Editorial: Banks must stick to the law on interest charges

Those who have been keenly following the on-goings in Kenya’s courts of law know that relief, though very gradually, has been coming to borrowers who have long bore the wrath of lenders for failing to pay up their debts in time.

Out of Kenya’s banking halls have come mind boggling stories of families left destitute by lenders armed with loan contracts that were clearly designed in their own favour and executed without the knowledge of the borrower.

One such classic case involved a businessman who borrowed Sh697,500 from a local bank and diligently serviced it until his business collapsed mid-course after he had paid in Sh3 million.

But the bank, in defiance of all the laws of natural justice approached him three years later demanding some Sh2 million – more than triple the residual amount and a million shillings more than what he had initially borrowed.

Such gruesome lending practice is the reason the Eighth Parliament attempted to control interest rates under what became popularly known as the Donde Bill.

The law, whose sting was removed through the August 1, 2005 gazette notice, required banks to stop charging interest on bad loans once the interest has equalled the outstanding amount.

One might wonder what business Parliament had intervening in purely voluntary and commercial transactions such lending.

The answer lies in the critical role that credit plays in the health of any economy and more critically the damage that the burden of debt can cause to social welfare via erosion of household incomes.

Recognition of these links is the reason the Banking Act has provided an elaborate mechanism aimed at shielding the borrowers from exploitation – preventing the lenders from varying interest charged on loans without authorization from the regulator and introducing new charges that were not provided for in the original contract.

Judging from court records, it is clear that many banks have contravened these provisions causing borrowers loss of millions of shillings worth of property and the psychological pain that comes with it.

Commercial banks have the right to recover money they have lent to customers because that is their core business.

Yet even with the removal of the in duplum rule, no one can credibly argue against the demand that lenders stop once the interest charge has equalled the outstanding amount or to seek authorisation from the regulator before varying interest rates.

Lending is, no doubt, a sensitive business whose success largely depends on the relationship with customers.

It is for this reason that it would serve the banks well if they conducted their activities by the book and avoided noisy court battles that only make approaching them for credit a scary undertaking.