IN DUPLUM RULE: STRICTLY STATUTORY OR PUBLIC POLICY?

In its literal sense, in duplum means double the amount. Therefore, in essence, the in duplum rule is a rule of law which provides that unpaid interest ought to stop accruing once it equals the unpaid principal amount.

The rule was introduced into Kenya’s banking sector by its codification under Section 44A of the Banking Act, Cap 488, Laws of Kenya. The section stipulates that:

“An institution shall be limited in what it may recover from a debtor with respect to a non-performing loan … the principal owing when the loan becomes non-performing; interest, in accordance with the contract between the debtor and the institution, not exceeding the principal owing when the loan becomes non-performing; and expenses incurred in the recovery of any amounts owed by the debtor…”

Simply put, when a loan stops being repaid as agreed, that is, becomes non-performing, the lender can only claim:

• – The principal amount of money that was still unpaid at that time;
• – Interest agreed in the contract, but only up to an amount equal to that unpaid loan (the interest cannot exceed the principal); and
• – Reasonable costs incurred in trying to recover the debt.

A non-performing loan is a loan on which no payment has been made for 90 days or more.

In principle, the in duplum rule seeks to protect the debtor from overexploitation by credit-rendering institutions. Having the objective of protecting borrowers from finding themselves entangled in a thread of debt that they cannot untangle; it has generally been described as being protective. This public policy limb of the rule was first advocated for through the judgment issued in Pelican Investment Ltd v National Bank of Kenya Ltd [2000] 2 EA 488 (CCK), where the learned judge stated:

“…such a legal proposition might be ideal in this country as it will ensure that debtors do not suffer the requirement upon them to pay extra-large interest caused by the indolence, lapse, or deliberate failure by creditors to act, thereby allowing unserviced loans to accumulate interest to unimaginable levels. It will protect the debtors while ensuring that the creditors get their money back for further circulation and hence the economy will be healthy…”

However, this position is not without controversy, which lies in the definition of credit-rendering institutions and subsequently the scope of the application of the in duplum rule.

WHAT IS AN INSTITUTION

Section 2 of the Act describes an “institution” to mean:

A bank: a company that carries on banking business, meaning it receives money from the public as deposits or through current accounts, allows customers to withdraw and make payments and then uses that money to provide loans, make investments, or carry out other financial activities for its own benefit and at its own risk; or

A financial institution: a company that is not a bank but still deals in handling money from the public. It takes deposits from people, money that can be withdrawn either on demand, after a set period, or with notice and then uses that money to make loans, investments, or other financial transactions for its own benefit and at its own risk; or

A mortgage finance company: a non-bank company that takes money from the public, usually as deposits, and uses that money mainly to provide loans for land-related purposes such as buying, building, improving, or developing property.

SCOPE OF THE APPLICATION OF THE IN DUPLUM RULE

Strictly speaking, the wording of the legislation consciously restricts the application of the rule to non-performing loans given by the aforementioned institutions. This was posited by the Court of Appeal in Prideinn Hotels & Investments Limited v Tropicana Hotels Limited [2018] KECA 651 (KLR), where the learned judge averred as follows:

“…Further, I decline to accede to the appellant’s invitation to find that the in duplum rule was applicable. The said rule is only applicable in cases of loans or financial facilities offered by financial institutions as defined under the Banking Act.”

However, the aforementioned stance is not representative of the entire bench. Courts have expressed divergent views in their interpretation of the scope of the application of the in duplum rule. While one line of authority has taken a literal approach to statutory interpretation, another has adopted a purposive approach. These two disparate views are evident in judicial pronouncements.

In Momentum Credit Limited v Kabuiya (Civil Appeal E035 of 2022), the facts were that Momentum Credit Limited loaned Teresia Nduta Kabuiya Kshs 1,300,000.00 secured by a motor vehicle. Kabuiya defaulted, leading to repossession and sale of the vehicle for Kshs 1,500,000.00 against an outstanding amount of Kshs 2,050,328.00. Momentum claimed Kshs 731,722.00 (principal, interest, penalties, and legal costs). Kabuiya contested the claim, arguing that the interest rate was exorbitant and that the vehicle had been undervalued. The Small Claims Court dismissed the claim, but the High Court allowed the appeal, with Majanja J (as he then was) ruling that Section 44A of the Banking Act did not apply to the appellant as it was not a deposit-taking institution.

Conversely, the High Court in Petition No. E002 of 2021: Anne J. Mugure & 2 Others v Higher Education Loans Board declared that the in duplum rule applies to all persons involved in the lending business. The facts of the case were that the petitioners had borrowed money from the Higher Education Loans Board (HELB) to finance their undergraduate studies. They argued that HELB had been charging exorbitant interest rates and penalties which exceeded the principal amount borrowed. They sought a declaration that such charges violated their constitutional rights and the in duplum rule. HELB, on the other hand, argued that the HELB Act prescribed repayment terms and penalties, and that the in duplum rule did not apply to it.

This position was reiterated in Jelangat & Another v Mwananchi Credit Limited & Another [2023] KEHC 19922 (KLR), where the court observed:

“In this regard, I hold that the rule is not only applicable to banks and financial institutions under the Banking Act but extends to all lenders. A narrow interpretation of the application of the rule will defeat justice. It will be discriminatory in that those who borrow from banks will enjoy greater protection, leaving those borrowing from elsewhere exposed. Borrowing is borrowing, and it would be inequitable for one group in society to be treated differently.”

WHAT DOES THIS MEAN FOR LENDERS AND BORROWERS ALIKE

By extending the in duplum rule to those involved in the “lending business” without clearly defining what constitutes such business, the courts have widened its scope to potentially include unregulated lenders. These judgments expose such lenders to legal challenges from borrowers who may feel disadvantaged by excessive interest and penalties once loans become non-performing.

While the rule appears to lean in favour of borrowers, it has equally been recognized as serving the interests of lenders. This was well settled by the Court of Appeal in Mwambeja Ranching Company Limited & Another v Kenya National Capital Corporation [2019] eKLR where the Court observed as follows:

“The duplum rule is concerned with public interest, and its key aim is to protect borrowers from exploitation by lenders who permit interest to accumulate to astronomical figures. It is also meant to safeguard the equity of redemption and prevent lenders from 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.”

CONCLUSION AND RECOMMENDATIONS

The jurisprudence surrounding the in duplum rule reflects tension between strict statutory interpretation and broader public policy considerations. While the Banking Act limits its application to regulated institutions, courts are increasingly willing to extend the rule to all lenders in the interest of fairness and equity.

In light of these developments:

• i. Lenders, including non-bank and informal lenders like microfinance institutions and even shylocks, should exercise caution in the structuring of interest and penalty clauses, ensuring that they do not expose themselves to legal challenges grounded in the in duplum principle.

• ii. Borrowers should be aware that they may invoke the rule, even outside traditional banking relationships, particularly where interest and penalties appear excessive or oppressive.

Ultimately, until there is definitive legislative or appellate clarification, both lenders and borrowers must navigate this area with prudence, bearing in mind the courts’ growing inclination to apply the rule as a matter of public policy to achieve substantive justice.

How We Can Help

Whether you are a credit provider seeking to bulletproof your recovery processes or a debtor facing unmanageable interest claims, our firm provides expert legal strategy in banking and finance litigation. We help clients navigate the complexities of interest caps, non-performing loan disputes, and debt restructuring.