REGULATION OF INTEREST RATES: WHERE ARE WE?

Background

Since 1989 when the Banking Act was amended to remove the power of the Central Bank of Kenya (the CBK) to regulate interest rates, the question of whether or not interest rates should be regulated is one that has occupied Kenyans. In 2001, the Donde Act reintroduced regulation of interest rates. This law was declared by the courts to be void for having a retrospective commencement date.

Fifteen years later, a private member’s bill resulted in the Banking (Amendment) Act, 2016 which introduced Section 33B of the Act. Section 33B provided:

• a ceiling of 4% over the rate set by the CBK on interest changed by financial institutions regulated under the Banking Act;
• a floor on deposit rates of at least 70% of the base rate set by the CBK; and
• penal consequences for the breach of this section by a CEO of a bank; namely imprisonment for up to a year or a fine of not less than KES 1,000,000.

Since coming into operation, Section 33B has been a matter of great public interest, drawing ire and support in equal measure.

Those in support have argued that the regulation is necessary to tame predatory lending; that in the period when interest rates were unregulated the rates charged by commercial banks in Kenya were some of the highest in the world and that they were uncontrollable, unpredictable and exploitative. The proponents argue that the controls protect consumers.

Those against Section 33B argue that regulation does not deal with the fundamental issues of costs of credit and ease of access; that the provisions have stifled credit and negatively impacted the economy.

Developments to date

Since the provisions came into operation in 2016:

1. The floor on the deposit rate has been repealed.
   The Finance Act, 2018 repealed the floor on the deposit rate. In proposing this repeal, the Cabinet Secretary, The National Treasury argued that it would enhance access to credit, minimise the adverse impact of the interest rate caps on credit growth, and strengthen financial access and monetary policy effectiveness.
2. Cap on interest rates has been declared unconstitutional.
   

   • In a judgment delivered on 14 March 2019, the High Court at Nairobi declared section 33B (1) and (2) of the Banking Act (which imposes the interest rate caps) unconstitutional after finding the provisions “… vague, imprecise, ambiguous and indefinite.” The judges cited as reasons for their decision: the lack of definitions for key terms; the use of terms that are not synonymous, specifically that “loan” and “credit facility” interchangeably; the fact that the provisions are open to multiple contradictory interpretations; and the lack of clarity regarding the base rate as well as the language spelling out the thresholds.
   • Recognizing the practical implication of the declaration, the High Court suspended it for 12 months to enable Parliament to review the offensive sections. However, the Court further declared that in the event that Parliament fails to do so, the declaration will come into force and the provisions will stand impugned.
3. Penal consequences on CEOs have been declared unconstitutional.

   • The Court also declared Section 33B (3) (penal consequences applicable to bank CEOs) of the Banking Act to be unconstitutional as it violates Articles 29 (Freedom and Security of the Person) and 50 (Fair Hearing) of the Constitution by depriving a person of his or her freedom arbitrarily and without just cause.
   • The Court held that any offenders could be dealt with under section 49 of the Banking Act, which sets the liability for contravention of the terms of the Banking Act as:
     • if the offender is a body corporate, a fine not exceeding KES 100,000; and
     • if the offender is an officer of the bank, a fine not exceeding KES 50,000 or imprisonment for a term not exceeding 2 years, or both.

So, where does all this leave Section 33B?

1. There is no longer a floor on the deposit rate.
2. Penal consequences for officers of banks introduced by Section 33B have been expunged from the law.
3. The cap on interest rates remains in force for the next 12 months pending review by Parliament. In the event that Parliament fails to undertake the review, the Court’s declaration will come into force and the offending provisions will be expunged from the law. Given that Section 33B was the fruit of a private member’s bill and not a Government Bill (and that both the Governor of the CBK and the Cabinet Secretary, The National Treasury have publicly objected to the rate cap), it will be interesting to see how this is resolved. Indeed, the CBK, which was enjoined in the Petition filed affidavits in support of the Petition. The Attorney General, the National Assembly and the Consumer Federation of Kenya on their part resisted the Petition.

   The Court has helpfully suggested that while making of law is a matter for the legislature, this sensitive matter will be best resolved through consultation with all key stakeholders.

In the meantime, the Consumer Federation of Kenya has filed a notice of appeal of the Court’s decision. 

We continue to monitor developments on this matter and will keep you apprised of any developments.