On 8th November 2019, His Excellency President Uhuru signed into law the Finance Bill 2019. After the said assent, there have been Media reports which have solely focused on the fact that the law on capping of interest rates has now been repealed.
While this is indeed the position, the daunting question to banks and borrowers is, How does the scrapping of the cap on interest rates affect already existing loans?
By way of a brief background, on 14th September 2016, the Banking Act was amended to introduce the capping of interest rates. The capping of interest rate was introduced by Section 33B of the said Act. Upon the introduction of Section 33B, Banks could only set the maximum interest rate chargeable on a facility at no more than 4%, the Central Bank Base Rate.
However, on 8th November 2019, the Finance Bill, which was signed into law, scrapped the capping of interest rates on credit facilities by repealing the said Section 33B. This means that once the Finance Act is gazetted and operationalized, Banks will exercise their discretion on how to charge interest rates on loan facilities.
This then takes us to the question that we seek to address. How does the scrapping of the cap on interest rates affect already existing loans?
Section 46of the Finance Act addresses this issue. It categorically provides that Banks shall continue to apply the interest rates agreed upon prior to the repeal of Section 33B of the Banking Act. This means that Banks cannot proceed to vary or charge new interest rates on the basis that the law on capping of interest rates has been repealed.
The next question then is, can a Bank exercise its contractual right to vary the interest rate under an already existing loan agreement?
Yes, it can, but the Bank is limited to a downward variation! The Finance Act still, under Section 46, provides that if the Bank is to vary the interest rate chargeable on a loan, then it can only do so if the variation is meant to lower the interest rate chargeable on that loan.
Therefore, the effect of the Finance Act on loan facilities with Banks is;
Banks can charge interest rates on loan facilities at their discretion;
All loans entered into after the capping of interest rates i.e, after 14th September 2016, will not be affected by the repeal of Section 33B and will continue to accrue interest at the existing rates prior to this repeal;
All loans which were varied downwards, pursuant to the introduction of capping of interest rates, will continue to accrue interest at the rates prior to the repeal of Section 33B of the Banking Act;
And finally, Banks cannot vary the interest rates chargeable on existing loans unless it opts to vary the interest rate downwards.
Should you require clarification on this article, do not hesitate to contact firstname.lastname@example.org
Refer to Section 45 of the Finance Act, which provides that the Banking Act is amended by repealing section 33B.
Refer to Section 45 of the Finance Act which provides that Notwithstanding the repeal of section 33B, any agreement or arrangement to borrow or lend which was made or entered into, or varied pursuant to the provisions of section 33B(now repealed), shall continue to be in force on such terms, including interest rates, and for the duration specified in the agreement or arrangement: