A Commentary on the Supreme Court’s decision in Stanbic Bank Kenya Limited v Santowels  Limited (Petition No. E005 of 2023) 

On June 27, 2024, the Supreme Court of Kenya delivered a landmark judgment in the case of Stanbic Bank Kenya Limited vs. Santowels Limited (SC Petition No. E005 of 2023). This ruling has set a new precedent in the banking sector by declaring that

banks and financial institutions must seek prior approval from the Cabinet Secretary before increasing interest rates on loans and facilities under Section 44 of the Banking Act.

This decision has far-reaching implications for both banks and consumers, reshaping the financial landscape in Kenya.

INTEREST RATES ARE NOT SUBJECT TO THE BANK’S DISCRETION.

The Supreme Court’s decision marks a significant shift in the regulatory framework governing the banking sector. Historically, the regulation of interest rates was governed by the now-repealed Section 39 of the Central Bank of Kenya (CBK) Act, which empowered the CBK to set maximum and minimum interest rates. With its repeal, the assumption was that interest rates would be liberalized, allowing banks to negotiate rates freely with their customers. However, this ruling clarifies that despite the repeal of Section 39, interest rates remain subject to regulatory oversight under Section 44 of the Banking Act.

WHAT THIS MEANS FOR BANKS?

For banks, this decision introduces an additional layer of regulatory compliance. Before any increase in interest rates on loans or facilities, banks must now obtain approval from the Cabinet Secretary. This process is expected to involve thorough scrutiny, ensuring that any proposed rate hikes are justified and in line with government policy and economic conditions. The requirement for prior approval aims to protect consumers from exploitative practices and ensure that interest rates remain reasonable.

This regulatory oversight could lead to operational delays as banks navigate the approval process. The additional administrative burden may also translate into increased costs for banks, which could, in turn, impact their profitability. Banks will need to enhance their compliance frameworks and possibly engage more with regulatory bodies to ensure timely approvals and avoid disruptions to their operations.

A WIN FOR BORROWERS!

For borrowers, the Supreme Court’s ruling is a welcome development.

It safeguards against arbitrary interest rate increases, providing an additional layer of protection in loan agreements.

This ruling ensures that interest rates remain within reasonable bounds, potentially preventing cases of exorbitant interest rates that have been a source of financial distress for many borrowers.

However, consumers should remain vigilant. They must review their loan agreements to ensure compliance with this new regulatory requirement. Any interest rate increases that were implemented without the necessary approval could be subject to challenge, and consumers may be entitled to refunds on overpaid interest.

RISK OF LITIGATION FOR BANKS?

One significant risk arising from this ruling is the potential for litigation against banks with increased interest rates without obtaining the required regulatory approval.

Borrowers affected by such unauthorized rate hikes may seek legal redress, leading to a surge in lawsuits. Banks could face substantial financial liabilities if courts order refunds of overcharged interest or other penalties.

Banks must audit their past practices and rectify any non-compliance to mitigate the risk of future litigation.

Conclusion: A Balanced Approach to Financial Regulation

The Supreme Court’s decision in the Stanbic Bank vs. Santowels case is pivotal in Kenya’s financial regulation history. By clarifying the application of Section 44 of the Banking Act, the court has ensured that interest rates on loans and facilities remain subject to necessary checks and balances. This ruling protects consumers and promotes a stable and fair banking environment. As both banks and consumers adjust to this new regulatory framework, the focus should remain on fostering a financial system that is both innovative and equitable.