In our first article, we gave a brief overview on the amendments to the Banking Act which article focused on the need for full disclosure by financial institutions; Interest rates on deposits and credit facilities & Penalties imposed upon contravention of the amendments to the Act.
This article focuses on whether the amendments affect pre-existing loans. To answer this question we need to briefly discuss the key features of loans and thereafter apply the law. (Kindly note that the article equally applies to deposits.)
Nature of Loans
In most instances, where a bank advances a loan, the debtor is required to repay the loan through instalments over a period of time. Meaning that a loan agreement is one that is performed though the continued payment of the facility. Therefore a loan agreement is one that is defined by continued performance. To simplify it, if the debtor is required to pay an instalment Kshs. 100/- on the 30th of every month, then it means that, every 30th of the month, a new obligation arises. The new obligation is expected to be honoured regardless of whether the debtor defaulted on the previous month.
This obligation is pegged on the payment terms of the loan agreement and once the debtor makes the payment of Kshs. 100.00, that obligation is fulfilled and it is until the 30th of the following month that a new obligation arises. This the typical nature of loans. (Please note that this scenario has been extremely simplified for purposes of this article).
It is on this background that we shall deal with the issue of the applicability of the amendments.
Applicability of the Amendments
It has been argued publicly that application of the amendments to pre-existing loans is be retroactive and as a general principal of law, the law does not apply retrospectively. To explain this; if for instance there was no law forbidding littering, and person X litters today, the tomorrow a law is passed stating that littering is an offence, person X cannot be charged with the offence of littering. After-all, he littered when littering was not an offence. The law will only be enforceable from the day of it being gazetted and published and not a day earlier. This example simply explains that the law is not retrospective, or, it does not operate “backwards”.
It is this principle that has been used to argue against the amendment affecting loan agreements that were entered between banks and its customers before the gazettement of the Amendments. However, as stated above loans create a continuing obligation. A loan by its very nature requires continued performance, which is the payment of instalments.
This is unlike most acts in law which are a one-time event, like littering, murder, stealing etc. A loan agreement creates a continuing contract unlike other contracts where performance is a one-off event. This therefore means that the moment the amendments become enforceable, which is 14th September 2016, the maximum interest rate chargeable shall not be more than 4 percent above a base rate set by the CBK. The law will only be applicable from the said date and on new obligations on pre-existing loans.
However, the law shall not be applicable to obligations that had not been fulfilled as at 14th September 2016. This means that, loans which were in arrears or obligations accruing prior the commencement date will not be subject to the reduction of interest rates. (Remember the law does not “operate backwards”). Further the law will not require banks to lower the arrears due to the capping of rates. The rates applicable on arrears will be that which operations prior to 14th September 2016.
It is imperative to note that in law, contractual obligations cannot supersede statutory or legal obligations. Simply put, if party X & Y entered into a contract for Y to take X fishing in Lake Z every month for Kshs. 10/-, then a law is passed outlawing fishing on Lake Z, X cannot insist for Y to take him fishing as this will be breaking the law. The same principle, though simplistic, applies.
The law supersedes all contractual obligations and parties are required to obey the law regardless of the terms of the contract. A party to a contract can therefore not insist on the performance of that which has been outlawed.
We hope that this article has been useful to you.