In a landmark ruling with far-reaching implications for banks and other lending institutions, the Supreme Court upheld an earlier ruling that banks must seek Treasury approval to increase interest rates.
The court was ruling on an appeal in a long-running civil dispute between Stanbic Bank and its former client, Santwells Ltd. Stanbic was ordered to refund 10 million Kenyan shillings to Santwells Ltd after it was found to have charged interest rates higher than those capped decades ago. Stanbic then applied to the Supreme Court seeking interpretation of sections 44 and 52 of the Banking Act.
While Article 44 is about banks needing ministerial approval to increase banking charges, Stanbic Bank sought clarification on whether interest rates have been defined under this provision.
“We declare that interest rates on loans and advances granted by banks are subject to regulatory procedure under Section 44 of the Banking Act,” the top court said in its judgement. “We are of the view that once interest rates have been agreed and a contract has been executed which in effect gives the lender discretion to vary the interest rates, that discretion cannot be exercised arbitrarily to charge exorbitant interest rates.”
“We hold that the interest rates on loans and facilities extended by banks/financial institutions are subject to regulatory procedures under Section 44 of the Banking Act. Further, such banks/financial institutions are required to seek the approval of the Cabinet Secretary under Section 44 of the Banking Act before increasing the interest rates on loans and facilities offered to their customers,” the judges said in their June 28, 2024 ruling.
Santwells, a sanitary napkin manufacturer, argued in the Court of Appeal that in the 1990s Stanbic Bank charged interest rates 3 percentage points higher than the ceiling rate without ministerial approval. The bank cautioned that the interest rates were based on a careful evaluation of the transactions between it and the manufacturers.
The suit was filed in March last year and an attempt to have the Treasury Ministry join the case was rejected in September last year. In its ruling, the Supreme Court also set aside the 10 million Kenyan shillings compensation awarded to Santwells by a lower court.
Why is this important?
Banks currently need the approval of the Secretary of the Treasury to raise interest rates or other bank charges. Even in the case of bilateral contracts between banks and individual customers, Article 52 of the Banking Act prohibits financial institutions from charging high interest rates.
The ruling will have implications for the banking sector as it limits financial institutions' freedom to set risk-based interest rates based on their contracts with customers and credit assessments, as well as the ability of the Central Bank to change base lending rates. The approval by the Treasury CS also raises the possibility of political interference, especially in situations where the Treasury and the Central Bank are not aligned on monetary policy.