Judges strike a blow for cheaper credit in interest rates suits

“The Central Bank is not aware of any commercial bank that has breached section 44A of the Banking Act (limit of interest to be recovered on defaulted loans),” said Fredrick Pere, the CBK director for Bank Supervision.

The director invited borrowers to address complaints on adherence by banks to the In duplum rule to his office.

Mr Pere said a wide array of remedial measures exist when banks violate statutory and prudential requirements.

These measures include issuance of directives, withholding of corporate approvals, removal of officers and directors and levying of penalties.

Prudential regulations issued by the bank consider a loan non-performing when the principal or interest is due and unpaid for 90 days.

The purpose of the rule is to protect the debtor who is in financial difficulty and is unable to service his debts from accumulation of interests and from exploitation by the creditor.

“It provides a temporary relief only as the escalation of the interest is merely tempered by the rule,” said Cathy Mputhia, an advocate of the high Court. “The biggest culprit that we have dealt with is penalty charges, where the bank goes against the contractual agreement with their clients by introducing irregular charges that are not provided for in the contract,” said James Mwangi, a consultant at Interest Rate Advisory Centre, one of the firms that recalculates interest rates on mortgages, personal and business loans.

For years banks have shielded themselves behind the fine print on loan contracts especially one that says the interest rates and charges can be varied without recourse to the borrower, a position that legal experts say has no basis in law and persists because of consumer ignorance.

“The law is supreme even when there is a contract. The biggest problem is reinforcement and control that is lacking,” said Gichuki King’aru, an advocate of the High Court who has handled many cases against banks.

In one case interest rate was revised to 40 per cent to which a penalty of 18 per cent was loaded for every delay in payment.

The interest Rates Advisory Centre says it gets 10 new cases related to flouting of the In Duplum rule every month, a tip of the iceberg because many borrowers suffer in silence.

A lawyer who talked to the Business Daily but could not be quoted due to involvement with various banks says many Kenyans walk blindly to banks, and are only too happy to receive a loan without understanding the terms and conditions.

“If it is stipulated in the contract that once a borrower defaults, it attracts a penalty rate, it is up to the borrower to settle the arrears because it will continue to accumulate,” said the lawyer. It is presumed that borrowers understand the contents of contracts before signing the dotted line.

“Once you sign a contract, it is a promise to the bank that must be fulfilled. It is expected that a borrower will repay any loan they seek from bank,” said John Wanyela, the Kenya Bankers Association executive director.

But besides diligently servicing the loan, many borrowers do not scrutinise their statements and fail to notice new entries or variations to the account.