The High Court has delivered a consequential interpretation of Kenya’s lending law, holding that the in duplum rule, traditionally associated with banks, applies to all lenders, including microfinance institutions. The decision in Faulu Microfinance Bank Limited v Kilonzo marks a significant shift in the regulatory and jurisprudential landscape governing consumer credit.
At the centre of the dispute was a relatively modest loan of Kshs. 569,000 advanced in 2019. After default in April 2022, the lender sought to recover over Kshs. 621,000. Despite the borrower not defending the claim, the trial court invoked the in duplum rule—capping recoverable interest once it equals the principal—and reduced the award to approximately Kshs. 145,000.
On appeal, Faulu Microfinance Bank Limited argued that Section 44A of the Banking Act—which codifies the in duplum principle—applies strictly to banks and not to microfinance institutions governed by separate legislation. The High Court rejected this narrow construction, framing the rule instead as a doctrine of public policy designed to curb exploitative lending practices across the entire credit market.
Public policy over contractual rigidity
The court’s reasoning is notable for subordinating strict contractual enforcement to broader equitable considerations. While the appellant relied on precedents such as National Bank of Kenya Ltd v Pipeplastic Sankolit to argue that courts cannot rewrite contracts, the judge held that statutory safeguards and public interest principles override unconstrained contractual terms—particularly in asymmetrical lending relationships.
In effect, the court affirmed that even in undefended proceedings, a trial court retains the authority—and obligation—to apply protective legal doctrines. This rejects the notion that uncontested claims automatically entitle lenders to full contractual recovery.
Clarifying the scope of the in duplum rule
The judgment builds on evolving Kenyan jurisprudence, including appellate guidance in Mwambeja Ranching Company Ltd v Kenya National Capital Corporation and more recent High Court decisions that have hinted at a broader application of the rule. By explicitly extending its reach to microfinance institutions, the court closes a long-debated interpretive gap.
Crucially, the court adopted a functional rather than formalistic definition of a “lender.” It noted that microfinance banks, particularly deposit-taking institutions, fall within the financial ecosystem contemplated under the Banking Act’s definitions. Even beyond statutory interpretation, the judge emphasized that limiting the rule to banks would create regulatory arbitrage, exposing borrowers from non-bank lenders to unchecked interest accumulation.
Implications for Kenya’s credit market
The ruling has immediate and structural implications:
- Uniform borrower protection: Consumers borrowing from microfinance institutions, SACCO-like lenders, and digital credit providers gain parity with bank borrowers regarding interest caps.
- Repricing of credit risk: Lenders may tighten credit assessment models or adjust pricing to account for capped recoveries in default scenarios.
- Litigation strategy shift: Courts are now likely to proactively apply the in duplum rule even where borrowers fail to appear, reducing reliance on procedural technicalities.
- Regulatory alignment pressure: Policymakers may face increased pressure to harmonize statutes governing banks, microfinance institutions, and digital lenders.
A decisive stance against “runaway interest”
By dismissing the appeal in its entirety, the High Court reinforced a clear doctrinal position: no lender can rely on legal classification to evade the in duplum constraint. Interest cannot be allowed to compound indefinitely beyond the principal sum, regardless of the lending vehicle.
In practical terms, the borrower in this case remains liable for a significantly reduced amount, subject to court-rate interest from the date of default and modest costs assessed at Kshs. 15,000.
Bottom line
This decision consolidates the in duplum rule as a market-wide safeguard rather than a bank-specific limitation. For Kenya’s rapidly expanding credit ecosystem—where microfinance and digital lending have outpaced traditional banking—it establishes a clear judicial boundary against excessive debt accumulation.
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