The High Court in Chuka has dismissed an appeal by Faulu Microfinance Bank, affirming that the in duplum rule under Section 44A of the Banking Act applies to deposit-taking microfinance banks. The appeal arose from a dispute over a loan advanced by Faulu Microfinance Bank to borrower Kenneth Mutegi Kilonzo in August 2019.
According to court documents, Faulu extended a KES 569,000 loan repayable over 84 months at an annual interest rate of 20.53 percent, with monthly instalments of KES 13,052.73. The borrower defaulted on repayments in April 2022, prompting the lender to file a claim seeking KES 621,209.04, representing the outstanding loan balance together with accrued interest and contractual charges.
Although the borrower neither entered appearance nor filed a defence, the Small Claims Court declined to award the full amount sought. Instead, the trial court applied the in duplum rule under Section 44A of the Banking Act and entered judgment in favour of Faulu for:
- KES 145,523.97 for breach of contract;
- Interest at court rates from April 2022 until payment in full; and
- KES 15,000 in costs.
Dissatisfied with the substantially reduced award, Faulu appealed the decision.
Faulu Challenged Application of Banking Act
In its appeal, Faulu argued that the trial magistrate erred by applying Section 44A of the Banking Act despite the institution being regulated under the Microfinance Act, 2006. The lender maintained that the statutory limitation on recoverable interest applies only to banks and financial institutions governed by the Banking Act and not to microfinance institutions.
Faulu further argued that because the proceedings were uncontested, the court should simply have enforced the contractual terms freely agreed upon by both parties, including the loan’s acceleration clause. The lender relied on previous court decisions affirming that courts should not rewrite contracts unless there is evidence of fraud, coercion or undue influence.
Judge Finds Faulu Falls within Banking Act
Justice R. Lagat-Korir rejected the lender’s arguments, holding that Faulu is a deposit-taking microfinance bank, bringing it within the scope of the Banking Act.
The judge observed that although judicial decisions have varied on whether the in duplum rule extends to microfinance institutions, Faulu’s status as a deposit-taking microfinance bank places it squarely within the definition of an institution contemplated under Section 2 of the Banking Act. The court therefore found that the trial magistrate had correctly applied the law in limiting the recoverable amount.
Justice Lagat-Korir also relied on earlier jurisprudence emphasising that the in duplum rule serves an important public interest by protecting borrowers from excessive interest accumulation. The court cited the Court of Appeal decision in Mwambeja Ranching Company Limited & Another v Kenya National Capital Corporation (2019), which described the rule as a safeguard against lenders allowing debts to grow to astronomical levels through accumulated interest.
The judge further referred to the High Court decision in Jelangat & Another v Mwananchi Credit Limited & Another (2023), which held that restricting the rule solely to banks would create unequal protection for borrowers depending on the type of lender they use. The earlier decision noted that borrowing should attract equal legal protection regardless of whether credit is obtained from a bank, microfinance institution or another lender.
Faulu also argued that the trial court should have enforced the loan agreement’s acceleration clause rather than limiting recovery using the in duplum rule. However, Justice Lagat-Korir held that once Section 44A was found applicable, the statutory protections took precedence over contractual provisions.
The judge concluded there was no legal error in declining to enforce the acceleration clause where doing so would undermine the protections offered by the Banking Act. After reviewing the evidence and applicable law, the High Court found the appeal lacked merit and dismissed it in its entirety. The court declined to award costs against the borrower.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.