Freedom of contract is a foundational principle of commercial transactions. However, where bargaining power is unequal and desperation drives consent, contractual terms may cross the line from merely unfavorable to unconscionable. Kenyan law increasingly recognises that consumer protection is not a luxury but a constitutional imperative. Lydia’s case below illustrates how courts may intervene to prevent exploitation by lending institutions.

Prompt

Lydia, a farmer, loses her entire harvest following a prolonged drought. In urgent need of capital to install irrigation equipment ahead of the next farming season, she approaches MBA Bank for financial assistance. The bank advances her a loan of Kshs. 5,000,000, subject to an interest rate of 20% per month and default interest of 10% per week. Despite the punitive nature of these terms, Lydia agrees, driven by necessity, and executes a charge over her matrimonial home as security.

Five years later, MBA Bank issues a statutory notice of sale over the charged property for alleged loan arrears. By this time, Lydia has repaid Kshs. 15,000,000, yet the bank claims an outstanding balance of Kshs. 50,000,000. The question that arises is: what legal redress is available to Lydia?

Legal redress under Kenyan Consumer Protection Laws

While the general rule of contract law requires parties to honour their contractual obligations, Kenyan law recognises important exceptions. The Constitution of Kenya, 2010 and the Consumer Protection Act, 2012 empower courts to intervene where contractual terms are illegal, oppressive, or unconscionable.

In Lydia’s case, she may institute a suit before the High Court seeking:

• A declaration that the interest rates charged are illegal, unconscionable, and oppressive;
• A permanent injunction restraining the bank from selling, alienating, or otherwise dealing with the charged property; and
• Pending determination of the suit, a temporary injunction to preserve the property and protect her equity of redemption.

Judicial precedent

The High Court in Mbobu & another v Hypac Investments Limited & another [2025] eKLR was faced with a similar situation where Hypac Investments Limited (HIL) advanced a loan of Kshs. 11,000,000/= to the Plaintiffs, Matthew Kyalo Mbobu (now deceased) and Riviera Estates Limited sometime in 2021. The loan terms were that the Plaintiffs would pay an interest rate of 15% per month and a late payment penalty of 5% per week. As security, the Plaintiffs transferred the suit property to HIL. After a few years, HIL sent notice to the Plaintiffs of their intention to sell the charged property. At the time, the Plaintiffs had repaid Kshs. 24,600,000/- but HIL nevertheless demanded Kshs. 69,495,599/-.

The High Court in a posthumous decision found in favour of the Plaintiff relying on the Court of Appeal decisions in Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited [2014] KECA 319 (KLR) and LTI Kisii Safari Inns Ltd v DEG [2011] KECA 1 affirming that courts have jurisdiction to infuse fairness into unconscionable contracts.

Significantly, the court went further and clarified the scope of Section 44A of the Banking Act. Section 44A codifies the principle that interest on a non-performing loan must not exceed the principal outstanding at the time the loan becomes non-performing (the in duplum rule).

Previously, there had been judicial divergence on whether Section 44A applies only to banks and deposit-taking financial institutions as explained in our previous post which can be accessed here: https://cfllegal.com/can-interest-rates-on-loans-be-subject-to-limitations/

The Mbobu (2025) decision marks a significant judicial shift. The court held that the protection embodied in section 44A is not confined to deposit-taking institutions but extends to all lending institutions engaged in advancing credit. This interpretation significantly strengthens borrower protection and closes a regulatory gap that previously allowed some non-deposit taking lenders to argue that the statutory cap on recoverable interest did not apply to them.

Conclusion

Lydia’s predicament underscores a critical reality in Kenya’s credit market; contractual freedom is not absolute. Where lending terms are manifestly oppressive and exploit a borrower’s vulnerability, courts will intervene to restore fairness and protect consumer rights. The 2025 Mbobu v Hypac Investments Limited decision represents a significant step in that direction by affirming that the in duplum rule applies across the lending spectrum, not merely to traditional banks.

Kenyan jurisprudence therefore continues to evolve, balancing enforcement of contractual obligations with firm safeguards against economic exploitation.

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