Banks & Financial Institutions must seek approval of Cabinet Secretary (Treasury) before increasing interest rates on loans: Supreme Court of Kenya Rules
Muriuki Muriungi
On 28th June 2024, the Supreme Court of Kenya, in Stanbic Bank Kenya Limited v SanTowels Limited, Petition No. E005 of 2023 held that “banks/financial institutions are required to seek the Cabinet Secretary’s approval under Section 44 of the Banking Act prior to increasing interest rates on loans and/or facilities advanced to its customers” (Paragraph 70). The Court was interpreting section 44 of the Banking Act (Cap 488) which provides: “No institution shall increase its rate of banking or other charges except with the prior approval of the Minister.” The Court also held that issue of interest is simply a contractual matter subject to mutual negotiation by the institutions and their customers within the meaning of section 52 of the Banking Act, but that any increase of interest rates must secure the approval of the Cabinet Secretary of Finance/Treasury.
The particular statutory provision had been the subject of litigation for many years. The High Court in Cooperative Bank of Kenya Limited v. Pius Kimaiyo Langat, HCCC No. 499 of 2004; [2012] eKLR and the Court of Appeal decision in Daima Bank Limited (In liquidation) v. David Musyimi Ndetei, Civil Appeal No.171 of 2010; [2018] eKLR where the superior courts held that section 44 of the Banking Act only requires Ministerial approval to varying of bank charges and not interest rates. On the other hand, the High Court in Husseni Dairy Limited v. Southern Credit Banking Corporation Limited & Another, HCCC No. 252 of 2008; [2020] eKLR, and John Gatu Nderitu v. Kenya Commercial Bank Ltd., HCCC No. 55 of 2001; [2011] eKLR as well as the Court of Appeal in Margaret Njeri Muiruri v. Bank Baroda(Kenya) Limited (2014)eKLR.
Indeed, it is these divergent views from the superior courts that had the issued certified as one of general public importance and therefore ripe for determination by the Supreme Court.
The court decision may likely spark litigation against banks and financial institutions over past instances of levying interest rates without seeking approval of the Cabinet Secretary responsible for finance.
In interpreting section 44 of the Banking Act which reads ““No institution shall increase its rate of banking or other charges except with the prior approval of the Minister”, the Supreme Court noted that the Banking Act does not provide a definition of what constitutes “rate of banking”. The contending parties in the suit were at cross-purposes as to whether the ‘rate of banking’ in the Act refers to interest rates on loans. The Court held that the ‘rate of banking’ includes and covers interest rates charged/applied by banks on loans.
This landmark judgment will certainly have significant ramifications for monetary policy making in a market economy such as Kenya. The Central Bank of Kenya is the agency empowered by the Constitution with formulating monetary policy-which mainly involves the apex bank setting the Central Bank base lending rate which signals to commercial banks the rate at which they may charge their loans. In doing this, the central bank is able to rein in on inflation or deflation thereby affecting employment rates and ensuring price stability. By requiring consent from the Cabinet Secretary for Treasury, the court judgment appears to have unwittingly wrested away the monetary policy making powers from the Central Bank to the National Treasury, with attendant consequences of delaying or disrupting transmission mechanisms of monetary policy. For instance, by rerouting interest rate adjustment through the Cabinet Secretary (even assuming that Treasury and the Central Bank will be aligned on the issue); time will be taken before such approval is granted thereby potentially weakening the effects of monetary policy. What was otherwise an organic process upon signaling by the Central Bank of Kenya risks being transmuted into a bureaucratic process with associated consequences.
Granted, the Parliamentary wisdom of requiring consent from the Cabinet Secretary before varying interest rates and bank charges was, from a consumer protection perspective, to avoid the erstwhile instances of exploitation of bank customers/borrowers by banks. But this decision somewhat harks back to the now repealed interest rate-capping regime where there was set a ceiling on the interest rate levied on loans, in an otherwise risk-based pricing loan regime. And it arguably impinges on the most important function of central banks-namely, formulation and implementation of monetary policy as well as the independence of central banks.
