On 7th March 2019, a three (3) Judge Bench of the High Court sitting in Nairobi declared the interest capping provision unconstitutional on the basis that it is vague, ambiguous, imprecise and indefinite.
The constitutional petition filed by Boniface Oduor in the case of Boniface Oduor v Attorney General & another, Kenya Banker’s Association & 2 others (Interested Parties) (2019) eKLR, sought to declare section 33B of the Banking Act (Cap 488 laws of Kenya) (the Banking Act), the interest cap provision, unconstitutional.
In its Judgment, the High Court has declared section 33B of the Banking Act unconstitutional but suspended the decision for a period of twelve (12) months to allow the National Assembly to consider whether it will make the necessary amendments to the Banking Act to regularize the unconstitutionality.
Background of the Interest Rate Capping
Section 33B of the Banking Act contested by the Petitioner was enacted through the Banking (Amendment Act) Act No. 25 of 2016 (the Amendment Act). It, among others, capped interest which a bank or a financial institution can charge for a credit facility in Kenya at “no more than four percent the base rate set and published by the Central Bank of Kenya.”
Proponents of the Amendment Act argued that interest cap would bring down the cost of credit in Kenya. Those opposed to it, including the Central Bank of Kenya (CBK), argued that the cap will hinder access to credit.
Away from the debate as to whether statutory interest rate caps reduce the cost of credit or not, the Amendment Act presented a myriad of interpretation challenges from the outset. A plain reading of section 33B of the Banking Act led to divergent interpretations. CBK through the Banking Circular No. 4 of 2016 (CBK Circular) attempted to address the ambiguity of the provision by issuing a guideline to banks and financial institutions and indicated that the base rate referred to in the provision is the Central Bank Rate (CBR) determined by CBK from time to time, that the interest cap will be set at four percentage basis points above the CBR and that the interest rates in the Amendment Act will apply on an annual basis. The CBK Circular has been operationalized by banks and financial institutions for the last two (2) years.
The Petitioner’s constitutional petition was based on grounds that section 33B of the Banking Act:
- deprives CBK of its constitutional mandate of formulating and implementing monetary policy;
- was passed without the involvement of Senate;
- is discriminatory against banks and financial institutions because the penalty for breach of the section applies to banks and financial institutions only and not to customers;
- infringes on property rights of banks and financial institutions; and
- is vague.
CBK and the Kenya Bankers Association supported the petition. The Consumers Federation of Kenya (COFEK), the Attorney General and the National Assembly opposed it.
The High Court declared section 33B of the Banking Act unconstitutional on the basis that it lacks clarity and is open to different interpretations. It cited the ambiguity of the use of the words “credit facility” and “base rate” in the Amendment Act. It stated that the term “credit facility” is not statutorily defined and therefore opens the provision to different subjective interpretations. Additionally, the High Court stated that the failure to sufficiently describe in the Banking Act that the base rate referred to in the provision is the same as the base rate set by CBK in the Central Bank Act could open section 33B to various interpretations. The High Court also observed that the phrase “four percent, the base rate set and published…” appearing in the provision is ambiguous. Since non-compliance with the provision is a criminal offence, the High Court was of the opinion that such a provision should be unequivocal which can be achieved through good legislative drafting. The High Court also said that the attempt by CBK to address the ambiguity by way of the CBK Circular did not assuage the ambiguity of the provision.
The High Court also stated that by imposing a penalty on a chief executive officer of the bank or financial institution for breach of section 33B of the Banking Act but excluding the customer involved in the same transaction from the penalty, section 33B of the Banking Act is discriminatory and therefore unconstitutional.
The High Court was not convinced that the provision stifles CBK’s statutory role of formulating and implementing monetary policy as alleged by the Petitioner; neither did it find that the provision is an affront to property rights of banks and financial institutions. Lastly, the High Court observed, obiter, that the Amendment Act did not require the approval of Senate as it was neither a bill concerning county governments, nor a special bill as contemplated in the Constitution.
Unless there is a successful appeal against the High Court decision, the National Assembly has a period of twelve months to consider amending section 33B of the Banking Act to address the shortcomings that have rendered it unconstitutional. In the meantime, banks and financial institutions continue to be guided by the CBK Circular indicated above. If the National Assembly does not amend the provision within twelve months, the provision will become null and void which will effectively remove interest caps. It is instructive to note that the decision does not make statutory interest caps introduced by way of unequivocal and precise legislation unconstitutional. We will have to wait to see how the National Assembly responds to this Judgment.
If you have any queries regarding the interest cap law and the financial services practice area generally, please do not hesitate to contact Peter Mwaura at email@example.com. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.