Banks likely to exploit flaws in new rates law
Posted by African Press International on August 28, 2016
ABIUD OCHIENG, email@example.com -1 | Jumapili, Agosti 28, 2016
Banks have over the years disregarded legal measures instituted to cap interest rates, posing a real danger to the newly-passed Banking (Amendment) Bill, 2015.
A series of laws in force at different periods from the 1980s were largely neglected, with thousands of borrowers suffering while only a few with legal muscle got redress.
Now experts are saying the wording on section 33B (1) of the Banking (Amendment) Bill, 2015, which was signed into law on Wednesday by President Uhuru Kenyatta, might expose it to manipulation by banks.
The Kenya Bankers Association (KBA) has already pointed out areas of concern which it says are unclear and need interpretation to guide on implementation of the law.
In one landmark ruling, a bank which demanded Sh150 million from a Sh5 million loan advanced in 1982 lost the case after judge Francis Gikonyo said it was unlawful to remain silent for over 30 years hoping to make a claim when the loan had accumulated high interest.
Habib Bank AG Zurich had demanded the amount from Mr Rajnikantkhetshi Shah, and threatened to auction the property used as security, sparking the court battle.
The judgment was dated February 10 this year. The case is among many where banks openly disregard existing laws and slap customers with heavy interests and penalties, making them unable to pay and eventually auctioning the property used to secure the loan.
Section 44A of the Banking Act Cap 488 of the Laws of Kenya, also known as the In-duplum rule, which came into effect on May 1, 2007, was developed to limit the amount a bank can recover with respect to a non-performing loan.
The section provides that the maximum amount recoverable is the sum of the principal owing when the loan became non-performing, and interest in accordance with the contract between the debtor and the institution, but not exceeding the principal owing when the loan became non-performing (not serviced for three months).
Mr Justice Eric Ogola applied this law in his June 25, 2014 judgment in a case Rupa (K) Ltd filed against Kenya Commercial Bank, to substantially reduce the amount the bank sought to recover from the debtor. This was another situation where an existing law had been disregarded.
Mr Wilfred Onono, managing consultant at Interest Rate Advisory Centre (IRAC), says: “Banks have not taken trouble to follow the law, unless the borrower provokes them by demanding their rights.”
The “Donde Bill” which became the “Donde Act” following its publication in the Kenya Gazette on August 7, 2001 after President Daniel Moi assented to it on August 6, the same year, was intended to save customers from exploitation by banks through high interest rates.
The Donde Act, otherwise known as, the Central Bank of Kenya (Amendment) Act, 2000, had a retrospective commencement date of January 1, 2001.
It also had a provision which criminalised violation of the Act. These gave the KBA a ground upon which to launch a scathing legal attack on the Act at the High Court. The KBA argued that “nobody should be criminalised for engaging in conduct that, when it was done, was not a crime.”
High Court judges Tom Mbaluto and Richard Kuloba, in a judgment delivered on January 24, 2002, agreed with KBA that “retrospective application of criminal charges is unconstitutional. Further, they said the Donde Act was unconstitutional to the extent that it had criminal provisions that could be applied retrospectively.”
The law was eventually repealed through The Central Bank of Kenya (Amendment) Act 2004, Act No. 8 of 2004, effective August 1, 2005.
Mr Joe Donde, a former Gem MP who initially introduced the Donde Bill, has welcomed the decision by President Kenyatta to sign the Banking (Amendment) Bill, 2015 into law, saying it is good for the economy. The new law was introduced by Kiambu Town MP Jude Njomo.
But KBA chief executive Habil Olaka says that as the law capping interest rates comes into effect, more than 40 per cent of new borrowers (or loans worth Sh18 billion), will be pushed out of the banking system to microfinance institutions and informal lenders.
Further, banks will lend only to those who are less risky… those with collateral and to huge corporates.
Mr Onono, however, says that small borrowers are already borrowing at very high interest rates from banks and when they default, additional charges are levied. Many have been unable to service these loans and have consequently been referred to the Credit Reference Bureaus, becoming ineligible to bank loans.
Meanwhile, Section 44 of the Banking Act which provides that “no institution shall increase its rate of banking or other charges except with the prior approval of the minister,” is currently the subject of a vicious court battle pitying more than 180 affected customers against their banks.
Ms Rose Florence Wanjiru, who filed a suit at the High Court against Standard Chartered Bank in 2003, seeking refund for illegal interest rates levied on her account without the Finance minister’s approval, was allowed by the court to open her case to parties who may have been affected in a similar manner.
More than 180 bank customers and institutions requested and were allowed by the court to participate in the suit, which is yet to be determined.
Interestingly, there exist previous cases where individuals won cases against their banks which did not apply Section 44 while adjusting interest on loans advanced to them.
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