Business

Banks must seek treasury clearance for interest rate uncreases, rules Supreme Court

The Supreme Court building.

By Bashir Mohammed | Saturday, June 29, 2024

They emphasised that while banks can have discretion over interest rate changes within mutually agreed contracts, this discretion is neither absolute nor unlimited.

Supreme Court has ruled that banks and financial institutions must obtain approval from the Cabinet Secretary for National Treasury before increasing interest rates on loans and other financial facilities offered to customers. This decision aims to ensure a check-and-balance system to protect consumers from unreasonable exploitation by lenders.

A bench of five judges, led by Chief Justice Martha Koome, upheld that Section 44 of the Banking Act governs interest rates on loans. They clarified that this section does not conflict with Section 52 of the same Act, which allows banks and their customers to agree on interest rates through mutual contracts. However, such agreements remain subject to regulatory oversight.

Keep reading

"In conclusion on this issue, we find that interest rates on loans and facilities advanced by banks or financial institutions are subject to the regulatory process under Section 44 of the Banking Act," stated the judges.

They emphasised that while banks can have discretion over interest rate changes within mutually agreed contracts, this discretion is neither absolute nor unlimited.

Deputy Chief Justice Philomena Mwilu and Justices Mohammed Ibrahim, Smokin Wanjala, and Njoki Ndung'u joined Chief Justice Koome in making the decision.

The court highlighted the necessity of obtaining ministerial approval to ensure that interest rate increases are reasonable and consumers are not exploited.

"The approval of the Cabinet secretary before increasing interest rates ensures that there is some check and balance or oversight to ensure that consumers of the loan facilities are not exploited and that the rates are reasonable," the judges added.

The ruling concluded a protracted legal dispute between Stanbic Bank and Santowels Ltd, a sanitary towels manufacturer. The case reached the Supreme Court as both parties sought an interpretation of Sections 44 and 52 of the Banking Act. Stanbic Bank argued that various court decisions had led to uncertainty regarding whether these sections applied to other bank charges, commissions, and rates in addition to interest.

Section 44 of the Banking Act states, "No institution shall increase its rate of banking or other charges except with the prior approval of the minister."