The Legal Framework for Charging Commercial Interest in Zambia

• Jurisdiction: South Africa
• Published date: 27 May 2019
• Pages: 436-451
• Author: Akalemwa wa Mubiana ni Munalula Ngenda
• Citation: (2008) 19 Stell LR 436
• Date: 27 May 2019

436

THE LEGAL FRAMEWORK FOR CHARGING

COMMERCIAL INTEREST IN ZAMBIA

Akalemwa wa Mubiana ni Munalula Ngenda

LLB LLM

Lecturer, Brunel Law School, Brunel University, United Kingdom

1 Introduction

This paper ex amines some of t he legal issues su rrounding the charging

of commercial interest i n Zambia. Particular attention is given to matters

arising in the context of banki ng and nancial ser vices. This area of the law

has expanded rapidly in Zambia since the liberalisation of the economy. The

backdrop is provided by, among others, the changes i n the law a nd practice

regarding i nstances of liquidation and receivership. In this rega rd there have

been judicial attempts to situate and clar ify the position of, for example, com-

pound and penalty interest. Most of the legal activity and litigation in this area

were brought about by major changes to the Companies Act 1994, and also the

changes now contained in new ban king and nancial services legislation.1

For instance, u nder section 87 of the Bank ing and Financial Services Act2

(BFSA), it is illegal for an “insolvent bank” t o carry on ba nking or nancial

business. T he Supreme Court thus decided in Yonnah Shimonde v Meridien

Biao Bank (Z) Ltd that it is unlawful for a “l iquidated bank” to charge com-

pound commercial interest.3 The myriad issues that have arisen from the

decision in Shimonde include the implications of the decision for a ban k in

receivership as oppo sed to one that is under l iquidation. Fur thermore, it may

be asked whether the chargi ng of interest in relat ion to mortgages is a st rictly

banking or nancial service. Another issue concerns the relationship of banker

and customer: does it cease t o exist where there is a receivership or liquida-

tion? This paper attempts t o shed some light on these and related issues.

2 Compound interest

Section 4 of the Law Reform (Miscellaneous Provisions) Act4 contem-

plates the cha rging of compound intere st in certain cases. Such interest may

be chargeable by custom or ag reement. It is otherwise prohibited u nder com-

mon law and by st atute.5 There is precedent for arguing th at it is the usage

1 The major changes to the Banking and Financial Ser vices Act 21 of 1994 are contained in the Ban king and

Financial Ser vices (Amendme nt) Act 18 of 2000 and 25 of 2005.

2 Laws of Zambia (1995 Edition of the L aws) Chapter 387.

3 Yonnah Shimonde v Meridie n Biao Bank (Z) Ltd SCZ Judgment 7 of 1999; delive red by Ngulube CJ, with

Sakala JS (as he then wa s) and Chirwa JS concu rring.

4 Cap. 74 of the Laws of Zambia.

5 See Financial Serv ices (Cost of Borrowing) Reg ulations, SI 179 of 1995, made under t he BFSA.

(2008) 19 Stell LR 436

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of bankers to capitalise interest at periodic or annua l rests.6 A bank must have

the customer’s consent before adding compound interest to the latter’s indebt-

edness. It is enough for the customer t o acquiesce in the same.7

The Supreme Court had occasion to deal with the issue of compound

interest in the case of Union Bank (Z) Ltd v S outhern Province Co-operat ive

Marketing Union Ltd,8 in which it was held that it is legal to charge compound

interest where the pa rties have ag reed to do so.9 Whether or not compound

interest is chargea ble may also depend on the court’s construction of the la n-

guage u sed in the security docu ment. The words “compound interest” need

not be expressly used. In R ama Krishna Naidu v Commerce Bank (Z) Ltd,10 a

clause in the mortgage deed which sanct ioned chargi ng of interest at cur rent

bank rate “with monthly rests” was held to have “envisaged and perm itted

compound interest ”.

However, a stipulation th at interest attracts the “us ual banki ng charges”

will not sufce. It must be clear from the transactions between t he parties

that they intended or agreed to have the interest compounded. It has been held

that a mortgage deed doe s not entitle the lender to re cover compound intere st

where the mortgagor agree d

“to pay and discharge on demand all monies and liabilities including charges of interest at current

rates … which interest shall be calculated in accordance with bank practice”.11

An import ant distinction needs to be ma de here. While compound interest

is char geable eithe r by agree ment or custom the same can be calculated by

practice of bankers. A banker or lender may also be entitled to recover interest

capitalised on a daily basis. A case in point is Commercial Bank (Z) Ltd v

6 See National Bank of Greece SA v Pinios Shipping Co No 1 (1990) 1 All ER 78, where Lord Goff reviewed

many previous a uthorities in sup port of the practi ce among bankers.

7 In Credit Africa Bank Ltd v John D ingani Mu denda SCZ Judgment 10 of 2003 [19 Septembe r 2003]

Silomba JS held that th e term acquiesc ence

“in its pro per legal sens e implies that a person abst ains from i nterfering while a violatio n of his legal

rights is i n progress; in ano ther sense it impl ies that he refra ins from seek ing redress whe n a violation

of his rights of wh ich he did not know at the ti me is brought to his not ice”.

In this case i t was held that the ban k’s statements sent to th e customer did “not co ntain informa tion on

compound interes t, descriptive enough to be easily understood by a layman, such as, the respondent” and as

such the borrower could not be taken to have been aware that compound interest was charged on the account.

In Kashanga v Finance Bank (Z ) Ltd SCZ Appeal 95/99 [1 Ju ne 2000], the Supre me Court (pe r Ngulube

CJ) reviewed the documenta ry evidence on record and held that the same revealed figures showing that the

initial loan had bee n compounded without prote st over the years. Each case will obviously tur n on its own

facts. See, fo r example, Barclays Bank of Zambia Ltd v Supreme Funera l Home Ltd 2000/H PC/0270 [28

August 2002]. T he plaintiff ba nk sought recove ry of the prin cipal and inter est on a loan adva nced to the

defendant and secured by mortgage (although the defendant company did not properly execute the mortgage

deed by affixing its common seal, a certific ate of title was surrend ered as security to the bank). While find-

ing in favour of the bank on the mai n claim, the High Cour t (per Chibomba J at p J5), however, ruled that:

“On the issue of compound interest , it wi ll be noted fro m the facility letter at pages 3 and 4 of the

Plaintiff ’s Bundle of Document s that compound interest w as not agreed. … [C]ompound interest is

chargeable if it was agre ed. The facility letter does not talk a bout compou nd intere st. If compound

interest was include d in computing the Defendant’s indebted ness, the sum owing should be recomputed

so that compou nd interest is remove d because it was not agr eed.”

8 (1995–1997) ZR 207 (SC).

9 See also Sa fe Deposit Bank Ltd v Credit Unio n and Sav ings Associa tion of Za mbia (Co-op erative) Ltd

SCZ Appeal 66 of 1997.

10 SCZ Appeal 64 of 1999 pe r Ngulube CJ.

11 See Cred it Africa Bank Ltd v Mudend a SCZ Judgment 10 of 2003 delivered b y Silomba JS, with Sakala

CJ and Chibes akunda JS concu rring.

CHARGING COMMERCIAL INTEREST IN ZAMBIA 437

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