Introduction of the In Duplum Rule in Kenya: A Legal Mechanism of Equitable Distribution of Resources or a Poverty Redistribution Initiative?
Introduction of the In Duplum Rule in Kenya: A Legal Mechanism of Equitable Distribution of Resources or a Poverty Redistribution Initiative?
by Georgiadis Makadia Khaseke (LLB, Moi).
The author is a bar admission candidate and a Legal Assistant in the firm of Waweru Gatonye & Company Advocates.
"If you lend money to any of my people who are poor among you, you shall not be like a money lender to him; you shall not charge him interest."(Exodus 22: 25) "Why then did you not put my money in the bank, that at my coming I might have collected it with interest?" Excerpt from The Parable of the Minas (see Luke 13-26) (The Holy Bible, New King James Version (1985) Thomas Nelson Inc. For further excursion on the paradox of charging interest also see Leviticus 25:35-37, and Deuteronomy 23:19-20)
Sir George Jessel once observed that "if there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts, when entered into freely and voluntarily, shall be held sacred and enforced by courts of justice." (Chesire, GC., Fifoot, CHS., (Eds) (1964) Cheshire & Fitfoot: The Law of Contract London: Butterworth & Co 6th Edn) These sentiments still hold water now as they were before to the extent that today, courts of law exercise a great measure of caution before interfering with contracts as executed by the parties.( National Bank of Kenya Ltd vs Pipe Plastic Samkolit (K) Ltd & another  502, the court stated that, "A court of law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud, or undue influence are pleaded and proved."(Page 507)
This trend denotes one of the central attribute of a free market economy, or laissez-faire, as is known in French. In such an economy, "individualism is both fashionable and successful; liberty and enterprise are taken to be the inevitable and immortal insignia of a civilized society". (Chesire, GC., Fifoot, CHS., (Eds) (1964) Cheshire & Fitfoot: The Law of Contract London: Butterworth & Co 6th Edn) The state plays no role in the control or regulation of commercial affairs as the individuals are left to transact as they deem fit. (Adam Smith, An Inquiry into the Causes and Nature of Nations, (The Wealth of Nations), available at www.ibiblio.org/smithA_Wealth Nations_p.pdf, observes that: "But the law ought always to trust the people with the care of their interest, as in their local situations they must be generally able to judge better than the legislator can do."(Page 410)
Notwithstanding the above, a pure laissez-faire economy is socially untenable. This is because of the economic realities and the notion that parties to a contract are at arm?s length is not always true. There is always a real or supposed imbalance of bargaining power between the contracting parties. (Adam Smith, An Inquiry into the Causes and Nature of Nations, (The Wealth of Nations), available at www.ibiblio.org/smithA_WealthNations_p.pdf, observes that: "But the law ought always to trust the people with the care of their interest, as in their local situations they must be generally able to judge better than the legislator can do."(Page 410) Thus, the society has long recognized the need to protect the less strong of its members and to rescue those who find themselves in situations of exploitation. (Chesire, GC., Fifoot, CHS., (Eds) (1964) Cheshire & Fitfoot: The Law of Contract London: Butterworth & Co 6th Edn) This is premised on the fact that whereas private enterprise is the main road to public good, freedom of contract must at times succumb to the exigencies of the state and to the ethical assumptions upon which it is based.8 Therefore the state intervenes in certain circumstances by way of legislation designed to protect its members from the harsh effects of some commercial transactions induced to benefit the commercial people.
It appears that it was in pursuit of such interventionist/protectionist approach in private affairs that the Government finally put a ceiling on the amount of interest that a lender can charge a borrower on a given loan. Consequently, in 2006, vide the Banking (Amendment Act) Act No.9 of 2006 (The Kenya Gazette Supplement No 93 dated 2nd January 2007) which became effective from the 1st May 2007 (Pursuant to Legal Notice No 52 of 2007), the Government effected a raft of amendments to the Banking Act Cap. 486, Laws of Kenya. This came hot on the heels of previous attempts to introduce these measures (Vide the Central Bank of Kenya (Amendment) Act, 2000(Act No 4 of 2001) through the Central Bank Act (Proviso to Section 39 (1) (now repealed) stipulated thus, "Provided that the maximum interest chargeable under this section shall not exceed the principal sum loaned or advanced and provided that this subsection shall only apply to contracts for loans or advances made or renewed after the commencement of this section.") Cap. 491, Laws of Kenya, which were thwarted by the banking industry players (It is interesting to note that the Central Bank of Kenya enjoined itself in the case as an interested party opposing the amendments when in fact it was the one charged with ensuring compliance of the said measures by financial institutions!) who had successfully urged the constitutional court to declare them illegal and unconstitutional. (Kenya Bankers Association & others v Minister for Finance & another (No 4)  1 KLR 61 (The Donde Bill Case), where it was held that the said Act No 4 of 2001 was inconsistent with the Constitution to the extent of its retrospective operation and in particular inconsistent with section 77(4) of the Constitution of Kenya.)After that decision, there was no choice but to repeal Section 39 of the Central Bank Act Pursuant to the Central Bank of Kenya (Amendment) Act, 2004 (Act No 8 of 2004) section 4) , and reintroduce that concept again in Kenya, this time, through the Banking Act. (The Government?s persistence seems to have been inspired by the wise words of Henry Ford that "failure is the opportunity to start again, this time more intelligently". Quote from NTV "Money Matters" aired on 12th August 2008.)
This paper specifically concentrates on the amendments introduced to the Banking Act by section 17 of the said Banking (Amendment) Act (Act No 9 of 2006) by virtue of which a new section, Section 44A, was incorporated. This section, simpliciter, limits the amount of interest that can accrue on the principal sum/loan lent to a borrower. Though not expressly provided for, this section introduces the in duplum rule in Kenya. (See Deepen Shah, "Kenyan Banking Law - Introducing the In duplum rule" available at www.ilfr1000.com/default.asp?page=22&fcindex=6508&countryID=91. See also, Interest Rates Advisory Centre, (IRAC), "Important Information", dated 2nd May 2007, available at www.irac.the%induplum%20rule.pdf. (Accessed on 08/08/2008)
Therefore, the paper sets out, in extenso, the provisions of the said amendment law, and then it explains the in duplum rule. Thereafter the justification of the said rule will be examined with a view to discerning its limits, if any, as currently introduced in Kenya by legislation. In this regard the impact of the rule on the freedom of contract will be considered. Also, the extent of applicability of the rule in other jurisdictions will be looked at.
Further, a distinction will be drawn between the Common law (This phrase is not used stricto senso to mean the usages and traditions of the English legal system, but as the decisions of the courts in South Africa while applying the in duplum rule in that jurisdiction before the statutory in duplum was introduced vide the National Credit Act of 2006.) in duplum rule and the statutory in duplum as formulated in other jurisdictions where the law is slightly developed on this subject. Finally, the paper will seek to make out, in line with the title; whether the rule, as codified in Kenya, is a banking regulation mechanism, or a consumer protection initiative, as is the case in other jurisdictions. It is imperative to point that this article does not seek to interrogate the proprietary or otherwise of charging interest on loans, which subject is left to the students of morals, ethics and religion. (Visser, WAM., MacIntosh, A., (Eds) (1988) A short Review of the Historical Critique of Usury London available at www.alastairmcintosh.com/articles/1998_usury.htm)
2. The Amendment (Banking (Amendment) Act, 2006 (Act No 9 of 2006) section 17)
As already stated, the Banking (Amendment) Act introduced section 44A in the Banking Act (Banking Act, cap 488, Laws of Kenya) which is reproduced here. Section 44A Limit on interest recovered on defaulted loans:
"An institution shall be limited in what it may recover with respect to a non performing loan to the maximum amount under subsection (2).The maximum amount referred to in subsection (1) is the sum of the following: 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."
The above cited two subsections formulate what is known as the in duplum rule. It can be seen from paragraph (b) of subsection (2) that the amount of accrued interest on the loan is restricted to equal the amount of the principal amount owing when the loan becomes non-performing. In effect, therefore, the lender cannot recover at any one given time an amount that is more than double the outstanding principal.
3. The In Duplum Rule
a) The Meaning
In duplum is a Latin phrase derived from the word in duplo which means "in double".( Black, HL., Black, HC., (Eds) (1990) Blacks? Law Dictionary St Paul Minnesota: West Group Publishing 6th Edn) The rule has its origin in the Roman Dutch law. (Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008) It basically provides that interest stops running when unpaid interest equals the outstanding capital amount. (Louw, MK., Better Consumer Protection under the Statutory In duplum Rule. The Journal of Consumer & Commercial Law pp 20-24.) Perhaps in more clearer and comprehensive terms, the rule was enunciated by the Zimbabwe High Court in Commercial Bank of Zimbabwe vs. MM Builders and Suppliers PVT Ltd 1997(2) SA 285 ZHC, as follows;
"It is a principle firmly entrenched in our law that interest, whether it accrues as simple or compound interest, ceases to accumulate upon any amount of capital owing once the accrued interest equals the amount of capital outstanding, whether the debt arises as a result of a financial loan or out of any contract whereby a capital sum is payable together with interest thereon at a determined rate." (Campbell, J. 2006 "The Cost of Credit in the Micro- Finance Industry in South Africa", LLM thesis of Rhodes University, December 2006 available at eprints.ru.ac.za/899/01/Campbell-LLM-TR07-87.pdf (accessed on 07/08/2008)
In Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995(4) SA 510 C (As quoted from Jonathan Campbell) the Supreme Court of South Africa further explained the rule thus, (at page 31) "when due to payment, interest drops below the outstanding capital, interest again begins to run until it once again reaches that amount." (This is in consonance with section 44A(3) of the Banking Act which provides that;"If a loan becomes non-performing and then the debtor resumes payments on the loan and then the loan becomes non-performing again, the limitation under paragraph (a) and (b) of subsection (1) shall be determined with respect to the time the loan last became non-performing.")
As already pointed out, the rule has its origin in the Roman Dutch law system. However, the same has been given the full force of law in South Africa,( Banking (Amendment) Act, 2006 (Act No 9 of 2006) section 17) perhaps because of its colonial history with the Dutch, and thus the law relating to this principle is quite developed in that jurisdiction. Therefore, for the purposes of this paper there shall be heavy reliance on South African decisions to expound on the various issues pertaining to the rule.
b) The Justification and Purpose
The rule is based on public policy or public interest. (Page 40, the court observed that it is concerned with public interest and protects borrowers from exploitation by lenders who permit interest to accumulate.") It is meant to protect debtors from exploitation by creditors by forcing them to pay unregulated charges, and enforce fiscal discipline on the creditors. (Ethekwini Municipality v Verulam Medicentre(PTY) Ltd  ZASCA 98 (457/04, 29 September 2005) available at www.saflii.org/za/cases/ZASCA/2005/98.rtf ) To better understand the public policy drive behind this rule, one needs to forage through the many cases in Kenya where the amount of interest (or is it usury?) that borrowers have been burdened with by the lenders in the event of default. (For a detailed analysis of these cases refer to Charles Kanjama, "The Baffling Statutory Power of Sale", Hot from the Bench series, available at www.lawafrica.com) The most abnormal, unconscionable, and extortionist of all was depicted in Pelican Investment Ltd v National Bank of Kenya Ltd 2 EA 488 where a loan of Kenya Shillings 10 Million was alleged to have escalated, more than thirty times, to Kenya Shillings 316 Million!
Such situations have led some judges, when found in such unjust corner, to purport to do "common sense justice" without laying down any principles for their decisions. Such was the scenario in National Bank of Kenya Ltd vs Pipe Plastic Samkolit (K) Ltd & Another 2 EA 503) when O?Kubasu J. (as he then was) exercised his own sense of proportion, without citing any precedent, to reduce an outstanding sum of Kshs. 103 Million on 21 million loan to Kshs. 30 million. The ratio for the decision was his "taking judicial notice" of some commercial practice where banks waive interest. (This decision was set aside by the Court of Appeal on the ground that it was an attempt by the superior court to re-write the contract for the parties.) In deed such usurious interest (Visser, WAM & Macintosh A., (supra note 20) where it is opined that "usury" means the charging of interest above the legal or socially accepted rate) is unacceptable. Decrying this state of affairs Onyango ? Otieno J. (as he then was), way back in the year 2000, while constrained to apply the in duplum rule as was the case in South Africa, advocated for its introduction in Kenya in order to bring the otherwise worsening situation under control. This was in Pelican Investment Ltd v National Bank of Kenya Ltd (above);
I do agree that such a legal proposition might be I deal in this country as it will ensure that debtors do not suffer the requirements upon them to pay extra large interests caused by the indolence and lapse or deliberate failure by the creditors so as to let the unserviced loans accumulate interest to unimaginable levels. It will protect the debtors as well as ensuring that the creditors get their money back for further circulation and hence the economy will be healthy. However, to introduce this Dutch law by way of a judgment in the common law country will be in my opinion too drastic a step to take as it will not be based on any existing legal authority or statute whatsoever in our country. It is law that had better be introduced by way of legislation (at page 494.)
In all estimation, it can be rightly argued that the words of the judge as echoed in the South African cases clearly outline the public policy considerations for the in duplum rule in Kenya. No wonder then that immediately he pronounced the above sentiments, they spread like wild fire to the chambers of Parliament and barely had ink dried on the paper where those words were written than the legislature sought by an initial attempt to introduce the rule in Kenya via the Central Bank Act. (Pursuant to Legal Notice No 52 of 2007)
c) The Applicability and Limits
This section looks at the extent to which the rule will be applicable in Kenya. In this connection, both express and implied limitations will be discussed. The point of departure is the section 44A itself.
It is apparent from the wording of section 44A that the in duplum rule as legislated applies to formal loans (Section 44A(5)(b) defines a "loan" to include "any advance, credit facility, financial guarantee or other liability incurred on behalf of any person") only and not to debts generally. In addition, it only applies to loans given by institutions (Section 2 of the Banking Act cap 488 laws of Kenya, defines "institution" to mean a bank or financial institution or a mortgage finance company.)
This is clearly evident from the provisions of section 44A (1);
"An institution shall be limited in what it may recover?.."
It is thus arguable that the rule as introduced in Kenya governs only the banking sector and not other entities which offer other forms of loans or financial facilities (See for instance of the Building Societies Act (cap 489) section 24, Housing Act (cap 117) section 16, of the Insurance Act (cap 487) section 50(4) (b) which permits insurer to invest their admitted assets by way of debentures on unencumbered immovable properties in Kenya.) This is a variation from the applicability of the rule in South Africa. In the Ethekwini case (Ethekwini Municipality v Verulam Medicentre(PTY) Ltd  ZASCA 98 (457/04, 29 September 2005) available at www.saflii.org/za/cases/ZASCA/2005/98.rtf) the Supreme Court of South Africa held that the rule "does not only relate to money lending transactions but applies to all contracts where a capital amount that is subject to interest at fixed rate is owing." It must be said here, however, that the Supreme Court of South Africa was applying the common law in duplum rule and not the statutory in duplum rule since as at the time of that judgment, the National Credit Act (National Credit Act, 2005 (Act No 34 of 2005) which become effective on 1st of June 2007. For more details on this Act see Jonathan Campbell, (supra, note 27) page 99 thereof), which codifies the in duplum, had not been legislated.
Since the Act defines "loans" to include advances or a credit facility it is submitted that the rule also applies to overdrafts and credit card accounts. (Kawonde, P., 2003. In duplum rule and Inflation, The Zimbabwe Independent, 30th May 2003, available at www.thezimbabweindependent.com/index.php (accessed on 10/08/2008), states that "This rule applies to loans, overdrafts and any other contracts where a capital sum can be identified, and where interest is chargeable on it at an ascertainable rate.")
ii) Judgment Debts
It is expressly provided under the Act (Banking Act (cap 488, Laws of Kenya) that the rule does not apply to limit any interest under a court order accruing after the order is made Section 44A (4). In effect, therefore, interest can accrue on a judgment debt more than double the judgment debt. This seems to be contrary to the common law application of the rule. (In Standard Bank of South Africa Limited case (supra, note 23) the court held (at page 50) that the in duplum rule applies to interest accruing on a judgment debt, to wit, "once judgment has been granted, interest may run until it reaches the double of the capital amount outstanding in terms of the judgment") A question that begs answer here is whether interest continues to accumulate, more than the principal sum sued, during the litigation process before the order or judgment is made. The section is silent in respect of this issue as it only deals with interest under a court order accruing after the order is made. (Banking Act (cap 488, Laws of Kenya).
While faced with this question the Supreme Court of South Africa observed that;
"It appears as previously pointed out that the rule is concerned with public interest and protects borrowers from exploitation by lenders who permit interest to accumulate. If that is so, I fail to see how a creditor who has instituted action can be said to exploit a debtor, who with the assistance of delays inherent in legal proceedings, keeps the creditor out of his money. No principle of public policy is involving in with the protection pendite lite against interest in excess of the double." (The Standard Bank of South Africa Ltd case, at page 49)
The court based its view on the fact that a creditor has no control over delays caused by the litigation process. It, therefore, held that the in duplum rule is suspended pendite lite (Philippides, M., "Interest and the in duplum rule, Paper delivered at Deneys Reitz Case Law Update available at www.roylaw.co.za/), where the time is said to begin upon service of the initiating process. (Black, HL., Black, HC., (Eds) (1990) Blacks? Law Dictionary St Paul Minnesota: West Group Publishing 6th Edn) Given that the Kenyan law expressly suspends the applicability of the in duplum rule to judgments, while it is silent as to what happens during the litigation, it is arguable that, taking into consideration the common law justification for suspension of the rule during litigation process, the same principle also applies in Kenya. This argument is lent credence by the provisions of the Civil Procedure Act (Civil Procedure Act (cap 21 Laws of Kenya) which gives the courts the jurisdiction to award interest on money even for the period before judgment. In this regard Section 26 (1) thereof stipulates thus;
"Where and in so far as a decree is for the payment of money, the court may, in the decree, order interest at the such rates as it deems reasonable to be paid on the principal sum adjudged from the date of the suit to the date of the decree in addition to any interest adjudged on such principal sum for any period before the institution of the suit, with further interest at such rate as the court deems reasonable on the aggregate sum so adjudged from the date of the decree to the date of payment or such earlier date as the court thinks fit." (Emphasis supplied)
It is quite evident from the above that interest is permissible to run even during litigation. And such, there is nothing in the law to stop it getting in excess of the principal amount owing as at the time of instituting suit. (In the case of Yousouf Abdalla Gulamhusein v. The French Somaliland Shipping Co Ltd  EA 25, the then Court of Appeal for Eastern Africa, while applying section 32 of the Civil Courts Ordinance (which is in pari materia with section 26 of the Civil Procedure Act Cap 21 laws of Kenya) held that the court has the discretion to award interest from the institution of the suit until payment. See also Mohamed v Athmani Shante  EA 1063 where the court confirmed that it may in its discretion award contractual interest from the date of the institution of the suit to the date of judgment.
Most recently the Kenyan court of appeal in Ajay Indravadan Shah v. Guilders International Bank Ltd  1 EA 269 clarified section 26(1) of the Civil Procedure Act thus;
This section in our understanding confers upon the court the discretion to award and fix rate of interest to cover three stages, namely, the period before the suit is filed the period from the date the suit is filed to the date when the court gives its judgment; and from the date of the judgment to the date of payment of sum adjudged due or such earlier as the court may, in discretion, fix.
We further understand these provisions to be applicable only where the parties to a dispute have not, by their agreement, fixed the rate of interest payable.) To this extent the Kenyan legal position is similar to that of the common law rule as propounded in theStandard Bank of South Africa Ltd Case. (Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008)
iii) Interest on Principal Owing
According to section 44A (2) (b) the interest recoverable by the lender is limited to the interest as provided by the contract, not exceeding the principal owing when the loan becomes non-performing. It is imperative to discern here whether the "principal owing" is confined only to the actual loan amount advanced to the borrower/ debtor or is it the aggregate of all amounts owed by the debtor to creditor. Financial institutions do levy several charges on the processing of the loan such as legal fees, and administration fees. In some instances lenders do not require the borrowers to pay these charges upfront but they are lumped together with the actual loan amount and thus form an aggregate of the debt due. The question is whether the "principal" owing is confined to the actual loan advanced or the aggregate all the amounts incidental to the loan owed to the lender.
"Principal" in the context used here is defined to mean "the capital sum of a debt or obligation as distinguished from interest or other additions."(Black, HL., Black, HC., (Eds) (1990) Blacks? Law Dictionary St Paul Minnesota: West Group Publishing 6th Edn.) Going by this definition, it is arguable that the rule only applies to the interest accruing on the actual loan amount as opposed to the sum total of the loan including other charges. (Under section 44A (2) (c) the creditor is also entitled to the expenses incurred in the recovery of any amounts owed by the debtor. However, it is important to add that under that provision no it seems interest is not taken care on the said expenses) It is also arguable, looking at the wording of the section, that in fact, interest on the costs of recovery of the amount may be chargeable.
In South Africa, the statutory in duplum rule has been clearly and widely crafted to include not only the principal owing but also other charges or expenses incurred in obtaining the loan (National Credit Act, 2005 (Act No 34 of 2005), available at www.info.gov.za/gazette/acts/2005/a34-05.pdf ). In this regard, the Act uses the "cost of credit" (ibid, Part C, section 101) rather than the principal amount. (Michelle Kelly Louw, supra note 25) The cost of credit includes the principal debt, the initiation fees, the service fee, default administration charges, collection costs, and costs of any credit insurance. (Section 101(1) (a) to (g))
d) The Operation
In this section the operation of the in duplum rule is examined. To begin with, if we take for instance, a loan of Kshs. 1 Million; the lender is not allowed to get more than 1 million as interest. This is because once interest equals the amount of the loan, i.e. 1million, the in duplum swings into action and the interest is stopped from further accumulating. In such a case, therefore, the lender can recover a maximum of Kshs. 2 million as the amount owing from the borrower. It is, however, imperative to quickly add that the rule does not operate always in such a simple manner. Sometimes the borrower may make payments which will of course reduce the amount owing. In such situations complications rise in which require a clear understanding of the rule.
It is important to clarify here that the rule does not prevent the lender from getting interest on the principal more than the loan itself. What the rule means is that at no time should the lender recover more interest than the principal amount owing. This explanation is aptly put forth by Michelle Kelly Louw Louw, MK., Better Consumer Protection under the Statutory In duplum Rule. The Journal of Consumer & Commercial Law pp 20-24;
"The rule does not mean that a creditor (i.e. the lender) is prevented from collecting more than double the unpaid (or paid) capital amount in interest, as long as he at no time allows unpaid interest to reach the unpaid capital amount."
If the borrower makes payments, the interest element of the total amount is decreased and the interest again starts accumulating till it again equals the outstanding amount owing (As quoted from Jonathan Campbell.) This phenomenon is clearly underscored by section 44A (3) (Banking Act, cap 488 Laws of Kenya) which provides that,
"If a loan becomes non-performing and then the debtor resumes payments on the loan and then the loan becomes non performing again, the limitation under paragraph (a) and (b) of subsection(1) shall be determined with respect to the time the loan last became non-performing."
Having discerned that payments by the borrower/debtor on the outstanding loan amount permits interest to start accumulating again, it is also vital to make out how the payments are appropriated in settlement of the outstanding loan amount.
i) Appropriation of Payments
The mind boggling question is how the payments made by the borrower are appropriated in settling the outstanding loan amount. This question seems more intriguing where there are competing two figures. On one hand there is a figure of the debt due, and on other there is interest that is due on the amount.
Conventionally, a borrower who is indebted to a lender in respect of more than one debt may, when making a payment, expressly or tacitly indicate how the payment is to be allocated. However, where the borrower fails to indicate the lender may appropriate the payment as he deems fit as long as he does so promptly and communicates his decision to the borrower within a reasonable time. The question then is how are the payments appropriated in the event that neither party allocates them?
An initial attempt to deal with a similar situation was considered in Devayes vs. Noble 68(Clayton?s case). In this case, the court formulated what came to be known as the Rule in Clayton case. The court was dealing with payments credited in a current account. It went a head to formulate the rule thus,
"In the case of a current account between debtor and creditor there is, in the absence of an agreement to the contrary, a presumption that the first item on the credit side of the account is intended to be applied in the payment of the first item on the debit side of the account."
In simple terms the rule means that, in a current account, credit items go in reduction of the earliest debit items on the principle of first-in-first-out. If we follow the analogy as enunciated in Clayton?s case in the present situation, it would mean that any payments in relation to the loan would first be applied to the capital sum then to the interest. In effect therefore, if the in duplum rule is to operate, the Clayton rule will give the debtor a double benefit as the capital amount will have to be reduced to equal the now reduced amount of interest.
The South African Supreme Court declined to apply the Rule in Clayton?s case to appropriation of payments on debts on the basis that the facts the way a current account of a bank operates is different from that of a loan with interest, and secondly that it will gave the debtor unfair advantage if the two rules are allowed to operate together. Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008) The court instead adopted the proposition contained in Wessels, the Law of Contract in South Africa which stipulates that where a debt produces interest, the money paid in must first be applied to the interest then to the capital. In its own words the court laid down the principle that;
"In the absence of effective appropriation by the borrower or lender, the in duplum rules. As soon as, and as long as the in duplumrule suspends the further running of interest all credits to the account should be appropriated to pay interest before they are applied to pay capital."
It is apparent from section 44A (3) that that proposition is also applicable to the Kenyan circumstance. This is evident from the provision that "the limitation under paragraphs (a) and (b) of subsection 1 shall be determined with respect to the time the loan last become non-performing" Section 44A (3). It is implied that interest on non-performing loan is allowed to run since the payments were appropriated to the accumulated interest and not to capital first. That is why the limitation on interest is determined from the last time that the loan became non-performing.
ii) Capitalization of Interest
At the center of the operation of the in duplum rule is the interest. According to the law, interest should not exceed the principal owing when the loan becomes non-performing (Section 44A(1) (b). There is a common practice among money lenders to treat the interest accrued on the loan, after the debtor defaults, as capital so that interest on capital also attracts interest (National Bank of Greece v Pinions Shipping Co Ltd  1 All ER 78), the House of Lords held that the basis of any implied contractual right to capitalize interest is the custom and usage of banks. This practice is called compounding, which is the capitalization of interest so that interest itself yields interest (Mark Hapgood, (12th Ed.) Paget?s Law of Banking, Butterworth?s.) If such happens, can the lender then argue that since the interest has been capitalized it should be treated as the capital sum and thus the operation of the in duplum rule is suspended? To put it simply, does interest lose its character as interest when it is capitalized?
While confronted with this question, the South African Supreme Court clearly stated that the practice of "capitalization" of interest does not result in the interest losing its character as interest as such for the purposes of the in duplum rule (Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008). The court?s rationale in coming to this conclusion was that;
"If interest were to become capital, the capital amount of the debt would always be increasing and the bank would run no risk of a lesser capital amount being the subject matter of the rule?further more, if lenders were allowed to employ the expedient of a book entry to convert what is interest into capital this would afford an easy way to avoid the in duplum rule."
In effect therefore, capitalization of interest does not affect the operation of the rule. When interest is compounded it just remains interest and neither the description nor the practice of compounding it affects the nature of the debt.
e) Common Law in duplum or Statutory in duplum: The Kenyan Case
As pointed out earlier, the use the word "common law" does not denote the usages and practice of England, but the judicial pronouncements of the South African Supreme Court. (In Otieno v Ouga & another ("the SM Otieno case") [1986-1989] EA 468 it was held that common law is a synthesis of judicial general principles).
From the discussion above, it is arguable that the Kenyan in duplum rule borrows heavily from the common law in duplum rule as applicable in South Africa albeit with a few variations. The statutory in duplum rule as codified in South Africa is very wide, comprehensive and all embracing to all kinds of credit agreements. (Under section 44A (2) (c) the creditor is also entitled to the expenses incurred in the recovery of any amounts owed by the debtor. However, it is important to add that under that provision no it seems interest is not taken care on the said expenses)
Whereas the common law in duplum rule applies to all contractual transactions where there is a capital sum owing (Ethekwini Municipality v Verulam Medicentre(PTY) Ltd  ZASCA 98 (457/04, 29 September 2005) available at www.saflii.org/za/cases/ZASCA/2005/98.rtf), the Kenyan in duplum rule as codified, seems to apply only to money lending transactions. (See section 44A (1) non-performing loans) The section restricts itself to the non-performing loans. It goes ahead to define a loan as including any advance, credit facility, financial guarantee or any other liability incurred on behalf of any person. (Section 44A(5)(b) However, the operation and applicability of the rule draws heavily from the common law rule as already seen. The South African statutory in duplum rule was solely enacted as a consumer protection law rather than a banking regulation mechanism as is the case in Kenya. (Mullei, AK "Achievements, Challenges, and Policy Directions for the Banking Sector in Kenya", a keynote address at the Kenya Institute of Bankers Annual Dinner, Safari Park Hotel, 11th November 2005 available at www.cbk.go.ke./publications.pdf (accessed on 20/06/2008)
f) Consumer Protection vs. Bank Regulation
The question as to whether the in duplum rule as codified in Kenyan law is for consumer protection or banking regulation has been partially dealt with herein above. In South Africa, there exists both the common law in duplum rule and the statutory in duplum which was codified recently via the National Credit Act (Jonathan Campbell, supra note 26). The statutory in duplum rule was specifically introduced to protect consumers of credit as it covers all types of credit agreements. That Act provides a single law that treats all credit transactions and credit lenders equivalently.
Whereas it is arguable that the rule serves more as a banking regulation mechanism in terms of achieving sound monetary policy, its effect will also be felt by credit consumers. To that extend, one may argue that it also protects the credit consumer. Attempts are in the pipeline to introduce a consumer protection law in Kenya, and a comment on it cannot escape mention.
i) Consumer Protection Bill 2007; Brief Overview
There is a Consumer Protection Bill (Consumer Protection Bill, available at www.kenyalaw.org (accessed on 20/08/2008) pending before parliament for debate and possible enactment. The Bill, if enacted, will consolidate the consumer laws in Kenya and prevent unfair trade practices in consumer transactions.( The Preamble )Part IV thereof deals with credit agreements. In that regard, a credit agreement is defined under section 71 to mean:
"A consumer agreement under which a lender extends credit or lends money to a borrower and includes a supplier credit agreement ? but does not include an agreement under which a lender extends creditor lends money on security of a mortgage of real property."
This Bill, if it becomes law, will introduce certain measures that will protect a consumer of credit from extortionist or unfair treatment by the lender.( See section 74 and 75) In the same breadth the Bill prevents the borrower from paying charges that are unreasonably imposed by a lender (Section 80) The Bill also restricts the lender from arbitrarily changing the rate of interest. The lender is permitted to add only 1% on the previous year?s rate of interest (Section 85(2). It is also interesting to note that whereas the South Africa Act uses the words "cost of credit"( Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008), the Bill uses the words "cost of borrowing"( Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd 1995 (4) SA 510 available at www.saflii.org/za/cases/ZASCA/1997/94.pdf ((accessed on 11/08/2008) .
It is worthy noting that the Bill as drafted does not put a cap on the amount of interest that a lender may charge on a credit agreement. The only thing that it does is to restrain the lender from arbitrarily changing the rate of interest. If the Bill is enacted into law, it will be a matter of keen interest to watch how the courts will reconcile the provisions of the Bill with those of the Banking Act in so far as the amount of interest that the lender can recover on any given credit transaction is concerned.
There is need to bring the Bill in accord with the Banking Act by introducing a limit on the amount of interest recoverable by the lender to be not more than the outstanding cost of borrowing. Whereas the Bill does not apply to juristic persons (Section 2 defines a consumer as "an individual acting for personal or household purposes and does not include a person who is acting for business purposes"), the provisions of the Banking Act apply to both the juristic and natural persons.
g) Equitable Distribution of Wealth or a Redistribution of Poverty: Vision 2030
Whereas the main theme of this paper was to analyze the legal applicability of the in duplum rule, its economic and social ramifications could not escape a discussion. The rule has a considerable impact on the freedom to contract. The rule is now an exception the general principle of freedom of contract (Chesire & Fifoot supra note 2, opines that "it became clear that private enterprise predicated some degree of economic equality if it was to operate without injustice".) As already seen, the rule to puts a cap on the extent to which the lender can reap from his or her investment. Price control, with very rare exceptions is not applied in Kenya. Why then should interest be different? The response to this question is that by its very nature it is difficult for consumers to assess the cost of credit (The Department of Trade and Industry of South Africa, Report for the Credit Law Review, available at www.thedti./20%expertopinion/.Rev1.pdf (accessed on 08/08/2008) This is on the public interest justifications that the lender ought not to explore the borrower.
In so capping the amount of interest, it seems that the country has finally decided to put word into deed. The state recognizes the importance of commerce and industry in spurring economic growth and development. However, in the same breadth it is recognized that economic growth must be pursued with the principles of social justice at the back of the mind (Chesire & Fifoot, supra note 2, say that "contractual freedom must be fostered, but any contract that tended to prejudice the social and economic interest of the community must be forbidden" (page 297) Thus, the court observed that "it is clear beyond peradventure that save for those special cases where equity might be prepared to relieve a party from a bad bargain; it is ordinarily no party of equity?s function to allow a party to escape from a bad bargain."( Fina Bank Ltd v Spares & Industries Ltd 1 EA 52)These words emphasize that fairness is the underlying basis of contracts. (Campbell, J. 2006 "The Cost of Credit in the Micro- Finance Industry in South Africa", LLM thesis of Rhodes University, December 2006 available at eprints.ru.ac.za/899/01/Campbell-LLM-TR07-87.pdf (accessed on 07/08/2008) Contracts are expected to occur in the public interest, which in the alternate means that any contract against public policy or interest is illegal and ought not to be enforced.
According to the Government?s development blue print (Officially known as Kenya Vision 2030,( the Popular version) available at www.ministryoffinance.go.ke/downloads/vision2030.pdf (accessed on 20/08/2008), equitable distribution of national resources is one of the core values that the country seeks to achieve in its developmental agenda. ibid, the social pillar seeks to build a just, cohesive society with social equity, while the economic pillar aims at a sustained economic growth of 10% for 25 years) It is therefore arguable that the rule as introduced in Kenya will to a certain extent aid in the achievement of this objective. Private enterprise must be allowed to thrive, but, with a blend of social justice that informs public interest considerations.
Otherwise, capitalistic economic growth will carry along with it some of the most debilitating consequences for the poor. In this regard the rule is advanced as a mechanism of wealth distribution rather than poverty redistribution. With such an economic strategy as developed by the Government, it would be too pessimistic to advance the economics of poverty.( It will be paradoxical to talk of poverty redistribution when the country is aiming at poverty eradication through its blue print for development) The vision aims to grow our wealth more, and in so doing ensure that social justice prevails.
This paper has discussed the in duplum rule as enacted in Kenya with a view to demystifying its applicability and operation. It is hoped that the case law considered herein addressing various underlying issues will find some persuasiveness and relevance in the judicial decisions in this country. The paper has also proffered some issues which need amendments in order to better serve the public in relation to the cost of credit.
The paper has also put forth a case for the introduction of the rule in credit agreements generally. This will ensure that the often ignorant or illiterate consumer is not exploited due his necessitous situation. The rule as legislated is mainly intended for the commercial men. If the state is keen on ensuring that the social pillar of the Kenya Vision 2030 is achieved there is need to apply this rule to all kinds of debts or credit agreements. In Namibia for instance, there are attempts to apply the rule to tax debts (Kotze, C., 2007. Income Tax Amendments Part 1, The Namibia Economist, available at www.economist.com.na/content/view/2176/34 (accessed on 11/08/2008). This move is expected to improve the taxpayers? morality as they will have the assurance that the interest on unpaid taxes will be capped and cannot exceed the original tax amount owing. The in duplum rule is also applicable to the insurance industry in South Africa although there are attempts, which are bitterly opposed by consumer protection groups, to remove it by way statutory waiver. (COSATU, "Submission on the Insurance Amendment Bill 2002", available at www.cosatu.org.za/docs/2003/insure.htm (accessed on 11/08/2008)
Even judgment debts ought to be subjected to this rule. This may require corresponding amendments to the Civil Procedure Act in order to avoid conflict. There is also need to bring into the equation pawn broking and other methods of lending not similar to advances of loans. In this way, the credit consumers will be accorded the necessary protection against the lenders. The introduction of the rule is lauded as it will "strike a balance between the oft- usurious lender and the often sly and crafty borrower".( For a detailed analysis of these cases refer to Charles Kanjama, "The Baffling Statutory Power of Sale", Hot from the Bench series, available at www.lawafrica.com) As it was once said: "the law is a living thing; it adopts and develops to fulfill the needs of the living people who it both governs and serves. Like clothes it should be made to fit people," (Midland Bank Trust Company v Green  2 WLR 130;  1 AC 513) it is hoped that the courts of law will develop this principle further in this country.