Why High Court threw out law on interest rates law

Parliament’s failure to define key technical words used in the interest rates control law made the legislation ambiguous and hence unconstitutional, the High Court has held in a detailed ruling released Monday.

Justices Francis Tuiyot, Jacqueline Kamau and Rachel Ngetich last week declared Section 33 (B) (1) and (2) of the Banking Act unconstitutional, but gave the National Assembly one year to amend the anomalies.

The judges took issue with Parliament’s failure to define the terms ‘credit facility’ and the ‘Central Bank Rate’ (CBR), leaving them open to misinterpretations.

“Any words that have the potential of causing confusion must be clearly defined. The Legislature should not assume that the meaning of material words can be inferred. It must make it easy for everyone, including a lay person, to understand the meaning of a provision. In our view, Section 33B lacks the minimum degree of certainty that is required of legislation that creates criminal offences,” the judges stated.

Failure to amend the ambiguous section of the Act will mean a reversion to free-floating interest rates regime, where commercial banks set the cost of loans without reference to any law.

The interest rates cap restricted banks to charging customers a maximum of four percentage points above the CBR.

Section 33 B(1) of the Banking Act states that “a bank or a financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four percent, the Central Bank Rate set and published by the Central Bank of Kenya”.

4 percent

The judges noted that the words “at no more than four percent, the Central Bank Rate” is vague since it is not clear if it is above or below CBR.

The judges further said that CBR has neither been defined nor clarified in the Banking Act and yet the clause failed to refer to the section of the Central Bank of Kenya (CBK) Act that clearly defines CBR, therefore making it open to multiple interpretations.

The judges held that the lack of definition on the meaning of ‘credit facility’, left it open to various interpretations.

They noted that while credit facility appears in various sections of the Banking Act, it has not been defined in the interpretation provisions of Section 2 of the Banking Act or in the Interpretation and General Provisions Act.

They stated that various conflicting meanings of the word are available in dictionaries and other materials, making it ripe for misinterpretation.

They also observed that Section 33B(3) only prescribes punishment for banks and their CEOs and not customers and other persons who contravene the provision.

The judges observed the ambiguities of the law made it so uncertain that the Central Bank was at one time forced to release a circular to clarify it.

CBK's role

They noted that for the law to be obeyed it must be clear.

The court, however, declined the argument advanced by the petitioner, CBK and KBA, which wanted the judges to find that the National Assembly had interfered with CBK’s role of formulation of monetary policy.

The judges noted that it was not apparent whether the legal framework that regulates the manner in which banks or financial institutions charge interest for facilities granted to their customers is a function of monetary policy.

Petitioner Boniface Oduor filed the case seeking to end interest rates control.

The Central Bank of Kenya (CBK) and Kenya Bankers Association (KBA) supported Mr Oduor’s petition, while the Consumer Federation of Kenya (Cofek), National Assembly and the Attorney-General opposed it.

Cofek Tuesday filed a notice of appeal against the ruling.

The amendments to the Banking Act were introduced by Kiambu Central MP Jude Njomo through a Private Member’s Bill that was signed into law in August 2016, sparking a long fightback from banks which argued they were unable to price in risk in their costing of customers’ loans.

The amendment capped the maximum loan rate at four percentage points above the prevailing CBR (currently at nine percent) and the minimum deposit rate at 70 percent of CBR, though the latter provision was removed last year.

MPs have in the meantime continually rejected proposals by Treasury Secretary Henry Rotich to repeal the rate cap law.

CBK strongly supported the petition by Mr Owuor, in an indication that it presented an opportunity to get a window of repealing the law.

The High Court decision is, however, only a half win for CBK and KBA since Parliament can amend the law to address the ambiguity during the one-year grace period.

While suspending the effective date of the judgment, the judges noted that it would have huge ramifications on existing contracts between banks and borrowers.