Legal analysis of the Supreme Court’s Ruling on Interest Rates: Regulatory Processunder Section 44 of the Banking Act

On June 27, 2024, the Supreme Court delivered a pivotal judgment in Supreme Court
Petition Number E005 of 2023, Stanbic Bank Kenya Limited versus Santowels
Limited. The Court 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. This section mandates 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.”

Background of the Case

The matter arose from proceedings in the High Court between Santowels Limited
(“Santowels”) and Stanbic Bank Kenya Limited (“Stanbic Bank”). Santowels alleged that
Stanbic Bank charged interest on banking facilities exceeding 16.5% per annum, which
Santowels argued was the maximum legally permitted interest rate. Alternatively,
Santowels claimed that the interest charged exceeded the contractually agreed rates and
sought a refund of the overpayments.

Legal Debate on Section 44 of the Banking Act

Applying Section 44 of the Banking Act to the rate of interest charged by banks has been
contentious resulting in two primary positions:

1. First Position: Section 44 was never intended to control interest rates but rather
   banking charges such as ledger fees. Interest rates were regulated under the now-repealed
   Section 39 of the Central Bank of Kenya Act (CBK Act), which allowed the CBK to determine
   and publish the maximum and minimum interest rates for deposits and loans in
   consultation with the Minister of Finance.
   With the repeal of Section 39 of the CBK Act and the enactment of Section 33B of the
   Banking Act in 2016, which introduced a maximum interest rate chargeable on credit
   facilities, the prevailing view was that interest rates on credit facilities were to be
   negotiated and agreed upon by the parties.
2. Contrary Position: As reflected in the Court of Appeal’s decision in Margaret Njeri
   Muiruri v. Bank Baroda (Kenya) Ltd. (Civil Appeal No. 282 of 2004), this view held that
   once an interest rate is agreed upon, any discretion by the lender to vary the interest rate is
   subject to supervision by the Cabinet Secretary under Section 44 of the Banking Act.

Supreme Court Judgment

The Supreme Court recognized the conflicting interpretations of Section 44 and the divided
opinions on whether banks need the Cabinet Secretary’s approval before increasing
interest rates. The Court held that:

1. Regulation of Interest Rates: The term “rate of banking” in Section 44 includes interest
   rates banks charge on loans and facilities.
2. Role of Section 44: The repeal of Section 39 of the CBK Act and Section 33B of the
   Banking Act did not liberalize interest rates, as those sections addressed interest rate
   capping. Section 44 serves a different regulatory role, ensuring consumer protection and
   reasonable rates.
3. Delegation of Approval Powers: Through Legal Notice Number 35 of 2006, the powers
   conferred by Section 44 were delegated to the Governor of the Central Bank of Kenya
   (CBK). Therefore, the CBK governor, not the cabinet secretary, should approve increasing
   banking charges under Section 44.

Detailed Analysis

1. Objective of the Banking Act: The Supreme Court emphasized that the primary objective
   of the Banking Act is to regulate banking business in Kenya. Regulation of interest rates
   ensures consumer protection and prevents exploitative practices by financial institutions.
2. Definition of ‘Rate of Banking: By examining definitions in the Black’s Law Dictionary and
   the Banking Act, the Court concluded that the ‘rate of banking’ includes interest rates on
   loans and facilities. This interpretation aligns with Section 31A of the Banking Act, which
   mandates banks to disclose all charges, including interest, before granting a loan.
3. Historical Regulation of Interest Rates: The Court noted that previous versions of Section
   39 of the CBK Act and Section 33B of the Banking Act capped interest rates to protect
   consumers. The repeal of these sections did not imply complete liberalization but
   rather a shift in the mode of regulation. The role of Section 44 is to provide oversight
   and ensure that any changes in interest rates are reasonable and align with
   governmental policies, preventing arbitrary and exploitative increases by banks.
4. Contractual Obligations: The Court clarified that Section 52 does not invalidate
   contractual obligations between banks and customers. However, it emphasized that
   interest rates, even if agreed upon, are subject to regulatory limits. Banks cannot charge
   interest rates that exceed the maximum permitted under the Act.

Conclusion

The Supreme Court’s decision is the final determination on interpreting Section 44 of the
Banking Act unless reviewed. All other courts must adhere to this interpretation, ensuring
that banks obtain prior approval from the CBK Governor for any increase in the rate of
banking charges, including interest rates on loans and facilities. This landmark ruling
underscores the importance of regulatory oversight in protecting consumers and
maintaining fair banking practices in Kenya.

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