Victor Ngaruiya
The In duplum rule is a rule of law which provides that when interest on a debt equates to the capital of the debt, interest ceases to continue accruing. The in duplum rule serves to aid debtors in financial difficulties by holding that it is unlawful to recover interest equal to or more than the capital sum upon which interest had accrued. However, the rule is divided into the common law and the statutory law. But since Kenya’s history does not point towards any application of the in duplum rule prior to the amendment made to the Banking Act, it will be taken that all references to the in duplum rule in a Kenyan context refer to the statutory In duplum rule.
The Amendment that gave birth to the In Duplum Rule in Kenya
Before the rule became applicable in Kenya, the Government had to put a ceiling on the amount of interest that a lender can charge a borrower on a given loan. Consequently, in 2006, vide the Banking (Amendment Act) Act No.9 of 2006, which became effective from the 1st May 2007, the Government effected a raft of amendments to the Banking Act Cap. 486, Laws of Kenya. This came hot on the heels of previous attempts to introduce these measures through the Central Bank Act Cap. 491, Laws of Kenya, which were thwarted by the banking industry players who had successfully urged the constitutional court to declare them illegal and unconstitutional in the case of Kenya Bankers Association & others v Minister for Finance & another (No 4) [2004] 1 KLR 61 . After that decision, there was no choice but to repeal section 39 of the Central Bank Act and reintroduce that concept again in Kenya, this time, through the Banking Act Section 44A.Where the introduced Section 44A set a Limit on interest recovered on defaulted loans:
“An institution shall be limited in what it may recover with respect to a non performing loan to the maximum amount under subsection (2).The maximum amount referred to in subsection (1) is the sum of the following: the principal owing when the loan becomes non-performing; interest, in accordance with the contract between the debtor and the institution, not exceeding the principal owing when the loan becomes non-performing; and expenses incurred in the recovery of any amounts owed by the debtor.”
The above cited two subsections formulate what is known as the in duplum rule. It can be seen from paragraph (b) of subsection (2) that the amount of accrued interest on the loan is restricted to equal the amount of the principal amount owing when the loan becomes non-performing. In effect, therefore, the lender cannot recover at any one given time an amount that is more than double the outstanding principal. However there is a recent precedent that sought to expand the financial institutions obligated to observe the above principle. Therefore, this Article specifically concentrates on the extension of the In Duplum rule in Kenya following the recent judicial pronouncements.
Application of the Rule in Kenya
The duplum rule was elucidated by the Court of Appeal in the case of Kenya Hotels Limited Vs Oriental Commercial Bank Ltd (Formerly known as Delphis Bank Limited) (2019) eKLR thus:-
“In duplum” is a Latin phrase derived from the word “in duplo” which loosely translates to “in double”. Simply stated, the rule is to the effect that interest ceases to accumulate upon any amount of loan owing once the accrued interest equals the amount of loan advanced. Since the introduction of this principle on 1st May 2007 it has been applied by the courts with reasonable degree of consistency…The In duplum rule is concerned with public interest and its key aim was to protect borrowers from exploitation by lenders who permit interest to accumulate to astronomical figures. It was also meant to safeguard the equity of redemption and safeguard against banks making it impossible to redeem a charged property. In essence, a clear understanding and appreciation of the in duplum rule is meant to protect both sides.”
It is settled Law that the In Duplum rule has a retrospective effect. The retrospective effect of the in duplum principle was first considered by the Court of Appeal in the case of Lee G. Muthoga v Habib Zurich Finance (K) Limited & another [2016] eKLR. Where the court held that by dint of Section 44(6) of the Banking Act, all the provisions in Section 44A (1) to (5) applied in Kenya. It however did not carry out any legal analysis to back up its superficial holding. Moreover, the application of the retrospectivity of the rule was clearly reiterated by the Court of Appeal in the case of Housing Finance Company of Kenya Limited Vs Scholarstica Nyaguthii Muturi & Another (2020) eKLRin the following terms:-
“As we have shown section 44A of the Banking Act came into force on 1st May 2007. That provision of law sets up the maximum amount of money a banking institution that grants a loan to a borrower may recover on the original loan. The banking institution is limited in what it may recover from a debtor with respect to a non performing loan and the maximum recoverable amount is defined as follows in section 44A(2):“The maximum amount referred in subsection (1) is the sum of the following-
a) The principal owing when the loan becomes non-performing;
b) Interest, in accordance with the contract between the debtor and the institution, not exceeding the principal owing when the loan becomes non-performing; and
c) Expenses incurred in the recovery of any amounts owed by the debtor”.
By that provision if a loan becomes non-performing and the debtor resumes payment on the loan and the loan becomes non-performing again the limitation under the said paragraphs shall be determined with respect to the time the loan last became non-performing. In addition, by section 44A (6) it is provided: “This section shall apply with request to loans made before this section comes into operation, including loans that have become non-performing before this section comes into operation.”
Undoubtedly, retrospective application of the law is inequitable as it requires compliance with laws that were neither in existence nor contemplated at the time of contracting. However, it can be seen from the above analysis that the Banking Act had an elegant solution to this issue, being the recapitalization of the accrued interest as at the date of coming into force of Section 44A. This effectively capped the principal recoverable and consequently the interest that could accrue on such a facility.
The Recent Landmark Judicial Pronouncement that Advanced the In Duplum Rule
Initially, Kenyan courts had held that in duplum rule only applied to the banks as was confirmed by Justice Tuiyot in the case of Desires Derive Limited v Britam Life Assurance Co. (K) Ltd. However, vide a letter dated 13th January 2018, Allen Waiyaki Gichuhi EBS, C. Arb personally petitioned Parliament to consider amending the Consumer Protection Act and introduce the in duplum principle to all money lending transactions. This is the position in South Africa where the in rule is enshrined in the National Credit Act, No 34 of 2005. In his view, the amendment would have saved innocent Kenyans from the shylocks who bleed them dry with usurious interest rates. It is against the backdrop of this petition that the researcher narrowed down to the two recently pronounced Rulings.
On the19th of August 2022, The High Court of Kenya delivered its judgement in: Mugure & 2 others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR) where it held that all lenders including digital lenders and microfinance institutions, whether regulated under the Banking Act or not, are subject to the application of the In duplum rule. This was a game changer to the ruling that was delivered in the case of Momentum Credit Limited v Kabuiya (Civil Appeal E035 of 2022) [2022] KEHC 13705 (KLR), where the court had held that the In duplum rule does not apply to microfinance institutions operating under Microfinance Act.
The Brief facts of the Momentum Credit case are as follows: A lender had given a facility to a borrower, who defaulted forcing the lender to recover the debt by disposing security provided by the borrower. Unfortunately, the sale proceeds were not sufficient to clear the outstanding debt. The lender therefore sued in the Small Claims Court for the shortfall. The borrower successfully argued before the Small Claims Court the lender as a microfinance institution was subject to the in duplum rule in the Banking Act. The Small Claims Court agreed and held the lender could not recover the shortfall in light of the exorbitant and unconscionable interest rates charged. On appeal, the High Court overturned these findings. The Court found the relevant provision of the Banking Act did not apply to the lender as it was not a deposit taking institution. Interest rates were governed by the contract between parties, and the Court would only interfere if the contract was unconscionable, unfair or oppressive. The borrower had not proved either of these so there was no basis for the Court to intervene. The Court therefore allowed the lender’s appeal and entered judgment for the shortfall in its favour. In this Case, the Court focused on who Section 44 of the Banking Act was meant to apply to. It held that the section only applied to banks, mortgage finance companies, and finance institutions gazetted by the Cabinet Secretary in charge of finance.
Implications
The in duplum rule was a creature of the Banking Act, Chapter 488 of the laws of Kenya, and applied to banks and financial institutions that are regulated under the Act. By extending the in duplum rule to those involved in “lending business” and failing to clarify what amounts to lending business, courts have widened the statutory berth to include unregulated lenders. The judgement would expose such unregulated lenders to lawsuits from borrowers who may feel disadvantaged by the penalties and interest imposed once the loans become non-performing. Therefore Lenders who are not regulated by the Banking Act should therefore tread carefully. With the 2022 Digital Credit Providers Regulations applying the rule to digital lenders, it would appear the winds are blowing towards In duplum applying to all forms of lending.
Reference
Introduction of the In Duplum Rule in Kenya: A Legal Mechanism of Equitable Distribution of Resources or a Poverty Redistribution Initiative? Georgiadis Makadia Khaseke 2008.
