Introduction
The phrase “parties are bound by their own contracts” is a common refrain in commercial disputes. Traditionally, courts have refrained from altering contracts between consenting parties, upholding them regardless of how unfavourable or burdensome the terms may seem or be.
However, in Kenya, with the advent of the 2010 Constitution, the line between enforcing contractual terms and protecting parties from exploitation has become increasingly blurred. Article 10 (2) of the Constitution establishes equity and public policy as fundamental elements in the enforcement of socioeconomic rights enshrined in the Bill of Rights. Article 46 of the Constitution protects consumer rights, which include freedom from exploitative business practices. As a result, courts have been called upon in several cases to interpret where the balance lies between upholding the freedom of contract and safeguarding consumers from exploitative practices.
A key area where this balance is tested is in lending and borrowing, particularly in the relationship between borrowers and financial institutions. Banks and other financial institutions have always faced criticism for their aggressive approach to loan defaults, perceived as a strategy to capitalise on the misfortunes of borrowers. This criticism forms the backdrop of the discussion in this article.
In this article, we examine the in duplum rule and its implications in Kenya. We explore how the courts have interpreted and applied the rule, and whether it is limited to deposit-taking institutions or also extends to other lenders, such as microfinance institutions and digital credit providers that are not governed by the Banking Act.
The concept of the in duplum rule
The term in duplum is Latin for “double.” The rule ensures that a borrower is not overwhelmed by runaway interest charges on non-performing loans. It stipulates that interest on a debt should not exceed the principal amount of the loan. Once the accumulated interest equals the outstanding principal, no further interest can accrue.
Legal framework and application of the in duplum rule in Kenya
The in duplum rule was introduced in Kenya on 1st May 2007 through the Banking (Amendment) Act No. 9 of 2006, which incorporated Section 44 A into the Banking Act. The rule limits the amount a lender can recover from a borrower when a loan becomes non-performing. Specifically, it caps the recoverable amount to the sum of:
- The principal owed when the loan became non-performing.
- The interest that has accrued, but which cannot exceed the principal, and
- Reasonable expenses incurred by the lender in attempting to recover the loan.
The rule kicks in when the loan becomes non-performing. A non-performing loan is defined as a loan on which no payment has been made for 90 days or more. Once this status is reached, interest accumulation halts as soon as it matches the outstanding principal.
The rule is widely regarded as a consumer protection mechanism, which is now a constitutional protection under Article 46 of the Constitution of Kenya. It mitigates exploitative lending practices and encourages lenders to take proactive steps to recover loans in a timely manner.
Courts in Kenya have reinforced the significance of the in duplum rule in several decisions. In Mwambeja Ranching Company Limited & another v Kenya National Capital Corporation [2019] KECA 436 (KLR), the Court of Appeal clarified the application of the rule and held that it applies to the total outstanding debt, including any arrears or accumulated interest at any given time, and not just the original loan amount.
The Scope of Application in Kenyan Jurisprudence
There is an unsettled debate in Kenya as to whether the in duplum rule applies to banks and other financial institutions governed under the Banking Act only, or whether it also applies to microfinance institutions and other non-banking entities.
In the case of Mugure & 2 Others v Higher Education Loans Board (HELB) eKLR [2022] (“the HELB case”). The petitioners in this case had borrowed from HELB, a government agency tasked with offering loans to students to fund their higher education. Over time, their loans became non-performing, and the interest and penalties imposed by HELB far exceeded the original amounts borrowed. For instance, one of the petitioners borrowed approximately KES 82,000 in 2004, but by 2016, the debt had ballooned to approximately KES. 540,000 due to accumulated interest and penalties.
The petitioners argued that HELB’s actions violated their rights under Article 46 of the Constitution of Kenya and the in duplum rule by charging interest and penalties that exceeded the principal amount. HELB argued that as a statutory body, it was not bound by the Banking Act, which governs banks and financial institutions. HELB argued further that the Higher Education Loans Board Act authorised the agency to set interest rates and penalties according to its internal regulations, and thus, the in duplum rule did not apply to its operations.
The High Court, however, decided in favour of the petitioners, expanding the scope of the in duplum rule beyond traditional banks and financial institutions. The court held that the rule applies to all entities engaged in the lending business, including government-backed lenders like HELB.
Conversely, in the case of Momentum Credit Limited v Kabuiya [2022] KEHC 13705 (KLR) decided in October, the High Court (Majanja J.) held that non-deposit-taking institutions, like microfinance lenders, are not subject to the Banking Act and therefore not bound by the in duplum rule. In that case, an appeal arose from a decision of the Small Claims Court in which the applicant was successful in proving that a loan granted to it by the appellant had interest rates that were exorbitant and unconscionable. The appellant contested the decision on the grounds that it was not a financial institution that would be legally bound by the in duplum rule under section 44 of the Banking Act. The High Court held that for an organisation to be classified as a financial institution, it had to accept deposits from members of the public and employ that money or part of it for lending or investment as contemplated under the Act.
In 2016, the High Court of Kenya in Desires Derive Limited v Britam Life Assurance Co. (K) Ltd [2016] KEHC 3890 (KLR) held that the rule was only applicable in the circumstances of banks established under the Banking Act.
Implications for lenders and borrowers
The judgment in the HELB case opened the door for borrowers to challenge excessive interest and penalties imposed by non-bank lenders, particularly in cases where the loans become non-performing. Following that precedent, lenders are now exposed to litigation and financial losses if they continue to charge interest beyond what is permissible under the in duplum rule. Lenders have a responsibility to closely monitor and manage loans carefully, especially those that become non-performing, as the rule could limit their ability to recover substantial interest on defaulted loans.
For borrowers, this precedent set in the HELB case is a major victory because it offers a broader protection from being overwhelmed by interest charges and penalties that outgrow their original debt. Proponents of the position taken by the court in the HELB case argue that such pronouncements were a deliberate attempt to restore fairness in lending practices, ensuring that borrowers are not trapped in a cycle of debt due to exorbitant interest rates and penalties.
Legal confusion and further clarification
The contrast between the precedent set in the HELB case (decided on 19th August 2022) and that in the Momentum Credit Limited v Kabuiya case (decided on 7th October 2022) shows that courts are still divided on whether the rule should apply universally or be limited to financial institutions governed by the Banking Act. Both of these are High Court decisions, which complicates the debate because of the concurrent jurisdiction.
While some courts, as in the HELB case, have chosen to extend the rule to non-bank lenders, others maintain that the rule applies only to institutions specifically regulated by the Banking Act. This legal ambiguity is likely to persist until further clarification is provided, either through legislation or through consistent judicial pronouncements, especially by the Court of Appeal. This ambiguity means that lenders need to tread carefully when dealing with non-performing loans, as further legal challenges may continue to refine the scope of the in duplum rule.
Non-bank lenders
For non-bank lenders, particularly digital credit providers and microfinance institutions, the expansion of the rule presents real challenges. The Central Bank of Kenya (Digital Credit Providers) Regulations of 2021 introduced some oversight for digital lenders, but these regulations do not yet fully address interest rate caps or the in duplum rule.
While the Business Laws (Amendment) Act, 2024 (No. 20 of 2024) did not directly amend Section 44 A of the Banking Act, which codifies Kenya’s in duplum rule, it introduced significant reforms that may indirectly influence how the rule is applied and enforced.
These entities are now required to register and obtain licenses from the CBK, with non-compliance attracting penalties of up to KES. 20 million or three times the monetary gain from non-compliance, whichever is higher. By subjecting these lenders to CBK regulation, the Act potentially broadens the scope of the in duplum rule beyond traditional banks and financial institutions. This aligns with judicial trends favouring the extension of borrower protections to a wider range of credit providers.
Non-bank lenders now face the prospect of legal challenges if they continue to charge interest and penalties that exceed the original loan principal. Moreover, borrowers may now challenge loans that have become unmanageable due to excessive interest. This will lead to a potential wave of lawsuits against lenders, whether or not they succeed. To mitigate these risks, lenders must review their loan terms and conditions and adjust their business models to comply with the broader interpretation of the rule.
Comparative analysis with South African law
This principle exists in both South African and Kenyan legal systems, but it has developed differently in each jurisdiction. In South Africa, the rule originates from the common law and has since been reinforced by statute, particularly the National Credit Act (NCA) of 2005. South Africa offers an instructive comparative lens, particularly through the scholarship of Henrich Schulze. In his article “Are there exceptions to the in duplum rule?”.
In South Africa, the in duplum rule applies once a debt becomes in mora—that is, in default. The courts have long upheld this principle as rooted in public policy, aimed at discouraging exploitative lending practices. Henrich Schulze explores how the South African judiciary has handled potential deviations from the rule. One such deviation arose in the case of Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd SAFLII [1998], where the court controversially held that interest could accrue beyond the principal once litigation commenced. This position created uncertainty, leading to further litigation. Eventually, in the case of Paulsen v Slip Knot Investments (Pty) Limited (CCT 61/14) SAFLII [2015] , the Constitutional Court reaffirmed the rule’s public policy basis and emphasised that exceptions must be tightly circumscribed, thereby restoring the clarity that had been eroded by earlier judgments.
Schulze’s article also considers the question of whether a debtor can waive the protection afforded by the rule. While some judgments appear to suggest that waivers may be possible after default, Schulze warns against any broad acceptance of this position, arguing that allowing waivers would undermine the protective character of the rule. South African law continues to balance the rights of creditors and debtors with a strong emphasis on fairness and consumer protection, particularly under the NCA, which codifies the in duplum principle and explicitly limits the total cost of credit recoverable in the event of default.
Unlike the Kenyan version codified under statute, the South African approach is nuanced as discussed above. Courts recognise certain exceptions, such as where the debtor delays proceedings unreasonably or where the parties have reached a settlement agreement that alters the repayment terms.
South Africa also expressly incorporates the rule into its National Credit Act, which provides that interest and fees on defaulting loans cannot exceed the unpaid principal debt. This statutory framework offers a broader, consumer-protective approach akin to the Kenyan Constitution’s Article 46. However, the South African judiciary tends to emphasise equity and good faith, occasionally allowing parties to depart from strict application of the rule where justified.
The Kenyan experience, particularly after the HELB and Momentum decisions, shows a jurisdiction still wrestling with whether the rule is a statutory protection only applicable to banks or a broader principle of fair lending. In contrast, South Africa’s legal landscape appears more harmonised due to its robust statutory and common law foundation. Kenya could benefit from adopting a similar cohesive legislative framework that codifies the rules across all forms of lending, offering clarity to both borrowers and lenders.
Conclusion
The In Duplum Rule continues to shape the legal landscape of lending in Kenya, serving as a critical safeguard for borrowers against punitive interest and exploitative lending practices. While originally confined to deposit-taking institutions under the Banking Act, recent judicial decisions—particularly the HELB case—have signalled a shift toward broader consumer protection, potentially extending the rule’s reach to non-bank lenders. However, the conflicting High Court decisions underscore the need for clarity, either through appellate jurisprudence or legislative amendment.
In the meantime, both borrowers and lenders must navigate this evolving terrain with caution. Lenders, especially non-bank and digital credit providers, should reassess their lending policies in light of growing judicial activism in favour of borrower rights. On the other hand, borrowers have a constitutional and statutory basis to challenge disproportionate interest burdens. Ultimately, the ongoing legal discourse on the in duplum rule reflects a deeper pursuit of equity and fairness in Kenya’s financial ecosystem.