April 1, 2019
Are interest rates charged by banks in Kenya capped or not?

Overview:

By way of an amendment to the Banking Act (“Act”), introduced through section 33B of the Act, Parliament on 14th September 2016 imposed a limit on the interest rates that banks in Kenya could charge. There were considerable complaints by the banking sector on how this affected the profits and from borrowers with respect to the increased documentary requirements to access lending that was as a result of this amendment.

For information, section 33B of the Act provides as follows:

33B.
Powers of Central Bank to enforce interest ceilings
(1)

A bank or a financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent, the Central Bank Rate set and published by the Central Bank of Kenya.

(2)

A person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law.

(3)

A bank or financial institution which contravenes the provisions of subsection (2) commits an offence and shall, on conviction, be liable to a fine of not less than one million shillings, or in default, the Chief Executive Officer of the bank or financial institution shall be liable to imprisonment for a term not less than one year.

A private citizen subsequently presented a Constitutional Petition in the High Court challenging the constitutionality of the provision capping interest rates that banks could charge borrowers and, on 14 March 2019, a three-judge bench declared the provision unconstitutional but suspended the implementation of its decision for 1 year.

Basis:

The court found that the provision of the aforesaid section 33B of the Act was vague in so far as it failed to provide to clarify what the terms “credit facility” and “base rate” referred to with precision. According to the court, it was difficult to determine whether the interest cap was to be computed on the basis of the prevailing Central Bank Rate (CBR) or the Kenya Banks’ Reference Rate (KBBR).

The argument by the Central Bank of Kenya that it had the right under the Central Bank Act to clarify the CBR and KBBR through circulars, the court retained the view that the provision is vague.

The court also found the provision discriminatory in so far as failure to comply results in a criminal offence for which only the banks’ CEOs could be prosecuted but not the customer who failed to adhere to the provisions. The court took the view that both the lender and the borrower should be penalized for noncompliance.

Impact:

The impact of the decision will not be felt immediately as its implementation was suspended for 1 year. In our view, this will allow Parliament, if it is intent on doing so, to make necessary amendments to the provision making it clear what the terms “credit facility” and “base rate” are intended to refer to.

 

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