In a landmark ruling, the Supreme Court of Kenya has declared that interest rates on loans and facilities advanced by banks and financial institutions are subject to the regulatory process under Section 44 of the Banking Act.

This requires these institutions to seek the approval of the Treasury Cabinet Secretary responsible for Finance before increasing interest rates.

The court's decision was delivered in response to an appeal filed by Stanbic Bank Kenya Limited against Santowels Limited.

The appeal, filed on 1st March 2023 and dismissed on 21st March 2023, revolved around the question of whether banks and financial institutions need to seek approval from the Cabinet Secretary for matters relating to finance prior to increasing interest rates on loans and facilities advanced to their customers.

In its judgment, the Supreme Court declared, “A declaration do hereby issue that interest rates on loans and facilities advanced by banks/financial institutions are subject to the regulatory process under Section 44 of the Banking Act. In that, such banks/financial institutions are required to seek the approval of the Cabinet Secretary responsible for matters relating to Finance prior to increasing interest rates on loans and facilities advanced.”

Additionally, the court dismissed the appellant's appeal, "The appellant's appeal dated 1st March, 2023 and filed on 2nd March, 2023 is hereby dismissed."

The judgment emphasized the importance of this regulatory process in protecting public interest, noting that “due to the public interest nature of this matter each party should bear their own costs.”

The case traces back to a long-standing banking relationship between Stanbic Bank Kenya Limited (the appellant) and Santowels Limited (the respondent) established between 1993 and 1997.

The agreed terms included an interest rate of 32 per cent per annum above Stanbic’s base lending rate.

Stanbic Bank reserved the right to vary the interest rate and periodically notified the Satowels of any adjustments.

Santowels paid the interest as required until 2002, when disputes arose regarding the interest charged.

In 2003, Santowels engaged Interest Research Bureau (K) Ltd. to audit and verify the accuracy of the interest charged on the facilities.

The audit revealed overcharged interest, leading to further disputes and the eventual closure of the Santowels's accounts with Stanbic.

The Supreme Court's judgment underscores the necessity for regulatory oversight in the financial sector, ensuring that changes in interest rates are subjected to scrutiny to protect consumers from arbitrary increases.

This ruling is set to have significant implications for the banking industry in Kenya, promoting transparency and fairness in the financial services sector.