Court Gives Lenders Powers to Increase Interest Rates

The High Court has temporarily suspended a rule that requires lenders to first seek approval from Treasury before making adjustments to loan interest rates. This was after the Kenya Bankers Association (KBA) argued in an ongoing court case that the process, as per section 44 of the Banking Act, clouds the constitutional independence of the Central Bank of Kenya in formulating and implementing monetary policy.

“Conservatory order issued is to remain in place pending further orders of the Court of Appeal in Kenya Bankers Association’s appeal against the judgement of 11th December,” the law firm representing KBA, Denton Hamilton Harrison and Mathews, said in a statement.

Bankers are pushing for the rule to be struck out arguing that the approval requirement undermines the constitutional independence of the Central Bank of Kenya (CBK), particularly in implementing monetary policy.

While the High Court has not permanently whitewashed the section 44 of banking rules, the implications is that staying of the order will impact borrowers, especially those with loans whose interest rates are adjustable. From an experts perspective, the court directive could increase cost of borrowing for asset-based financing like mortgages and business facilities.

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From a customer’s perspective, the implications of deliberately giving banks the option to determine interest rates of loans will likely push up the cost of borrowing. According to CBK Governor Dr. Kamau Thugge, there is no need for lenders to seek approval from the CS National Treasury for interest rate adjustments.

“The decisions from the courts have been that monetary policy is independent. Therefore, when we change the interest rate, that should translate immediately to lending rates,” Thugge said.

Today, the lending rates have been fairly stable coming down significantly to 8.75 percent CBR rate, a level that gives good environment for individuals and businesses. The latest decision to temporarily allow banks to adjust interest rates may slow uptake of loans.

But how will the conversation shape up? The Court of Appeal will have the final say on the temporary stay of the Banking Act.

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