Understanding the concept of interest and how it applies in Zimbabwe

BY RUKUDZO KACHAMBGWA AND FUNGAI CHIMWAMUROMBE

Since the earliest times, interest has troubled lenders, borrowers, princes, emperors and rulers alike.
The central question has always been how to balance the competing interests of lender and borrower.
Over the years, interest has ceased to be a purely private matter between the parties to a transaction and has become a question of public policy.
So, what is interest, and what is its purpose?
Webster’s New Twentieth Century Dictionary (Unabridged, 2nd ed.) and the Concise Oxford Dictionary both define interest as money paid for the use of money lent, or for not exacting repayment of a debt.
F.A. Mann, in The Legal Aspect of Money (quoted with approval by Chinhengo J in Mawere v Mukuna), puts it this way:“… interest is awarded to compensate for the deprivation of the use of money due until payment.”
In commercial terms, interest is the lender’s profit on the loan and the borrower’s cost of it.
How interest is calculated.
Several factors determine the rate of interest in any given case. These include the cost of the funds to the lender, the risk the borrower presents (having regard to his creditworthiness or lack of it), the lender’s overheads and desired profit margin, and the country risk.
In African Dawn Property Finance (Pty) Ltd v Dreams Travel and Tours CC, Ponnan JA observed:“… [The rate of interest levied depends upon various factors, not least the risk to the lender, which in turn is usually dependent upon whether the creditor is well or ill-secured.
And, it can hardly be disputed that inasmuch as profit varies and fluctuates, so too must interest, which by its very nature is representative of profit.”Because the charging of interest affects the public at large, the legislature has enacted laws regulating how much interest may be charged on a debt.
The laws governing interest in Zimbabwe.The Prescribed Rate of Interest Act [Chapter 8:10]The foremost statute is the Prescribed Rate of Interest Act [Chapter 8:10]. It empowers the Minister of Justice, with the approval of the Minister of Finance, to prescribe the rate of interest on certain debts.
Under Statutory Instrument 164 of 2009 (the Prescribed Rate of Interest Notice, 2009), the prescribed rate at the time of writing is 5%.However, this 5% rate is subject to exceptions.
Section 4 provides that the prescribed rate applies only to interest-bearing debts whose rates are not governed by any other law, agreement, trade custom or other means.
For example, if the parties sign a loan agreement stipulating a higher rate, that rate governs.
Only where there is no agreement on the rate would the prescribed rate apply.The Moneylending and Rates of Interest Act [Chapter 14:14]Section 8 of the Moneylending and Rates of Interest Act [Chapter 14:14] prohibits a lender from stipulating for, demanding or receiving interest on money lent and advanced at a rate higher than the prescribed rate. This prohibition, however, is likewise subject to the limits set by s 4 of the Prescribed Rate of Interest Act.
Penalty interestMost loan agreements contain a penalty provision, under which additional interest is added to the outstanding balance if the borrower breaches the contract.
For instance, if a debtor misses an instalment, an agreed percentage of penalty interest may be added to the balance.Penalty interest is governed by the Contractual Penalties Act [Chapter 8:04], which, according to its preamble, provides for the enforcement of penalty clauses in contracts.
The Act defines a “penalty” as any money a person is liable to pay or forfeit under a penalty stipulation.
A “penalty stipulation” is a contractual provision under which a person is liable to pay money as a result of, or in respect of, an act or omission in conflict with a contractual obligation.Section 4 begins by declaring that a penalty stipulation is enforceable.
It then empowers the court to reduce a penalty that appears out of proportion to the prejudice the creditor has suffered as a result of the act or omission.
The court may also grant any other relief it considers fair and just to the parties.

Interest is the price of using another’s money, representing profit to the lender and cost to the borrower.
The rate in any given case reflects the lender’s cost of funds, the borrower’s creditworthiness, the lender’s overheads and margin, and the country risk.
Because the balance between lender and borrower is a matter of public concern, the law regulates it.In Zimbabwe, the Prescribed Rate of Interest Act [Chapter 8:10] sets a default rate, currently 5% under SI 164/09.
That rate yields to any other rate fixed by law, agreement or trade custom, so a higher rate stipulated in a loan agreement, or any other law, will generally prevail.
The Moneylending and Rates of Interest Act [Chapter 14:14] caps the rate a lender may charge at the prescribed rate, but is itself subject to s 4 of the Prescribed Rate of Interest Act.
Penalty interest for breach is regulated separately by the Contractual Penalties Act [Chapter 8:04]. Such penalties are enforceable, but the court may reduce any that are out of proportion to the creditor’s actual prejudice.