The third quarter of 2017 saw a number of changes in the regulatory framework of the Rwandan financial sector, the most significant of which included a change in the law governing the regulator of the financial sector (the National Bank of Rwanda) and the enactment of the New Banking Act governing the organisation of banking, both of which were gazetted in October 2017. The New Banking Act brought about many changes, but one that will affect banking business most significantly, particularly in the lending market, is the introduction of the in duplum rule.
In duplum directly translates to “double the amount”, but in law the in duplum rule provides that arrear interest ceases to accrue once the sum of the unpaid (accrued) interest equals the amount of capital outstanding at the time (and not the amount of capital originally advanced). To illustrate the in duplum rule, if someone borrows RWF5-million and had already repaid RWF3-million, under the in duplum rule, the cap of interest to be paid at the time of recovery is RWF2-million ie, the borrower’s total obligations cannot be more than RWF4-million.
This rule, which is based on South African common law and has its roots in ancient Roman and Dutch law, was previously unknown to the Rwandan lending market and is now expressly provided for under article 112 of the New Banking Act, where it states that:
“A bank is limited in what it may recover from a debtor with respect to a nonperforming loan to the following maximum amount: (1) the unpaid balance of the principal when the loan becomes nonperforming; (2) interests, in accordance with the contract between the debtor and a bank, not exceeding the principal owed when the loan becomes nonperforming; (3) expenses incurred in the recovery of any amounts owed by the debtor.”
Although the in duplum rule is very new in the Rwandan legal system and is yet to be interpreted by Rwandan courts, its introduction will certainly work well for borrowers who have at times in the past had to pay three times or more the principal originally advanced. The rule, therefore, enhances borrowers’ protection from potential exploitation by banks.
The New Banking Act also sends a strong message to lenders who delay in recovering non-performing loans by enforcing their security and end up recovering more than twice the outstanding principal from borrowers.
Lenders must now take into consideration the in duplum rule when structuring their funding transactions. For instance, when funding transactions are structured such that the loans (principal and interest) will only become repayable after some time, during which period interest accrues on a compounded basis, it may happen that the aggregate accrued and unpaid interest reaches the amount of the unpaid capital. At this point, in accordance with the New Banking Act, interest would cease to accrue.