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High Court terminates law capping loan interest rates

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Loan Interest Rates in Kenya: The High Court of Kenya has terminated the law that capped interest rates at 14 per cent and later 13 per cent.

President Uhuru signing the bill that capped interest rates and lowered cost of loans into law in September 2016

Following the ruling by a three judge bench, borrowers can now expect to borrow money at exorbitant rates.

“3-Judge High Court Bench rules that capping of interest rates under Banking Act Sec 32B is unconstitutional. However, implementation is suspended for 12 months to allow regulator to put in place appropriate mechanisms,” the Central Bank of Kenya (CBK) announced after the ruling.

The court ruled that section 33B (1) and (2) of the Banking Act, providing for CBK to regulate how much lenders can earn from customers, was vague.

Judges also declared section 33(B) of the Act discriminatory against banks’ CEOs, for providing a punishment in the event they breached the interest rate caps law.

They observed that the section had left out other players in loan – customers and even guarantors – who were also likely to breach the Act.

“The provisions of section 33B (1) and (2) of the Banking Act is vague, imprecise, ambiguous and indefinite. And insofar as the contravention of the provisions attracts penal consequences, the same violate Articles 29 and 50 of the Constitution. Article 29 (a) of the Constitution guarantees a person the right not to be deprived of freedom arbitrarily or without just cause,” the judges ruled.

According to the judges, setting up of interest rate caps was a consultative process which ought to consider the voice of all stakeholders – the CBK, the Executive, banks and Parliament.

The case was filed by a Mr Boniface Oduor through lawyer Miller Wanjala. He argued that the National Assembly irregularly passed the Banking (Amendment) Bill, 2016 and went beyond their mandate in taking over duties of CBK in determining the maximum interest rates banks should charge on loans.

“The act in its entire form is illegal, null and void. It should not be allowed to continue operating when Members of Parliament violated several laws in the process of enacting it,” said Mr Wanjala.

He contested that the new law is likely to bring instability in the financial sector and affect the country’s economy, after it took away CBK’s role in formulating and overseeing the implementation of all monetary policies.

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