Unconscionable Interest On Loans: The Ghanaian Courts' Approach

Introduction

Private lending has become increasingly common in Ghana. Individuals frequently lend money to others on terms that closely resemble those imposed by banks and licensed financial institutions. When repayment becomes due, disputes often arise, with borrowers challenging such agreements on grounds of unconscionability, illegality, fraud, duress, or undue influence. Among these, unconscionability and illegality are the most frequently invoked.

This article examines how Ghanaian courts approach interest charged on loan transactions, particularly where the lender is unlicensed and the interest rate appears excessive. It considers whether lenders are entitled to enforce such interest and the circumstances under which courts will intervene to grant relief to borrowers. Two key issues guide the discussion: whether the transaction is illegal, and whether the interest charged is unconscionable.

The Legal Framework on Interest

The starting point is the general principle of freedom of contract. Courts will ordinarily enforce agreements freely entered into by parties at arm's length, in the absence of vitiating factors such as fraud, duress, undue influence, mistake, illegality, or unconscionability.

With respect to interest, the Court (Award of Interest and Post-Judgment Interest) Rules, 2005 (C.I. 52) provide that where a court decides to award interest on a sum of money, such interest shall be calculated at the prevailing bank rate and on a simple interest basis. However, where an enactment, instrument, or agreement between the parties specifies a particular rate and manner of calculation, the court may award that rate.

Importantly, the mere existence of an agreed interest rate does not bind the court to enforce it. Like any contractual term, an interest clause may be impeached on established legal grounds, particularly unconscionability and illegality.

Unconscionability in Loan Transactions

Unconscionability has been defined as conduct or terms that affront the sense of justice, decency, or reasonableness. In assessing whether an interest rate is unconscionable, the courts adopt a holistic approach, examining whether the rate is reasonable, fair, justifiable, and not excessive or harsh in the circumstances.

The decision in Ahenfie Cloth Sellers Association v Philomina Mensah and Others (2010) JELR 68496 (SC) illustrates the court's willingness to intervene where contractual terms are oppressive, even where parties have ostensibly agreed to them.

Case Study: Nana Osei Afrifa v Eugene K. Chinebuah & Humphrey Tenzagh

In Nana Osei Afrifa v Eugene K. Chinebuah & Humphrey Tenzagh (2019) JELR 63874 (HC), the plaintiff advanced the equivalent of USD 100,000 to the defendants, repayable within ten days with a 50% interest, subject to a five-day grace period. Upon default, the agreement imposed a compound interest of 1% per day.

The defendants challenged the transaction on two main grounds. First, they argued that the plaintiff was not licensed under the Borrowers and Lenders Act, 2008 (Act 773) or the Non-Bank Financial Institutions Act, 2008 (Act 774), rendering the transaction unlawful. Second, they contended that the interest rate was unconscionable.

Although part payment had been made, the court was called upon to determine whether interest on the loan was exigible and, if so, at what rate. The High Court reaffirmed that while parties are generally bound by their agreements, the court retains discretion to refuse enforcement of unconscionable terms. The court held that a 50% interest repayable within two weeks was unconscionable and oppressive.

On the issue of illegality, the court found that the plaintiff was engaged in moneylending within the meaning of Act 774 and required a licence to operate. In the absence of such a licence, the court declined to enforce the interest component of the agreement. The defendants were ordered to repay the principal sum, converted to cedis at the exchange rate prevailing at the date of judgment, but no interest was awarded.

This decision underscores the position that while unlicensed lending does not automatically render a loan agreement void, it significantly limits the lender's ability to recover interest, especially where the terms are harsh.

Illegality and Unlicensed Moneylending

Ghanaian law draws a distinction between contracts that are illegal and those that are merely voidable. Not every contract that contravenes a statute is illegal and unenforceable. As explained in Olatiboye v Captan [1968] GLR 146, where a statute imposes a penalty primarily for revenue purposes, the underlying contract may still be enforceable. However, where the statute intends to prohibit the contract itself, the agreement will be illegal and unenforceable.

In the context of moneylending, courts are cautious not to encourage breaches of regulatory statutes. Where a lender operates without the requisite licence and charges interest as a business, the courts are inclined to deny enforcement of excessive interest, while still allowing recovery of the principal sum to prevent unjust enrichment of the borrower.

The Supreme Court's Position: Royal Beneficiaries Association v Ankamafio & Others

The Supreme Court revisited these principles in Royal Beneficiaries Association v Ankamafio & Others (2023) JELR 110961 (SC). In that case, the plaintiff on-lent part of a bank loan to the first defendant, imposing fees and interest significantly higher than those charged by the bank itself.

Both the High Court and the Court of Appeal found that the plaintiff's conduct amounted to moneylending in violation of the Moneylenders Act. On appeal, however, the Supreme Court held that despite the regulatory breach, the plaintiff was entitled to recover a fair and reasonable portion of the amount agreed upon.

The Supreme Court found the fees, charges, and interest imposed by the plaintiff to be harsh and unconscionable. While the plaintiff sought to recover a substantially higher amount, the court recalculated the obligation based on what was reasonable, awarding a significantly reduced sum with interest at the prevailing bank rate.

This decision highlights the court's equitable approach: borrowers are not relieved of their obligation to repay money received and used, but lenders will not be permitted to profit from unconscionable or exploitative terms.

Conclusion

The jurisprudence on interest rates in Ghana demonstrates a careful balancing act. The act of lending money is not illegal per se, provided the purpose of the loan is lawful. However, where lending is conducted as a business without the requisite licence, and particularly where excessive interest is charged, the courts will intervene.

Unconscionable interest rates are unlikely to be enforced, regardless of party agreement. Courts will scrutinise the surrounding circumstances, the relative bargaining power of the parties, prevailing bank rates, and regulatory compliance. Ultimately, while borrowers will generally be required to repay the principal sum received, lenders who impose harsh and oppressive interest terms do so at the risk of forfeiting their expected returns.

This evolving body of case law sends a clear message: freedom of contract in loan transactions is not absolute, and equity remains a central consideration in the enforcement of interest obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.