BARCLAYS BANK OF ZIMBABWE LTD v ARROW ZIP FASTENERS (PVT) LTD 1999 (2) ZLR 441 (H)

Flynote

Banking — interest — on overdraft — whether compound interest may be charged

Interest — rate — banking practice of compounding interest on a monthly basis — lawfulness of — Moneylending and Rates of Interest Act [Chapter 14:14] — s 12 — does not prevent compounding of interest

Headnote

The plaintiff bank sued for monies due as interest on overdraft facilities granted. The overdraft facility letter provided that the interest on an overdraft would be charged at 1% above the current prime lending rate. The contract also provided that the bank was entitled to calculate interest on the minimum balance by which the account was overdrawn on a daily basis, to add such sums in any one month and to debit the interest to the account. The interest was added to the outstanding balance and interest calculated on the outstanding balance, which included the previous month's interest, thereby compounding the interest. The defendant argued that the bank was not entitled to charge an overall interest exceeding that agreed in the facility letter.

Held, that s 12 of the Moneylending and Rates of Interest Act [Chapter 14:14] requires that every instrument of debt in respect of a loan must state that it is a loan agreement, the amount loaned, and the rate of interest to be charged. While the lender is only entitled to recover at the rate of interest specified in the agreement, the section does not prohibit the charging of compound interest.

Held, further, that the banking practice of charging compound interest on overdraft facilities has been recognised and accepted by the courts as reasonable. While interest levied on any amount due never loses its character and remains interest, whether or not it has been capitalised, there is nothing in the law to prevent a lender charging interest on interest. That is the difference between simple and compound interest. It is fallacious to say that if the banks are entitled to charge compound interest, the interest must be calculated so that it equates to simple interest. The principle of charging compound interest has been settled. The banks were not obliged to levy compound interest at a rate which would, at the end of a year, equal the annual rate agreed on.

Held, further, that the defendant had operated its overdraft on that basis for several years without query. It had never queried the practice until it received legal advice. Having regard to the banking custom practised for many years and to the acceptance by the defendant of that practice for several years, the plaintiff was entitled to charge interest in the way it had.