In a striking oversight, a recent judgment failed to address a critical breach of banking law, where a borrower was left high and dry over a stealthy interest rate hike. The plaintiff, who secured a loan with the promise of a fixed rate, faced a shock increase without warning. This case raises questions about the protection of bank customers in Uganda.
In Choudry v Bank of Baroda, a retired judge took out a home loan. He claimed that even though the bank reserved the right to increase the interest rates, he was assured that his interest rate was fixed. Lo and behold, the bank hiked the rate from 16% up to 27%! The startled borrower scrambled, paid off the loan, and sued, arguing the bank should have let him know via email, SMS, or letter, not just general newspaper notices. The bank's defence was an audacious clause, that it owed no warning of the interest rate hike.
The plaintiff cited an Indian banking code, mistakenly thinking it applied due to the bank's ties to Bank of Baroda India, but the court swiftly dismissed this as irrelevant.
The big mistake was that the court did not address the Mortgage Act, which requires a bank to give 15 days' notice to a borrower of an increase in the interest rate payable under a mortgage. This Act came into force a few months before the bank started raising its interest rates against borrowers. The bank's stealthy rate hike left the borrower reeling, but the court's silence was deafening. On this issue, the judgment is in ignorance of the law.
(We save for another day the argument whether an interest rate should be stated in a mortgage deed.)
Even if the plaintiff had invoked the Bank of Uganda's Financial Consumer Protection Guidelines, which demand prompt notification of interest rate changes, they would have still been out of luck as the courts have ruled them unenforceable (See our previous article here).
What this case lays bare is the need for greater awareness of consumer protection and a stronger legal regime. This places responsibility at the doorstep of the Bank of Uganda to do both. It must require that banks, as its licensees, conduct more awareness campaigns on consumer protection. Additionally, it must also elevate the consumer protection guidelines to formal regulations and provide sector-specific safeguards for financial consumers similar to consumers in the communications sector. These regulations can then supplement the Competition Act and enhance the overall consumer protection framework.
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