The Kenyan banking sector is facing a financial crisis of historic proportions following a High Court ruling on December 29, 2025. The Court dismissed a petition by the Kenya Bankers Association (KBA), upholding a previous Supreme Court precedent that declares unilateral interest rate hikes on loans illegal if conducted without specific ministerial approval.
The legal dispute traces back to the economic liberalization of the 1990s. For decades, Kenyan banks operated under the assumption that the repeal of certain central bank regulations granted them "freedom of contract" to vary interest rates based on market conditions. However, in the landmark case Stanbic Bank v. Santowels, the Supreme Court ruled that Section 44 of the Banking Act remained in force. This section explicitly requires banks to obtain approval from the Cabinet Secretary for Finance before increasing banking rates.
The High Court’s refusal to limit the retrospective application of this ruling means that any interest rate variation made since the 1990s without specific government approval is null and void. The decision firmly rejected the bankers' arguments that "market practice" or implied customer consent could override statutory requirements.
The economic implications are staggering. Analysts estimate the banking sector's contingent liability for refunding illegal charges could reach KES 100 billion (approximately USD 800 million). This figure represents nearly 40% of the industry's total annual pre-tax profit. The ruling affects major domestic lenders and international banks alike, threatening liquidity and dividends. While consumer protection advocates have hailed the decision as a victory against predatory lending, foreign investors are closely monitoring the situation, fearing a systemic liquidity crunch. The KBA is now expected to seek a structured settlement plan with the Central Bank to manage the fallout.
Source: Ecofin Agency