High interest rate upheld

In the case of National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd, [2001] KECA 362 (KLR), the plaintiffs alleged that after borrowing KES 25 million in 1991 and providing Professor Ongeri's property as loan security, they adhered to rescheduled repayments but nonetheless faced advertisements for the property's sale by the defendant. They also contested the punitive interest rates, as the amount owed had escalated to approximately KES 100 million.

The defendant argued that the plaintiffs had failed to service the loan despite being given adequate time and acknowledged the debt. They asserted their right to charge compounded monthly interest and to sell the property if the debt remained unpaid.

The court observed that the agreed interest rate was a minimum of 20% per annum, calculated on reducing balances and payable monthly in arrears. The judge determined that the defendant was entitled to charge interest at rates exceeding 20% per annum. It was noted that the debt had increased due to high interest and penalties. The judge recognized that the plaintiffs were bound by the terms of the charge document and could not claim that the interest rate was excessive.

The Court of Appeal, referencing the judgment in Fina Bank Limited vs Spares & Industries Limited (Civil Appeal No 51 of 2000) (unreported), held that a court cannot rewrite a contract between parties unless there is evidence of coercion, fraud, or undue influence. As no such evidence was presented, the parties were bound by the terms of their contract, and the judge in the lower court lacked jurisdiction to order a waiver of interest.

It should be noted that this case predates the introduction of the in duplum rule by the Banking (Amendment) Act, 2006 and must be understood in that context. The in duplum rule now limits the interest recoverable by a financial institution on a defaulted loan to the principal, interest (which should not exceed the principal owing at the time of default) and loan recovery expenses. The application of this case was also distinguished in Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited [2014] eKLR.