Kenyan commercial banks are facing heightened legal and financial exposure following a series of court decisions that reaffirm statutory controls on interest rate increases. The High Court’s dismissal of a constitutional challenge by the Kenya Bankers Association (KBA) has reinforced the requirement that lenders must obtain prior approval from the Treasury Cabinet Secretary before increasing interest rates on loans, as stipulated under Section 44 of the Banking Act.
The ruling has far reaching implications for the banking sector, with legal experts warning that lenders could be required to refund billions of shillings to borrowers who were subjected to interest rate increases implemented without the legally required approval. Section 44 provides that “no institution shall increase its rate of banking or other charges except with the prior approval of the minister,” a provision the courts have consistently interpreted as applying to loan interest rates.
In its judgment, the High Court rejected arguments by the banking lobby that Section 44 was unconstitutional or that it unlawfully interfered with the Central Bank of Kenya’s mandate. The court held that the provision does not conflict with the Constitution and does not undermine the Central Bank’s role in monetary policy. Instead, the judges emphasised that the law is designed to protect borrowers from arbitrary or unilateral interest rate changes by lenders.
The ruling follows earlier court decisions where individual banks were found to have violated Section 44 by revising loan interest rates without Treasury approval. In some cases, lenders were ordered to refund millions of shillings to customers or to recalculate loan balances downward after applying unapproved rate increases. These decisions have strengthened the legal position of borrowers seeking redress for what courts have deemed unlawful charges.
Historically, banks have relied on delegated authority granted through a legal notice issued in 2006, which allowed the Central Bank Governor to approve rate changes on behalf of the Treasury. However, the courts have clarified that while administrative delegation may exist, the ultimate legal responsibility remains with the Cabinet Secretary, and any interest rate increase lacking proper approval is invalid.
Consumer advocates have welcomed the High Court’s decision, describing it as a significant boost for transparency and accountability in lending practices. They argue that the ruling offers borrowers greater protection at a time when high interest rates have increased the cost of credit for households and businesses.
On the other hand, banking sector representatives have raised concerns that strict enforcement of Section 44 could limit lenders’ operational flexibility and complicate compliance processes. Despite these concerns, the judiciary has maintained that statutory consumer protections must be upheld, regardless of market pressures.
As borrowers increasingly turn to the courts to challenge historical interest rate changes, banks may now face a wave of refund claims and legal disputes, marking a critical moment for Kenya’s financial sector and its regulatory framework.
