By Dickson Jere
Are banks allowed to charge interest on nonperforming loans? This legal question was back in the Courts again!
A company borrowed money from FNB, which was guaranteed by an individual. The over ZMW 3 million was also secured by a legal mortgage. The borrower defaulted on the loan and the bank took the matter to court claiming for immediate payment of the loan plus interest as well as foreclosure on the property.
In defence to the claim, the borrowers argued that the bank was charging interest on nonperforming loan and contended that was illegal. The borrowers cited section 110(1) of the Banking and Financial Services Act (BFSA). But FNB insisted that it was allowed to charge interest on nonperforming loans.
The High Court Judge (Commercial Court), Bonaventure Mbewe had to determine this matter after hearing both sides.
“I do not agree with the Respondent argument and interpretation that section 110(1) (b) obliges a lender to stop charging interest upon a loan being classified as nonperforming,” the Judge observed.
“It does not state that a lender shall not recover any interest or shall suspend interest upon classifying or putting a loan in accrual status,” the Judge ruled.
The position taken by the Judge is contrary to what the Court of Appeal ruled few months ago (Chilola v CCEC case) in which it stated that interest is not chargeable on nonperforming loans.
Judge Mbewe disagreed with his superiors in the following words;
“The error that the Court of Appeal fell into in the Chilola case…is that it read into section 110, words or meaning which is not intended or conveyed by a simple reading thereof,” the High Court Judge said.
“It must be noted that the said section carries no punctuation mark to separate charging interest and capping interest at an amount exceeding the principal amount owing,” the Judge said.
He indicted that he got his reasoning from the earlier cases decided by the Supreme Court, which is higher than the Court of Appeal.
“It is therefore my conclusion that the Applicant herein is allowed to charge and claim interest on the loan in default even after it was classified as nonperforming,” Judge Mbewe said.
For details, read the case of First National Bank v Quatt M Investment Limited and Another – 2024/HPC/0518 and Judgement delivered last month.
So much on interest, this case raises questions on whether the High Court can disagree with the Court of Appeal given the hierarchical structure of our Courts that relies on binding precedents of superior Courts. I am sure Jurisprudence students are gnashing their teeth to understand this theory.
