Over the past year, banks have reported several non-performing loans and several debtors have gone into distress. When considering the interest rate payable, how does the in duplum rule apply?
The common law in duplum rule provides that the interest on arrears ceases to accrue once the sum of the unpaid interest equals the amount of capital outstanding at the time. The rule directly translates to “double the amount”. On May 1, 2007 the common law in duplum rule was incorporated into our statute law with the introduction of Section 44A of the Banking Act
The rationale for the in duplum rule was explained by the Court in the case of Mwambeja Ranching Company Limited and Another v Kenya National Capital Corporation [2019] eKLR as follows:
“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.”
The rule is operative once a loan becomes non-performing at which point it limits the maximum amount of interest that can be charged on that non-performing loan. For example, if your loan became non performing when the outstanding principal was KES. 50,000,000 then by operation of the rule the maximum amount the bank could claim would be the sum of: KES. 50,000,000 principal plus Maximum of KES. 50,000,000 interest plus any expenses incurred in recovering the loan.
However, if the loan started performing and then after some time become non-performing again when the outstanding principal was KES. 25,000,000 then the 25m figure is what would be used to determine the maximum amount claimable.
Can a creditor therefore claim interest equal to your principal loan amount if you’ve already paid an amount equal to the principal?
To determine this question, depends on whether the amount was paid before the loan was declared in default. Any amounts paid before the loan was declared to be in default are not considered when applying the in duplum rule.
The in duplum rule would only come into operation once the loan was declared to be in default. A loan is considered to be in default when the bank sends a formal notice in writing to the borrower.
The outstanding principal at the time of the most recent declaration of default, will therefore be the figure used to calculate the outstanding amount payable. In theory this amount could be equal or higher than the initial principal loan amount.
However the Court has placed the burden of proving the outstanding amounts on the bank. Such evidence would include statements of accounts, notices for default and payments received.
The in duplum rule can protect a borrower from predatory interest, but only applies when a loan is in default.
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