High Court suspends interest rate cap law

Written By: Ben Njue
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Borrowers are staring at possibilities of the increased interest rate on loans they take from banks.

This follows a ruling by a three-Judge High Court Bench in Nairobi that has ruled that section 33B of the Banking Act 2016 is unconstitutional.

The law put a limit on interest rates to not more than 4 percent above Central Bank Rate.

The law has now been suspended, but loans would be priced at the current capped rate for a year to give parliament time to reconsider sections that were declared unconstitutional by the High Court.

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In a two page summarized ruling found illegal section 33B subsection 1 and 2 of the Banking Act on capping of interest rates saying it disrupts the existing contractual relationships between banks and customers.

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Justices Francis Tuiyot, Jacklin Kamau and Rachel Ngetich ruled that the operations of the Act will remain suspended for a period of 12 months in order to allow parliament an opportunity to reconsider the existence of the provisions.

According to section 33B part 1 sets the maximum interest rate chargeable for a credit facility in Kenya at no more than four percent, the base rate set and published by the Central Bank of Kenya; and the minimum interest rate granted on a deposit held in interest-earning in Kenya to at least seventy percent, the base rate set and published by the Central Bank of Kenya.

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Subsection two which reads, a person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law has also been suspended.

In the meantime, the court said pending consideration of National  Assembly and the secular 4  of  2016  dated 13th Sept 2016  issued by Central Bank of Kenya will continue to provide measures of clarity to the impugned provisions offering borrowers temporary relief for a year.

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In 2016 the rate ceiling was introduced following concerns about high lending rates by banks.

The banks have since said that the move caused them to cut on loans to high-risk groups.

Currently, borrowers are charged a maximum interest of 13 percent.

CBK’s Monetary Policy Committee is set to hold a meeting at the end of this month to review the rate which has been retained at 9 percent in the past four sittings.

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