End of cheap loans? Court leave bank customers' fate in hands of MPs

Borrowers are staring at a return to expensive loans after a court nullified a law setting bank interest rate caps.

The High Court has declared the law capping interest rates as unconstitutional - a development that will be welcomed by commercial banks that have fought the controls.

High Court judges Francis Tuiyott, Rachel Ngetich and Jacqueline Kamau yesterday left borrowers with bank loans in the hands of MPs, who will either amend to save them from unregulated loan interests or wait for the end of cheap loans.

In the intervening period, the court ruled, the Central Bank of Kenya (CBK) will continue regulating the rates for 12 months after which the effect of the judgement made yesterday will kick in.

“Mindful of the possible ramifications and disruption on existing contractual relationships between banks and their customers, the court suspended the effect of the declaration for 12 months from the date of this decision to give the National Assembly an opportunity to reconsider the provisions,” the judges ruled.

The court ruled that section 33B (1) and (2) of the Banking Act, providing for CBK to regulate how much lenders can earn from customers, was vague.

Judges also declared section 33(B) of the Act discriminatory against banks' CEOs, for providing a punishment in the event they breached the interest rate caps law.  

They observed that the section had left out other players in loan - customers and even guarantors - who were also likely to breach the Act.

“The provisions of section 33B (1) and (2) of the Banking Act is vague, imprecise, ambiguous and indefinite. And insofar as the contravention of the provisions attracts penal consequences, the same violate Articles 29 and 50 of the Constitution. Article 29 (a) of the Constitution guarantees a person the right not to be deprived of freedom arbitrarily or without just cause,” the judges ruled.

According to the judges, setting up of interest rate caps was a consultative process which ought to consider the voice of all stakeholders - the CBK, the Executive, banks and Parliament.

The case was filed by a Mr Boniface Oduor through lawyer Miller Wanjala.

He argued that the National Assembly irregularly passed the Banking (Amendment) Bill, 2016 and went beyond their mandate in taking over duties of CBK in determining the maximum interest rates banks should charge on loans.

"The act in its entire form is illegal, null and void. It should not be allowed to continue operating when Members of Parliament violated several laws in the process of enacting it," said Mr Wanjala.

He contested that the new law is likely to bring instability in the financial sector and affect the country's economy, after it took away CBK's role in formulating and overseeing the implementation of all monetary policies.

The petitioner added that the Act went against advice of the International Monetary Fund that financial systems should not be subjected to political processes.

"The act is unintelligible, with material words not defined and hence open to various interpretations. There is confusion within the banks as to which transaction the law applies to, making it possible to exploit customers," said Wanjala.

The petitioner further argued that capping interest rates is an interference with market stability and is likely to affect the economy unless the court declares the new law unconstitutional.

Wanjala argued that every person and institution had the right to own property and that when people own banks, it is the duty of the Government to protect their property rights instead of passing laws that affect that right.