The owners of Nairobi’s 14 Riverside complex have asked the High Court to scrutinise a provision of the Banking Act that allows interest on court-awarded debts to go beyond the original principal, but the National Assembly has defended the law.
Cape Holdings Limited is challenging Section 44A (4) of the Banking Act, which removes judgment debtors and court decrees from the protection offered by the in duplum principle.
The principle generally prevents interest recoverable on a debt from exceeding the outstanding principal. Cape Holdings wants the court to determine whether it is constitutional to allow interest on a debt already determined by a court to continue accumulating beyond the principal amount.
The company argues that the provision can expose borrowers to financial claims that are far greater than the original debt.
Parliament has rejected the challenge, maintaining that determining the extent of a statutory limit on interest is a matter reserved for the legislature under the Constitution.
"The formulation, scope and reach of a statutory interest cap, including any question whether and how it should extend to Categories of debt beyond non-performing bank loans, is a matter of legislative policy squarely within the constitutional mandate of Parliament under Articles 94, and 109 to 113 of the Constitution, Parliament said.
The National Assembly Deputy Clerk Jeremiah Ndombi made the position in an affidavit filed in response to the petition.
Ndombi said Section 44A was not enacted to provide a blanket rule for every type of debt, court enforcement process or interest arising from a decree.
He pointed to other laws that deal with those matters, including the Civil Procedure Act, Civil Procedure Rules, Arbitration Act and Auctioneers Act and Rules.
Parliament has also argued that the law makes a valid distinction between interest charged under a contractual relationship between a bank and a borrower and interest that becomes payable after a court has issued an order or decree.
According to Ndombi, the in duplum rule was introduced to address cases where licensed financial institutions could continue accumulating "unrestrained" contractual interest against borrowers as the lender-borrower relationship continued.
The Banking Act sets limits on the amount that can be recovered from a borrower once a loan becomes non-performing.
Section 44A (1) and (2) provide that the recoverable amount should comprise the principal outstanding when the loan became non-performing, contractual interest that does not exceed the principal and reasonable costs incurred in recovering the debt.
Parliament's argument is that these protections were specifically designed for non-performing loans held by licensed financial institutions and were not intended to apply automatically to debts that have already been converted into court decrees.
Cape Holdings is nevertheless asking the High Court to examine whether the exclusion of judgment debts and court decrees from the statutory interest limit is constitutional.
The petition has therefore raised a wider question over whether the protection against excessive interest should extend beyond non-performing bank loans to other forms of debt that have been determined through court proceedings.
The National Assembly maintains that expanding the reach of the interest cap would involve a policy choice for Parliament, while Cape Holdings is seeking a judicial determination on the effect of the exclusion on debtors.
The High Court will consequently be called upon to consider the legal scope of Section 44A (4) and whether the distinction between non-performing bank loans and court-awarded debts is constitutionally valid.