were paid to it in contravention of the interest rates limit set by statute.
Despite the above reasoning, the Court took a different trajectory when it came to the question of whether the sums charged over and above the statutory interest rate were recoverable. It restrained itself from interfering with the contractual agreement between the parties. It relied on the case of National Bank of Kenya vs. Pipeplastic Samkolit Kenya & Another  which held that a Court of law cannot rewrite a contract between the parties. The Court was also guided by the case of Fina Bank v Spares & Industries (Civil Appeal No 51 of 2000) which stated that:
“…it is ordinarily no part of equity’s function to allow a party to escape from a bad bargain”.
Therefore, the Court held that the only sum of money recoverable were the amounts charged over and above the stipulated contractual interest rate.
The relationship between a bank and its customer is one of a contractual nature. Typically, in the event of breach of contract, the party that has been wronged can file a suit before a court to retrieve damages for said breach. In this particular case, breach of contract had neither been alleged nor proved. The Court therefore stated that it would not award the Company any additional amounts to what was to be recovered, for charging amounts above the contractual interest rate.
The Company was dissatisfied with the ruling of the High Court given on 22 March 2018 and filed an appeal.
3. Court of Appeal
In April 2022, after deliberating on the issues brought before it by the parties, the Court of Appeal gave the following ruling:
On this, it agreed with the High Court’s reasoning and determined that the suit was not time barred.
The Court found that the Bank had charged interest over and above the prescribed limit without seeking the consent of the Minister of Finance, as was then the law. It also found that the mere fact that the Company had executed the letters of offer with the contractual interest rates did not give the Bank leeway to override the specific provisions of the law. The interest rate charged by the Bank under the terms of the contract with the Company was therefore deemed to be unlawful. However, on the issue of recoverability of this money, the Court agreed with the High Court’s reasoning. It too restrained itself from interfering with the wishes of the parties as expressed by the terms of their contract, and no money was awarded.
Just like the High Court, the Court of Appeal proceeded to determine that the only amounts recoverable, were the amounts charged over and above the stipulated contractual interest rate that had been as a result of a miscalculation by the Bank. It only disagreed with the High Court on the actual figure to be awarded to the Company. It ruled that the amount should have been higher than what the High Court had awarded. This, in our opinion, was due to an error made by the High Court as the sum, based on the recalculation done by the consultants, was higher than what the High Court had awarded.
As the law currently stands, Kenya has done away with interest rate caps. That said, for contracts that commenced before the interest rate cap was repealed, this case is extremely relevant. The case maintains the general attitude of the courts’ reluctance to interfere with the sanctity of contract. Whereas the Court agreed that the Bank had unlawfully overcharged the Company, it opted to rely on the principle that a contractual bargain is sacrosanct. It therefore seems that borrowers who have been charged interest at rates that are over and above the stipulated statutory interest rates (during periods where there was a prescribed interest rate limit) will not find relief in the courts and will be bound by the contracts that they have entered into with the lending institution.
 There had been controversy as to whether section 44 extended its application to interest rates. However, controversy was settled by the Court of Appeal in the case of Margaret Muiruri v Bank of Baroda (2014) where it held that Section 44 extended to the rates of interest.
 The courts have taken a similar position in a number of cases, including Desai & Others v Fina Bank (2000); Pelican Investment v National Bank of Kenya (2000); and Morris & Co v Kenya Commercial Bank & Others (2003).
Anne Mburu, Trainee Lawyer