Supreme Court Rules Cabinet Approval Required for Bank Interest Rate Increases

Brief Background: The dispute between Santowels Limited (“Santowels”) and Stanbic Bank Kenya Limited (“Stanbic”) has been the subject of protracted litigation spanning over 2 decades. The dispute raises important issues concerning the application and regulation of loan interest rates in Kenya’s banking sector.

Santowels commeced legal proceedings against Stanbic Bank in 2004, alleging that Stanbic had overcharged interest on loan facilities contrary to the statutory limits set by the Central Bank of Kenya (“CBK”) for the period between 1993 and 1997. Santowel contended that whereas CBK had capped the maximum interest rate chargeable at 16.5% p.a., Stanbic had acted unilaterally and imposed higher interest rates without justification.

Procedural Posture: High Court Civil Case No. 648 of 2004: Santowels Limited v Stanbic Bank Kenya Limited The High Court, through its judgement delivered on 27 March 2018, held that CBK’s statutory interest rate cap of 16.5% p.a. was applicable and that Stanbic had overcharged interest on Santowel’s loan account without obtaining the approval of the Minister for Finance. Consequently, the High Court awarded Santowels Kshs.8,978,813.63, being the interest overcharged by Stanbic.

Civil Appeal No. 160 of 2018: Santowels Limited v Stanbic Kenya Limited Aggrieved by the decision of the High Court, both parties appealed to the Court of Appeal. Santowels contended that the correct amount that should have been awarded by the High Court was Kshs.68,986,536.28 based on contractual terms and recalculated interest. In its cross-appeal, Stanbic argued that the suit was time-barred under Section 4 (3) of the Limitation of Actions Act, and that the contract between Santowels and Stanbic permitted interest rate adjustments. Vide a judgement dated 28 April 2022, the Court of Appeal upheld the High Court’s finding that Stanbic had overcharged interest but increased the quantum of the overcharged interest recoverable from Stanbic to Kshs.10,449,411.74, plus interest from the date of filing. The Court of Appeal dismissed Stanbic’s cross-appeal.

Civil Application Sup E196 of 2022: Stanbic Kenya Limited v Santowels Limited Aggrieved by the Court of Appeal’s decision, Stanbic sought certification and leave to appeal to the Supreme Court. On 17 February 2023, the Court of Appeal certified the matter as raising issues of general public importance under Article 163 (4) (b) of the Constitution, particularly regarding the interpretation of Section 44 of the Banking Act on the requirement for ministerial approval of interest rate increases.

Supreme Court Civil Petition No. E005 of 2024: Stanbic Kenya Limited v Santowels Limited The Supreme Court considered Stanbic’s appeal and through a judgement delivered on 28 June 2024, held that banks and financial institutions are legally required to seek the prior approval of the Cabinet Secretary for Finance before increasing interest rates on loan facilities under Section 44 of the Banking Act. The Supreme Court rejected Stanbic’s argument that the power to approve rate increases had been delegated to the CBK Governor under Legal Notice No. 35 of 2006. Stanbic applied for a review of the Supreme Court’s judgment, arguing that the authority to approve rate changes had been effectively transferred to the CBK Governor. On 14 March 2025, the Supreme Court dismissed the review application, reaffirming that the statutory requirement for Cabinet Secretary approval remains in force despite the delegation of powers to the CBK Governor. The court held that the delegation to the CBK Governor could not prevail against an express statutory provision which assigned the responsibility of interest rate capping to the Cabinet Secretary.

Holding & Implications: The Supreme Court’s latest ruling clarifies that:

• Banks and financial institutions are subject to regulatory oversight under Section 44 of the Banking Act when adjusting interest rates on loans.
• The requirement for prior approval by the Cabinet Secretary responsible for Finance remains operative, notwithstanding the delegation of certain regulatory functions to the CBK Governor under Legal Notice No. 35 of 2006.
• Any increase in interest rates without the requisite ministerial approval is unlawful and may expose the institution to claims for reimbursement of overcharged interest.

Implications for Banks and Financial Institutions The Supreme Court’s decision introduces a key shift in the regulatory framework governing interest rate adjustments. Specifically:

• Banks can no longer rely on contractual terms or CBK guidelines alone to adjust interest rates. Any increase of interest rates, even where contemplated in a loan agreement, must be expressly approved by the Cabinet Secretary.
• Loan agreements granting banks unilateral discretion to vary interest rates may need to be revised to reflect the statutory approval requirement. Financial institutions should carefully assess any historical interest rate adjustments to determine potential exposure to refund claims.
• Banks will need to engage with the Ministry of Finance to ensure timely approval processes and may face delays in implementing interest rate changes due to bureaucratic requirements.
• Banks that adjusted interest rates without Cabinet Secretary approval may face claims for refunds of overcharged interest. The decision also opens the door to potential class action litigation from customers whose loan facilities were subjected to an interest rate increase sans the requisite approval from the Cabinet Secretary for Finance.
• Banks may need to reassess their risk models and funding strategies in light of the increased regulatory control.

Implications for Customers For customers of financial institutions, the decision provides them with a statutory safeguard against arbitrary increases in interest rates. Customers who were overcharged interest without ministerial approval now have a basis for seeking recovery of the overcharged interest.

Practical Considerations for Financial Institutions To align with the Supreme Court’s decision and mitigate potential exposure, financial institutions should:

• Conduct a comprehensive review of existing lending agreements to ensure that any provisions allowing unilateral interest rate adjustments are consistent with Section 44 of the Banking Act.
• Establish and implement a clear framework for securing Cabinet Secretary approval for any proposed rate increases.
• Undertake an audit of historical interest rate adjustments to identify and quantify any potential refund liability.
• Carefully monitor regulatory changes and stay informed of any legislative or regulatory developments that may affect the implementation of Section 44 of the Banking Act.

Conclusion: The Supreme Court’s ruling represents a key realignment of interest rate regulation in Kenya. The requirement for approval by the Cabinet Secretary before adjustmenting interest rates reinforces consumer protection and enhances regulatory oversight over banks and financial institutions. On the other hand, the decision also introduces practical and operational challenges for banks and financial institutions, which must now carefully navigate the approval process to ensure compliance and mitigate commercial exposure.

How MMAN Advocates can assist We are available to audit your loan agreements and provide tailored advice on how to implement the Supreme Court’s decision.

If you would like further information or guidance on this development, please feel free to reach out to Jomo Nyaribo and Vincent Oloo on [email protected] and [email protected].

Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.