Banks risk loan refunds over unapproved rate changes

By Newsflash Writer

Kenyan banks could be on the hook for billions of shillings in potential refunds following court rulings that declared changes to loan interest rates without formal approval from the Treasury Cabinet Secretary unlawful.

In two landmark decisions, judges found that Stanbic Bank and Spire Bank had breached the law by adjusting lending rates without obtaining the necessary consent from the Treasury, resulting in significant financial exposure for the banking industry.

In one ruling, Stanbic was ordered to reimburse a client over Sh10 million, while Spire Bank was instructed to revise a loan balance downwards. These decisions have rattled the banking sector, fuelling fears that more borrowers could launch similar legal claims.

The Kenya Bankers Association (KBA), the sector’s main lobby group, has once again turned to the courts in a bid to challenge the legal provision requiring banks to seek Treasury approval before revising lending rates. KBA CEO Raimond Molenje confirmed the group had returned to court, although he did not disclose specific details. This marks KBA’s third attempt to intervene on the matter, following two unsuccessful efforts to join earlier proceedings.

Historically, banks have obtained approvals for rate changes from the Central Bank of Kenya (CBK), following a May 2006 legal notice issued by then Finance Minister Amos Kimunya, who delegated that authority to the CBK governor.

Legal notice challenged in court

The recent lawsuits against Stanbic and Spire Bank challenged Legal Notice No. 35 of 2006, arguing that only the Treasury CS has the legal mandate to approve changes in lending rates. Courts agreed, affirming that while a CS may delegate authority, responsibility cannot be passed on.

Section 44 of the Banking Act clearly stipulates that no financial institution may raise interest rates or other fees without the prior approval of the Cabinet Secretary. Both the Supreme Court and the High Court ruled that the legal notice did not override this requirement.

In his 2006 directive, Mr. Kimunya stated that the CBK governor could approve rate changes on his behalf, with periodic reporting to the Treasury. However, the courts have now ruled that any variation in loan interest terms made without direct involvement of the CS is legally invalid — a finding that could open the floodgates to fresh legal action from borrowers.

This legal turn comes at a time when banks are grappling with a surge in loan defaults, which hit Sh724.2 billion — or 17.6 percent of Kenya’s total loan book — by the end of April. Interest rates have risen sharply over the past two years, climbing from an average of 12.36 percent in November 2022 to 17.22 percent by November 2024. Many banks increased borrowing costs during this period without securing the Treasury’s consent.

Stanbic case sets precedent

The rulings have placed the Treasury back at the center of interest rate regulation — a role it had effectively ceded to the CBK for nearly two decades. The Stanbic case was initiated by Santowels Limited, a company that borrowed from the bank between 1993 and 1997. The sanitary products manufacturer later closed its accounts in 2002, but filed suit a year later claiming that Stanbic had unilaterally increased interest rates, inflating its repayments by Sh17.25 million.

The dispute worked its way through the courts and eventually landed at the Supreme Court, which upheld the lower courts’ view that interest rates must comply with section 44 of the Banking Act and that Treasury approval is mandatory. KBA sought to participate in the case, citing its sector-wide implications, but the apex court dismissed the lobby’s application, ruling that KBA had a vested interest and could not pose as a neutral friend of the court.

“The applicant cannot, within the same proceedings, transmute from asserting a vested interest to claiming neutrality as an amicus curiae,” the court said in a March 2025 judgment. KBA had argued that it had the expertise to assist the bench in interpreting banking regulations.

Spire Bank also found in breach

The Stanbic ruling was cited in a July 24, 2025 High Court decision against Spire Bank, which had raised a customer’s interest rate from 28.5 percent to 32.5 percent without Treasury authorization. The court ordered the bank to recalculate the loan using the approved rate and issue a revised balance.

The issue of interest rate regulation remains highly sensitive in Kenya. In 2016, former President Uhuru Kenyatta introduced rate caps to make credit more accessible. However, the policy had unintended consequences, constraining lending and ultimately being repealed two years later.

As pressure mounts on banks and the Treasury reassumes its regulatory role, the sector may now have to brace for a new wave of legal scrutiny over past lending practices.