It is usual for banks in Kenya to charge a higher rate of interest to customers who borrow amounts over than the agreed facility amounts. The charging of this higher rate of interest is usually referred to by banks in Kenya as an 'over-limit penalty', and is justified by banks on the ground that the excess amount borrowed would usually be unsecured and thus constitute a higher risk.

Certain borrowers have argued that this higher rate of interest constitutes a 'penalty' and as such banks should not be entitled to claim it. An argument has been put forward (without any sound legal basis) by lawyers acting for these borrowers that the equitable principles applicable to penalty interest in the case of default should equally apply in these cases. In any event the issue was recently judicially considered in Sameh Textiles Industries Limited v The Delphis Bank Limited. The judge in this case rejected the argument outright and confirmed that the charging of additional interest where a customer borrows sums in excess of agreed limits does not constitute a penalty and can properly be claimed by banks. Banks would be advised to cease using the term 'over-limit penalty', which attracts unnecessary attention. Reference can be made instead to 'additional interest'.

For further information on this topic please contact Atiq Anjarwalla or Karim Anjarwalla at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337625) or by fax (+254 2 337620) or by e-mail ([email protected] or [email protected]).

The materials contained on this web site are for general information purposes only and are subject to the disclaimer.