The legal implications behind the banking practice of charging and paying interest

Abstract

Interest is the price of money. And as such it has to be treated. Incidentally, however, money is the medium through which all goods are acquired. All transactions including money therefore will arouse more than general concern. Thus the charging of interest on money, and indeed on goods of barter before coinage was invented, has been commented upon, criticized, condemned, misinterpreted and regulated. The history of such is fundamental if any understanding of the practice is to be arrived at. The Maltese banking arena although dating back in history has tasted modernization only very recently. The developments in the last half. century, therefore suffice to analyze existent legislation. The recent history of the rates paid by local banks on deposit accounts is of particular interest. These rates, although not presenting much scope for legal discussion, have influenced the fluctuation of debtor rates to which they are closely related. Indeed any government policy restricting the former is tightly bound to the latter, or vice-versa. Interest is charged on any goods, fungible or not. Banking interest, however, certainly relates to the former. Any distinction between the contracts of loan - Mutuum and of overdraft - apertura ta' kreditu is fundamental if any study on interest rate charge is to be attempted. The basic question whether an apertura ta' kreditu falls under the denomination of Mutuum must certainly be looked into. Of concern is the banking practice whereby in the contracts of overdraft the interest charged is capitalised every six months and interest is consequently charged on the obtaining balance. Whether such practice is foul to the specific provisions in our codes of law, prohibiting this method, is discussed in detail. The element of public policy underlying the sections of the law on obligations in general and Mutuum in particular are contrasted with reference to the practice of compounding interest The relevant case law on the matter which less one notable exception is consonant in concluding against such a proposition, is reviewed. A new movement towards this exception however is now being sensed. Commission, commitment, processing, or handling fees, or indeed any other charges are in many occasions burdened on the borrower. If these charges are to be considered as interest a contract which is considered as falling within the limits of the law will most probably exceed the maximum rate fixed. Particular mention of the credit card situation in this regard is accentuated. An element which is fundamental in most jurisdictions that still hold on to usury laws - that of intent - is completely lacking in the Maltese scenario. Although this may be reasonably expected, the prospective of introducing such an element is forwarded. The practice of discounting, which indeed has a twofold meaning is closely related to that of interest. Whilst recognizing its establishment in the commercial field even the liberal American states impose reasonable limits upon this practice. Interest is one of the oldest commercial practices and its regulation dates nearly as far back. Still today most governments are perturbed with the problems that arise in this regard. The most adequate legislation may be far from realization as this area is intrinsically related to the humours of social man himself.