By Dennis Ndiritu
On March 14, 2019, a three-judge bench of the High Court comprising Justices Francis Tuiyot, Jackline Kamau and Rachael Ngetich ruled that a section of the Banking Amendment Act 2016, which gives the Central Bank of Kenya authority to cap interest rates, is unconstitutional.
In its dictum, the court suspended Sections 33(b) 1 and 2 for 12 months to give the National Assembly an opportunity to reconsider the existence of the provisions. It threw the ball to the court of the Central bank of Kenya to provide measures of clarity to the impugned provisions during this period.
In ‘Boniface Oduor v The Attorney General & 4 Others Commercial & Admiralty Petition No. 413 of 2016’, the petitioner challenged the constitutionality of the interest rate capping law and auxiliary provisions of Section 33B of the Banking Act (Sections 33(b) 1 and 2), which were enacted through the Banking (Amendment) Act No. 25 of 2016. This issue had generated national debate in the country to the extent that Justice Grace Nzioka certified the matter as raising a substantial question of law under the provisions of Articles 165(4) of the Constitution of Kenya, prompting Chief Justice David Maraga to set up a bench to adjudicate on the matter.
The Petitioner claimed that, in so far as the object and effect of the impugned provisions is to cap the interest rate charged by banks and financial institutions for loans, the Act deprives CBK of its exclusive constitutional mandate to solely formulate and implement monetary policy. He further questioned the manner in which the Statute was enacted, pointing out that the failure to present the Bill to Senate for concurrence resulted in the Statute being unconstitutional.
The Petitioner contended that the Statute was discriminatory as it imposes penalties on banks and financial institutions and their chief executive officers but not on customers, thus opening them up to inhuman treatment, abuse of their basic human rights and a denial of their right to fair trial under Articles 25 and 50 of the Constitution. He further contended that the Act deprives banks and financial institutions of their property, the interest in and/or right to deal with their assets in a free, open and democratic society contrary to Article 40 of the Constitution, by interfering with pre-existing contractual rights to receive interest at rates agreed prior to September 14, 2016. In sum, the petitioner argued that the provisions were ‘vague, ambiguous, imprecise, undefined, incomprehensible and open to contradictory interpretations.’
In its decision, the High Court adopted the presumption of constitutionality underscored in ‘Ndyanabo vs Attorney General [2001] EA 495’ and ‘Pearlberg v Varty [1972] 1 WLR 534’ but noted that the onus is on the Petitioner to rebut this presumption. The court considered whether a framework that provides or regulates the manner in which banks and financial institutions set interest rates for credit to its customers is a function of monetary policy – i.e. whether formulation of monetary policy ends with the setting of CBR – or if it extends to the interest rate ceiling introduced by Section 33B of the Act.
The court noted that there was interplay between how banks and financial institutions charged their customers interest and other macroeconomic factors but noted the lack of clarity on this matter as a monetary policy issue. Thus, the setting of Central Bank Rates (CBR) under the provisions of Section 36 of the Central Bank Act, is undoubtedly a function in formulation of monetary policy and therefore the exclusive sphere of CBK; however, the Petitioner had not clearly demonstrated how the impugned provisions violate CBK’s constitutional mandate of formulating monetary policy. The court thus adopted presumption of constitutionality of statute.
It was the court’s view that the object for enacting Section 33B of the Act was to curb the runaway high interest rates by the banks thus acting as a means of consumer protection but did not deprive the petitioners of the right to property.
One enduring principal of law is that no person should be punished for disobeying a law that is uncertain. One must understand in clear terms the law one is required to obey. As drafted, Sections 33 B(1) and (2) of the Act are open to different interpretations. Any words that have the potential of causing confusion must be clearly defined and as such parliament should not assume that the meaning of material words can be inferred. It is on these premises that the court concluded that Section 33B lacked the minimum degree of certainty required of legislation that creates criminal offences and thus struck out for being vague, ambiguous and being in contravention to Article 29 of the Constitution.
In sum the judges agreed with the petitioning banks that the interest rate setting mechanism is discriminatory against banks and their CEOs, and that any such process ought to be consultative amongst all stakeholders including the CBK, the Executive and Parliament.
The ruling seems to favour banks – and CBK – and it is likely that it will impede the protection of consumers from exploitative rates, increased access to finance and affordable credit.
It is hoped that Parliament will rise to the occasion to amend the impugned provisions to rectify the ambiguities noted. It will be interesting to see how this and arising jurisprudence will affect existing commercial contracts, and subsequent implications on the economy. (
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