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In Duplum Rule Judgement and its Effect

posted 2 years ago

That Kenya has risen as the African fintech and digital financial products giant is no longer news. The various reports on Kenya’s innovation and tech development especially in mobile money, digital commerce and state of lending all point to a remarkable deepened financial inclusion. Fintechs, digital lenders and virtual businesses have grown tremendously, considerably changing commerce and financial services industries.

Whilst non-bank lending has successfully grown in Kenya, it is likely to be shaken by recent legal developments. Recently, the High Court of Kenya in Petition No. E002 of 2021 – Anne J. Mugure & 2 Others v Higher Education Loans Board extended the application of the in duplum rule to catch ‘those involved in the lending business’. In Mugure, the petitioners borrowed money from the Kenyan Higher Education Loans Board (HELB) to finance their undergraduate studies. They later argued that HELB had charged them exorbitant interest rates and penalties, which exceeded the principal loan. On the basis of this, they claimed violation of their constitutional rights as well as of the in duplum rule. Amongst other prayers, the HELB argued that the in duplum rule did not apply to it, as the HELB Act allowed for the imposition of penalties. The court found that the imposition of interest and penalties that exceeded the principal amount violated the in duplum rule as well as the petitioners’ constitutional rights.

Whilst the on-surface effect of this ruling is to extend the rule to non-bank lending businesses, curiously the realm of this extension was not provided by the Court. The Court did not define ‘those involved in the lending business’ and this possibly lends itself to conjecture.

The in duplum rule is a statutorily set customer relief provision that effectively limits interest charged on borrowings to maximum of the principal amount borrowed, i.e. that interest should cease to accumulate upon any amount of the loan owing once the accrued interest equals the principal amount owing when the loan becomes non-performing.

Prior to this Mugure ruling, the relief was understood to apply to banks only as was set in Desires Derive Ltd v Britam Life Assurance Co (K) Ltd (2016) eKLR. The Mugure ruling thus, specifically departed from Desires. Interestingly, the Court judged that the rule was enacted for public interest and that “nothing bars the extension of such relief to specific borrowers under the HELB Act”. Moreover, it stated that “…but it would read into that section the in duplum rule.”

By extending the relief to other statutes, it in essence catches any contractual loan arrangements. Effectively, any lending structure would have to comply with the in duplum rule including intra-group and third-party lending since it appears the courts would take the approach of extending such reliefs into these transactions or reading the in duplum rule into the laws, rules, regulations and policies that would govern them.

It is likely that this case will be appealed against since the impact is wide and far reaching. For instance, mortgage contracts, digital lenders and other unregulated lenders stand to undergo through many lawsuits from borrowers who may feel disadvantaged by the penalties and interest imposed. Meanwhile, understand that there are efforts to amend the Consumer Protection Act to include the in duplum rule for other types of lending.

Another area that is likely to develop from this is on taxes, in particular deductibility of interest considered ‘in excess of the in duplum rule’. In as much as the current tax law allows deduction of costs incurred in business, and in respect of interest, being within market rates and thin capitalization threshold, with the recent fiscal trend, nothing would stop the policy makers from enacting this ruling to effectively deny tax deduction on interest paid over and above principal amount.  

The writer is a Tax and Law Partner, EY Kenya. The views expressed herein are personal.

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