On 27^th June 2024, the Supreme Court delivered its judgment in Supreme Court Petition Number E005 of 2023 Stanbic Bank Kenya Limited versus Santowels Limited and held that interest rates on loans and facilities advanced by banks and financial institutions are subject to the regulatory process under Section 44 of the Banking Act, which provides for prior approval by the Cabinet Secretary before increasing the rate of banking charges.

Section 44 of the Banking Act states, “No institution shall increase its rate of banking or other charges except with the prior approval of the Cabinet Secretary.”

The matter before the Supreme Court arose from proceedings commenced in the High Court between Santowels Limited (“Santowels”) and Stanbic Bank Kenya Limited (“Stanbic Bank”). The complaint by Santowels was that Stanbic Bank charged interest on banking facilities in excess of 16.5% per annum which Santowels argued was, by law, the maximum permitted interest. Santowels put forward an alternative claim that the interest charged exceeded the contractually agreed rates of interest. It claimed a refund of the overpayments.

Whether section 44 of the Banking Act applies to the rate of interest charged by banks on loans and credit facilities has been a contentious issue.

The first position argues that section 44 of the Banking Act was never intended to control the rate of interest and that this only applied to banking charges such as leger fees. The regulation of interest rates to be charged on loans was left to the now repealed section 39 of the Central Bank of Kenya Act (CBK Act) which provided that CBK may, from time to time, and after consultation with the Minister of Finance, determine and publish the maximum and minimum rates of interest which banks and financial institutions may pay on deposits and charge for loans.

While section 39 of the CBK Act existed, interest had always been controlled under the CBK Act and not the Banking Act. Section 33B was then enacted in 2016 and introduced the maximum interest rate chargeable on a credit facility. With the repeal of section 39 of the CBK Act and section 33B of the Banking Act, the position that was then taken was that the interest rates that would be charged on a credit facility was a matter of contract to be negotiated and agreed by the parties.

The contrary position, which is reflected in the Court of Appeal’s decision in Margaret Njeri Muiruri v. Bank Baroda (Kenya) Ltd. Civil Appeal No. 282 of 2004, concludes that once interest is agreed upon, and an agreement is entered into which in effect gives a lender the discretion to vary the interest, the discretion to increase interest is subject to supervision by the Cabinet Secretary under section 44 of the Banking Act.

In its judgment, the Supreme Court acknowledged that there have been contradictory interpretations of section 44 of the Banking Act and courts have been divided on whether banks are required to seek the approval of the Cabinet Secretary before increasing the rate of interest charged on facilities. The Supreme Court, upon considering the arguments of the parties, held that:

• The term “rate of banking” as employed by Parliament under section 44 of the Banking Act includes and covers interest rates charged or applied by banks on loans and facilities advanced.
• The repeal of section 39 of the CBK Act and section 33B of the Banking Act did not liberalise interest rates that banks could charge on loans as those sections only dealt with the capping of interest rates. Section 44 of the Banking Act on the other hand plays a different regulatory role that is complementary to the one played by capping interest rates. It ensures checks and balances on bank or financial institutions to ensure consumers of the loan facilities are not exploited and that the rates are reasonable.

While the decision of the Supreme Court refers to banks obtaining the prior approval of the Cabinet Secretary responsible for matters relating to Finance, it should be noted that through Legal Notice Number 35 of 2006, the then Minister of Finance exercised the powers conferred by section 38 of the Interpretation and General Provisions Act, and delegated the powers conferred by section 44 of the Banking Act to the person for the time being, holding the office of the Governor of the Central Bank of Kenya.

Any approval for the increase in the rate of banking or other charges under section 44 of the Banking Act should therefore be given by the Governor of the Central Bank of Kenya and not the Cabinet Secretary.

The decision of the Supreme Court is the final determination on the interpretation of section 44 of the Banking Act unless this decision is reviewed. All other courts are bound by the Supreme Court’s interpretation of section 44 of the Banking Act.

For more information on this decision or any other matters involving banking law in Kenya, please get in touch with the team listed under key contacts.