How the “in-duplum” rule is applied to loan interest

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

07 December 2025

Can a lender charge interest that is higher than the principal sum loaned? The answer is yes and no. The so-called in-duplum rule which is contained in Section 44A of the Banking Act applies only to non-performing loans. That is, when the borrower has defaulted in making the agreed installment payments. As long as the loan is being serviced regularly, the applicable interest remains payable in full.

If the in-duplum rule was applied to active, performing loans, it would force lenders to reduce the duration of loans. To illustrate, suppose you borrowed Sh5 million at a modest 12 per cent interest payable over a period of 10 years. The monthly installment works out to Sh71,735.

Over the 10 year (120 months) of the loan, you would pay a total of Sh8,608,200. That is, the total interest charged is Sh3,608,200 (Sh8,608,200 minus Sh5,000,000). This is less that the principal. However, if you find Sh71,735 too much and request to pay over a 20-year period, your new monthly installment comes to Sh55,055.

While this is a manageable amount, the total interest would be a significantly more because you are keeping the money for a much longer period. Sh55,055 multiplied by 240 months is Sh13,213,200. Therefore, the interest charged is Sh8,213,200. This is more than the principal.

If the in-duplum rule was applied to such a loan, the lender would simply refuse to lend it for a 20-year period. With an interest rate of 12pc, the longest period would be 13 years; in which case the monthly installment is Sh63,433. The total interest charged is just under Sh5 million. Unfortunately, you might still find the Sh63,433 unmanageable hence miss out on the loan.

The question then is, if you defaulted when you have a balance of Sh5 million on a 12pc-loan, how long would it take for the accumulated interest to reach Sh5million? The calculation is not straightforward. It requires knowledge of logarithms and I know most of my readers have forgotten about them!

The answer comes out to about 70 months; that is, just under six years. This is more than enough time for the lender to liquidate (that is, sell) the asset that had been put up as security for the loan…

However, if you had taken the loan from one of the numerous loan sharks that charge about 10 per cent per month, the in-duplum rule will kick-in after just 7 months from the time you default. This is the reason they want securities than be liquidated easily - like cars!