Anxiety for banks as court set to rule on interest rate suit

The High Court is expected to decide whether to allow millions of bank customers to join a potentially devastating suit for the industry on the legality of interest rates charged since 2004, leaving Kenya’s 43 lenders in a period of anxiety.

Justice Francis Gikonyo said he would give a ruling on notice over Rose Florence Wanjiru’s application seeking the court’s permission to invite, through newspaper advertisements, all bank customers to join the suit she has filed challenging the legality of interest rates charged since the enactment of the Banking Act of November 1989.

Ms Wanjiru, in a petition filed in 2003, had sought orders compelling Standard Chartered Bank and other lenders to return all money they have levied their customers without the approval of the Finance minister as required by the Banking Act of 1989.

The law provides that “no institution shall increase its rate of banking or other charges except with the prior approval of the minister.” 

The petition, which was earlier dismissed on a technicality, got a new lease of life last October when the appeals court ruled that the High Court erred in its decision to dismiss it.

The High Court had pegged its dismissal on grounds that the petitioner had failed to seek the court’s permission to sue on behalf of other customers.

Ms Wanjiru in her application says she is suing on behalf of all bank customers, past and present, who have been affected by charges levied without the requisite approval of the Finance minister.

Ms Wanjiru has listed the Kenya Bankers Association (KBA), the Central Bank of Kenya (CBK) and Standard Chartered Bank as respondents in her case.

READ: Court reopens 10-year battle over legality of bank charges

The three defendants have opposed the application, arguing that Ms Wanjiru did not follow the civil procedure rules.

The trio claims that the petitioner failed to seek consent of the parties on the format of notice that is to be publicized prior to filling the application seeking permission to advertise.

If allowed, Ms Wanjiru will advertise the suit in the media asking bank clients to join the case with potentially devastating effects on the banking industry.

It has not helped that the case has come in the middle of intense debate on interest rates.

Deputy President William Ruto has been unrelenting on the quest to bring down interest rates, arguing that high interest rates are partly to blame for the slowdown in economic growth.

Court records show that the High Court had on April 3, 2014 allowed Ms Wanjiru to advertise the suit but the decision was immediately set aside after the respondents demanded that the application to invite other customers into the suit be heard in court and a decision made.

Mrs Wanjiru through her lawyer, Samuel Gichuki has since reinstatement of the case in April, been in court pursuing her precedent-setting case that among other things will require banks to produce evidence that they actually sought and obtained the minister’s permission to levy the charges.

Failure to adduce such evidence would imply that commercial banks have been illegally levying various fees, charges and interest rates since 1991, opening the floodgates for more suits.

The suit is even more defining in the fact that an order requiring banks to compensate the customer for illegal charges levied since 1991 would affect the financial results that commercial banks have declared for 13 years and ultimately the taxes charged on the profits.

The Kibaki government in anticipation of the huge compensation crisis and its impact on government revenues unsuccessfully tried to delete Section 44 of the Banking Act in 2004 through an amendment in Parliament but the MPs defeated the Bill in Parliament.

The amendment sought to regularise all charges levied without the minister’s prior approval by deleting the section and inserting a clause that deemed charges levied between 1991 and 2004 to have been approved by the minister.

“All increases in the institutions rate of banking or other charges that were made before the deletion of Section 44 shall be deemed, for the purposes of past application of that section to have had the prior approval of the minister,” said the proposed amendment.

President Kibaki said in a memorandum to Parliament supporting the amendment that revision of financial statements of commercial banks and non-bank financial institutions would impact negatively on the country’s financial stability.

Mr Kibaki said the adjusted accounts would result in losses or lower profits and the Treasury would be required to refund large sums of corporation taxes paid on the basis of profits earlier declared.

Ms Wanjiru has further advised the KBA to ask its members to prepare financial statement since 1991 when the Banking Act came into effect in readiness for claims from aggrieved customers.

She accuses Standard Chartered Bank of failure to seek the minister’s approval before levying the charges while the CBK is accused of failing to regulate the banks and allowing them to arbitrarily increase charges.

Ms Wanjiru is seeking a declaration that all income accruing to the banks from charges levied without the minister’s approval since November 1989 are refundable to account holders.