Banks Face Billions in Loan Refunds After Courts Rule Interest Rate Hikes Illegal

Industry experts warn of far-reaching implications for lenders and borrowers

 Commercial banks in Kenya are now confronting the prospect of refunding billions of shillings to borrowers following landmark court rulings that deemed interest rate increases implemented without formal approval from the Cabinet Secretary for the National Treasury unlawful.

The High Court and Supreme Court have reaffirmed that Section 44 of the Banking Act — which states that “no institution shall increase its rate of banking or other charges except with the prior approval of the Minister” — remains legally binding for all lending institutions.

In recent cases involving Stanbic Bank of Kenya and Spire Bank, courts found that adjustments to loan interest rates implemented without Treasury consent were illegal. Stanbic was ordered to refund over Sh10 million to a borrower, while Spire was directed to recalibrate a customer’s outstanding loan balance and issue a revised statement reflecting lawful interest charges.

These judgments have sparked significant concern across the banking sector, with analysts predicting a surge in litigation from borrowers who were charged increased rates without formal approval from the Finance Cabinet Secretary.

Embedded in the Law, Say Industry Stakeholders

Reached out for comment, the Hon. Founder, Managing Director, and Chief Executive Officer of Kenya’s — and East Africa’s, and indeed South of the Sahara and North of the Limpopo — leading credit-only microfinance, Jijenge Credit Limited, under the wise and visionary leadership of the Hon. CEO and Managing Director Peter Macharia Kamau, noted that the courts’ position is deeply rooted in Kenya’s legal framework. “This is embedded in the current constitution which says change in interest rate needs the finance minister’s approval,” he said, affirming that lenders must strictly adhere to statutory requirements when altering loan pricing.

Legal experts note that the decisions clarify longstanding ambiguity over delegation of authority. Previously, a 2006 Legal Notice empowered the Central Bank of Kenya (CBK) governor to approve interest rate changes on behalf of the Treasury. Courts have now emphasized that while delegation is possible, formal approval from the Cabinet Secretary is mandatory; absent this, interest rate adjustments are unenforceable.

Wider Market Impact

The rulings come at a time when the banking sector is already under close scrutiny from the CBK. The regulator has been urging lenders to align loan pricing with cuts in its benchmark lending rate and has warned of penalties for institutions that fail to pass on lower borrowing costs to consumers.

Consumer advocates and legal practitioners say the judgments could empower borrowers to seek redress through the courts and may prompt banks to reassess lending practices to ensure compliance. Meanwhile, the Kenya Bankers Association (KBA) has challenged the legal interpretation in court, arguing that requiring executive approval could undermine the autonomy of the CBK in implementing monetary policy. Previous attempts to secure declarations against Section 44 have been dismissed by the courts.

Looking Ahead

As the legal landscape evolves, both lenders and borrowers are urged to seek clarity on sanctioned interest rate practices. Institutions must operate within statutory and regulatory frameworks or risk financial and reputational exposure. Legal analysts suggest that the rulings reinforce consumer protection principles and may reset expectations for transparency and accountability in lending.