Financial inclusion, as the bedrock of community-centred prosperity, makes consumer protection in the financial sector paramount to ensure fair and transparent dealings between lenders and borrowers. However, certain provisions in the regulatory framework seem to contradict this principle by permitting lenders to impose penalties for early repayment, particularly in cases of loan takeovers – a situation where borrowers switch to new financial service providers for improved terms and conditions, transferring their existing loan upon full repayment.

Despite being a prohibited practice in most instances, these provisions still raise concerns as they provide an avenue for lenders to take advantage of consumers. It binds them to unfair deals yet it is essential to recognise that consumers should have the right to shift from one lender to another in search of better terms and conditions.

Consumer protection laws in finance are inherently meant to ensure full safeguarding of consumer rights, devoid of contradictory clauses that could exploit borrowers or unjustly infringe upon their rights. The regulators have rightly recognised the importance of disallowing penalties for early repayment, which is a commendable step towards consumer protection.

Any clause that allows lenders to penalise borrowers for early repayment is inherently flawed, creating an opportunity for lenders to exploit consumers unfairly. Article 26 of Law No 017/2021 of 03/03/2021 relating to Financial Service Consumer Protection emphasises that any unfair clause in a contract governing financial products or services should be considered invalid in its entirety.

Similarly, Article 50 of Regulation N° 55/2022 of 27/10/2022 relating to Financial Service Consumer Protection nullifies any contract clause deemed unfair. The issue arises with Article 53 of the same regulation, which permits lenders to charge penalties for early repayment in cases of loan takeovers. This provision undermines the spirit of consumer protection and provides room for lenders to manipulate the law to their advantage.

Allowing penalties for early repayment during loan takeovers obstructs consumers from exercising their right to switch lenders freely and find more advantageous financial products. By penalising borrowers for seeking better options, this provision contradicts the very spirit of financial service consumer protection and forces them to stay tied to unfavourable financial arrangements.

One argument used by lenders to justify early repayment penalties is the "recapture rationale," stating that they need to amortise their administrative costs over the entire loan period. However, this reasoning is refuted by the fact that lenders already recoup these costs through various fees and charges collected at the loan's inception. Therefore, by receiving the entire outstanding amount with accumulated interests, the lender is not at any disadvantage.

Consider a scenario where a borrower has an outstanding loan of one billion Rwandan Francs with an interest rate of 20%. The borrower wishes to transfer the loan to another lender offering a lower interest rate of 14%. In doing so, the consumer aims to take advantage of more favourable terms and reduce the overall cost of the loan.

However, due to the clause permitting early repayment penalties, the borrower is confronted with an additional 10% penalty for repaying the loan early. This would mean the borrower needs to pay an additional 10% of the loan amount as a penalty, in addition to repaying the principal outstanding amount and accumulated interest.

In this situation, the penalty significantly outweighs the potential benefits of the lower interest rate offered by the new lender. The borrower is forced to reconsider transferring the loan, as the penalty becomes a barrier to exercising their right to seek better financial options.

This example underscores the unfairness of this kind of early repayment penalties. Instead of empowering borrowers to find more favourable terms, such penalties restrict their freedom to choose and make informed financial decisions.

In a nutshell, the presented facts highlight how early repayment penalties in loan takeovers undermine core principles of consumer protection and fair competition among lenders. A well-thought-out amendment to this provision holds the key to forging a financial landscape that is fairer, more transparent, and truly empowering for consumers as they make choices aligned with their financial well-being and goals, the clear-cut aim of financial inclusion.

The writer is a Junior Associate at Certa Law