On 27^th June 2024, the Supreme Court delivered a judgment in Supreme Court Petition No. E005 of 2023, Stanbic Bank Kenya Limited versus Santowels Limited. In the judgment, the Court held that interest rates on loans and banking facilities are subject to regulatory control under section 44 of the Banking Act Cap 488 Laws of Kenya (“the Banking Act”). This section provides that “[n]o institution shall increase its rate of banking or other charges except with the prior approval of the Cabinet Secretary.”

In the matter that spanned over two decades in the courts – from the High Court to the Supreme Court – the background to the dispute was that Stanbic Bank Kenya Limited (the appellant) and Santowels Limited (the respondent) had a banking relationship from 1993 to 1997. During this period Stanbic Bank granted Santowels Limited several financial facilities. Stanbic Bank periodically informed Santowels Limited of interest rate adjustments, which Santowels Limited paid as due.

However, in the year 2002, Santowels Limited began questioning the interest charges and subsequently hired Interest Research Bureau (K) Ltd. to audit the interest charges and the Bureau’s calculations suggested that Stanbic Bank had overcharged Santowels Limited. This prompted Santowles Ltd to file a suit at the High Court, challenging the action by Stanbic Bank to increase the interest rate on the loan facilities.

At the High Court

Santowels Limited argued that Stanbic Bank Kenya Limited exceeded the maximum interest rate of 16.5% per annum set by Gazette Notice No. 1617 of 1990 under section 39 of the Central Bank of Kenya (CBK) Act Cap 491 Laws of Kenya (“the CBK Act”). Santowels also claimed that the interest charged exceeded the contractually agreed rates and sought a refund. The High Court ruled in favor of Santowels, stating that even after the repeal of Section 39 of the Banking Act, the authority to regulate interest rates remained under Section 44 of the Banking Act. In the end, the High Court awarded Santowels Limited a sum of Kshs. 8,978,813.63 plus interest thereon at court rates from the date of filing the suit until payment in full together with costs of the suit.

At the Court of Appeal

Santowels Limited appealed the High Court’s decision, disputing the amount awarded. On its part, Stanbic Bank contended that the High Court misapplied sections 39 and 44 of the Banking Act and failed to distinguish between banking rates and contractual interest rates. The Court of Appeal agreed with the High Court’s decision that the interest rate was capped at 16.5% and that Stanbic Bank had unlawfully increased rates without the Cabinet Secretary’s approval. Stanbic Bank was aggrieved with this outcome and sought leave to appeal to the Supreme Court citing the matter to be one of great significance to the public.

At the Supreme Court

The main issue at the Supreme Court was the interpretation and application of sections 44 and 52 of the Banking Act. 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” while Section 52 highlights civil obligations with reference to contractual obligations between an institution and an individual.

The court noted that interpretations of Section 44 of the Banking Act have been inconsistent and contradictory, with differing views on whether banks need the Cabinet Secretary’s approval to increase the interest rates. The court held that the phrase “rate of banking” in section 44 includes interest rates on loans and facilities. This interpretation is supported by the Banking Act’s definition of “banking business” and section 31A, which mandates disclosure of all loan charges. Therefore, banks must obtain the Cabinet Secretary’s approval to increase interest rates.

Further, the court held that the repeal of sections 39 and 33B of the CBK Act and the Banking Act respectively, did not fully liberalize interest rates. Instead, there was a shift from direct rate caps to regulatory oversight. The court dismissed the appeal by Stanbic Bank.

Conclusion

The Banking Act aims to regulate Kenya’s banking industry, including loan facilities and interest rates. The Supreme Court’s decision maintains that even after the repeal of previous interest rate caps, banks must seek the Cabinet Secretary’s approval prior to increasing interest rates. This ensures consumer protection and prevents exploitation through regulatory oversight. Nevertheless, the practical impact on ongoing transactions and the potential delays in obtaining urgent loans due to the mandatory requirement of the Cabinet Secretary’s approval remain uncertain. Additionally, the declarations by the Supreme Court have the potential of re-opening disputes between parties and the banking institutions where a similar question may be an issue.

By: Mercy Mumbe

Cyril Kubai – Partner (Dispute Resolution)

2 July, 2024

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