Applicability of In Duplum rule in Kenya’s financial sector, and emerging jurisprudence on consumer protection issues in Kenya’s credit markets

This brief examines the gaps in the consumer protection framework in Kenya’s financial sector through an analysis of recent court judgments, with a view to illuminating on potential areas for reform.

In August 2022, the High Court in Nairobi (Justice Alfred Mabeya) in Mugure & 2 others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR) (Civ) held (at paragraph 25) that the in duplumrule is a rule of public interest and therefore applicable for all those lending monies as it applies to banks. The court at paragraph 18 explained the meaning and etiology of the in duplum rule thus: “In duplum” is a Latin phrase derived from the word “in duplo” which loosely translates to “in double”. Simply stated, the rule is to the effect that interest ceases to accumulate upon any amount of loan owing once the accrued interest equals the amount of loan advanced.”In the court’s reasoning, the rule was introduced to protect borrowers from exorbitant interest accumulation on loans and limit the amount recoverable by a lender on a defaulted facility to no more than double the principal owing when the loan became non-performing. The High Court appears to have relied on the discrimination argument in holding that the in duplum rule bound HELB, since borrowers from banks were protected under the rule while needy students who borrowed from HELB to finance their education were not so protected, and therefore discriminated in that respect (See paragraph 32). In the end, the Court issued a declaration against theHigher Educations Loans Board (HELB) that by imposing interest amounts and penalties or fines that exceeded the principal amount, HELB had contravened article 43(1)(e) and (f) on socio-economic rights and consumer rights and article 27 of the Constitution on non-discrimination.

The above finding is in stark contrast to the finding of the High Court in Desires Derive Ltd v Britam Life Assurance Co (K) Ltd (2016) eKLR (para 14) where the Court had stated that the in duplum rule is only applicable to banks only, as provided for under section 44A of the Banking Act 1989. On the other hand, the Court of Appeal in Lee G. Muthoga v Habib Zurich Finance (K) Limited & another [2016] eKLR (at paragraph 21) held that the application of the in duplum principle is specifically designed to apply to formal loans given by financial institutions, and that further under section 44A (4) of the Banking Act, the rule does not apply to limit any interest under a court order accruing after an order is made.

The finding in the Mugure case, is directly at odds with the decision of the High Court (Justice Majanja) in Momentum Credit Limited v Teresia Kabuiya Nduta HCCOMMA/E035/2022 delivered on 7^th October 2022; again attesting to the uncertainty in law on this aspect of consumer protection. In the appeal lodged by Momentum Credit Limited from a decision of the Small Claims Court. The High Court held that the in duplum rule only applies to institutions regulated under the Banking Act as defined in section 2 of the Act. At paragraph 13, the court stated:  “…it must be established that the Appellant is a bank or financial institution. It is not in dispute that the Appellant is neither a bank nor mortgage finance company. In order to qualify as a financial institution, the Appellant must either be gazetted as such by the Minister or be one that carries on or proposes to carry on financial business as defined under the Banking Act. In order to qualify as a financial institution, it must accept money on deposit from members of the public and employ that money or part of it for lending or investment as contemplated under the Act.” The court consequently held that the interest rate applicable in the loan between the parties was governed by contractual provisions. In the end, the Court found that the in duplum rule was not applicable to Momentum Credit Limited, which is a non-deposit taking microfinance institution regulated by the Central Bank of Kenya. This means that as per this court finding, the interest rates levied by non-deposit taking microfinance institutions involved in micro-lending are only governed and subject to contract.

Relatedly, in a recent decision delivered on 22^nd  September 2022, the High Court (Justice Odunga) in Association of Micro- finance v The Central Bank of Kenya & 3 others (Constitutional Petition E008 of 2022) [2022] KEHC 13053 (KLR) (22 September 2022) (Judgment) held that the Central Bank (Digital Credit Providers) Regulations 2022 applied to non-deposit taking microfinance institutions as they are not regulated under the Microfinance Act 2006 and thus not exempt from application of the said regulations. A reading of the regulations however reveals that they would only apply to non-deposit taking microfinance institutions, only in so far as they engage in digital credit lending. This case also brought to light the fact that no regulations have been published under section 3 of the Microfinance Act 2006 to regulate non-deposit taking microfinance institutions as envisaged. Such regulations would possibly attend to the lacuna especially in charging of interest rates by such non-deposit taking microfinance institutions especially where they do not channel the said credit through digital channels to be caught by the Digital Credit Providers Regulations.

Were the decision in the Mugure case to be taken as good law and binding, all money lenders (e.g. shylocks) as well as formal money lenders such as microfinance institutions and digital lenders, would not be permitted to levy excessive interest that surpasses the principal loan amount. At present, borrowers saddled with excessive interest rates and in huge debt burden,^[1] primarily from informal money lenders (shylocks)^[2] as well as some formal money lending institutions, primarily rely on the doctrine of unconscionability to seek relief from courts. The doctrine of unconscionability was applied and elaborated on by the Court of Appeal in Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited [2014] eKLR at paragraph 36 where it stated: “…courts have never been shy to interfere with or refuse to enforce contracts which are  unconscionable, unfair or oppressive due to the a procedural abuse during formation of the contract, or due to contract terms that are unreasonably favourable to one party and  would  preclude meaningful choice for the other party. An unconscionable contract is one that is extremely unfair.  Substantive unconscionability is that which results from actual contract terms that are unduly harsh, commercially unreasonable, and grossly unfair given the existing circumstances of the case.”In this case, the court stated that in a situation between a bank and a borrower or guarantor, a borrower/guarantor  are  at  a  situational  disadvantage,  or  a  special  disadvantage because of their position in relation to a bank. The court considered that the plaintiff had lost her husband and her business and the bank had hiked the interest rates astronomically thereby making it impossible for the plaintiff to redeem her property. Accordingly, the court held the agreement to have been unconscionable and therefore unenforceable.

The doctrine of unconscionability is also provided for in statute, to wit, section 56 of the Competition Act No. 12 of 2010 and section 13 of the Consumer Protection Act No. 46 of 2012.

Conclusion

A few conclusions emerge from the above analysis:

1. Informal money lending such as from shylocks is largely unregulated thereby raising consumer protection concerns especially in terms of interest rates levied and debt collection methods;
2. Digital lending by non-deposit taking microfinance institutions is now regulated under the Central Bank (Digital Credit Providers) Regulations 2022 as are digital lenders; however, non-digital lending by non-deposit taking microfinance institutions still remains unregulated;
3. It is unclear whether the in duplum rule is applicable to persons and institutions not captured under the Banking Act (that is banks and mortgage finance companies);
4. Consumers may only rely on the doctrine of unconscionability to come to their aid whenever they are exploited by lenders who do not fall under the regulated entities.

Accordingly, these issues require regulatory attention to improve market conduct in the credit markets.

^[1] https://www.businessdailyafrica.com/bd/corporate/companies/shylocks-auction-desperate-kenyans-matrimonial-homes-and-cars-2232754

^[2] https://nation.africa/kenya/life-and-style/money/stay-away-from-loan-sharks-to-avoid-painful-bite-793076