Borrowing and lending has long been part of human life. So long a feature of human society that it even finds expression in the biblical accounts. The story is told, in the Parable of the Unforgiving Servant, of a servant whose debt had been forgiven and who went out to demand payment from another who owed him a much smaller sum. Although taught for theological reasons, it reminds us of the basic fact that credit creation has been with mankind for centuries.
With a growing population, increasingly sophisticated financial markets, and the rise of digital lending, however, the business of lending cannot simply be left to the parties. Regulation has become necessary. The Bank of Ghana has accordingly established a licensing framework for persons and institutions engaged in lending. But, as happens in almost every sphere of human activity, there are those who may fail or refuse to comply with the law.
Recently, the Bank of Ghana published as many as twenty mobile loan applications which operating without the requisite licence. With this comes an interesting legal question. When these unlicensed lenders go to court to recover money they have lent, should the law lend its aid to them? Or should the law allow the borrower to keep money which was received as a loan merely because the lender was unlicensed? The answer emerging from the Ghanaian courts is more nuanced than either extreme.
The Regulation of Lending in Ghana
In Ghana, just like in many other countries, lending is not an activity which a person is free to turn into a business without regard to regulation. Lending and borrowing, and the wider creation of credit, are principally regulated by the Borrowers and Lenders Act, 2020 (Act 1052), together with other pieces of legislation.
Act 1052 broadly defines a lender as a person who enters into a credit agreement with a borrower. The regulatory framework therefore covers considerably more than the traditional commercial bank and extends to the various persons and institutions engaged in the provision of credit.
The Bank of Ghana has adopted a tiered system for the regulation of financial institutions and lending operators. The four-tier structure broadly accommodates different categories of operators according to the nature and scale of their activities. While each category is subject to its own regulatory regime, one theme runs through the framework is the requirement for obtaining the appropriate licence before engaging in lending activities.
The requirement for the appropriate licence or authorisation is intended to ensure that persons who make lending a business operate within a system of supervision and accountability.
The need for regulation has become even more apparent with the growth of digital credit. Borrowing that once required a visit to a bank, moneylender or susu collector can now be done with a few taps on a mobile phone. The convenience is undeniable. So too are the risks where the lender is operating outside the regulatory framework.
Illegal Contracts and Their Enforceability
The general principle of the law of contracts has long been that the courts will ordinarily not enforce an illegal contract. Generally, the law will not lend the authority of the courts to a transaction which is in violation of the law or which the law itself prohibits.
But to many general rules, there are exceptions. That has been the life of the law. In the interest of doing substantial justice, the law recognises that not every breach of a statutory provision necessarily makes the resulting contract illegal, void and unenforceable. The consequence of the breach depends, among other things, on the nature and purpose of the statutory provision and what the legislature intended should follow from its breach.
This becomes particularly interesting in lending transactions. If the general rule were applied without qualification, an unlicensed lender who had advanced, say, GH¢50,000 might find itself unable to recover the money through the courts simply because it had failed to obtain the requisite licence. The borrower, having received and used the money, could potentially argue that the court cannot assist the lender to enforce the transaction.
Is that really the position of the law?
The Approach of the Courts
The tension is illustrated more tellingly in Ahenfie Cloth Sellers Association v Philomena Mensah & Others. The plaintiff association had obtained funds from Ghana Commercial Bank and subsequently lent GH¢30,000 to one of its members. The borrower was required to repay GH¢900 weekly for one year, amounting to GH¢46,800 in total. When the borrower defaulted, the association commenced proceedings to recover the outstanding amount.
The defendants challenged the transaction, arguing, among other things, that the association was engaged in moneylending without the requisite licence and that the transaction was therefore unenforceable.
The Supreme Court, however, did not treat the absence of the licence as automatically rendering the entire transaction void. Applying the statutory regime then in force, the Court reopened the transaction after finding the interest charged to be excessive, harsh and unconscionable.
The case therefore shows that the absence of a licence does not necessarily entitle a borrower to retain the money received and escape all obligation to repay it. The court may, in an appropriate case, intervene to regulate the transaction rather than allow the borrower to retain the benefit of the loan without accounting for it.
This reasoning has subsequently been considered and followed in other cases, including Royal Beneficiaries Association v Esther Okailey Asare & 3 Ors and Royal Beneficiaries Association v Vivian Mensah, a subsequent decision of the Supreme Court.
The Worry Over Unjust Enrichment
The judicial approach is, at its heart, concerned with avoiding an unjust result. The difficulty is obvious. If a lender advances GH¢50,000 without the requisite licence, the law may have good reason not to reward the lender’s regulatory default. But should that mean that the borrower, having received and benefited from the GH¢50,000, should be permitted to keep it without accounting for anything?
The courts have been reluctant to endorse such a result. This is where unjust enrichment becomes important. In Royal Beneficiaries Association v Esther Okailey Asare & 3 Others, the Court of Appeal was concerned that it would amount to unjust enrichment to allow borrowers who had received and made use of the money to retain its benefit without paying back at least the principal.
The approach finds broader support in City & Country Waste Ltd v Accra Metropolitan Assembly, where the Supreme Court, while dealing with an illegal contract, recognised the need to balance the refusal to enforce an illegal bargain against the need to prevent one party from being unjustly enriched at the expense of the other.
The principle is therefore one of balance. The court will not necessarily enforce an unlawful transaction according to its terms merely because one party has benefited from it. At the same time, illegality will not necessarily become a licence for the other party to retain a benefit for which there ought, in justice, to be some accounting.
It must be noted that the judicial response is case-specific. The fact that a court may, in an appropriate case, prevent a borrower from retaining the benefit of money received does not make a lending licence optional. A lender who operates without the requisite authorisation places the recovery of its money, and particularly its entitlement to interest and other charges, at the mercy of the applicable law and the court’s discretion.
The prudent course is therefore to simply obtain the licence before lending, rather than hoping that equity will come to the rescue after the money has been advanced.
