In duplum rule and inflation

By Peter Kawonde

PUT simply, the in duplum rule states that interest, however regarded, stops to run once what has accumulated equals the amount of capital borrowed or outstanding. Thus, if an amount of $100

is borrowed, assuming everything is equal, the amount payable on it in both interest and capital should be no more than $200.


This rule applies to loans, overdrafts and any other contracts where a capital sum can be identified, and where interest is chargeable on it at an ascertainable rate. This rule thus covers such transactions as hire purchase schemes, credit sales and microlending transactions and the like.


In practice, because repayments are appropriated to interest and to capital as they are made, forensic calculations are necessary to establish exactly how and when the in duplum position would have been reached. This aspect is beyond the scope of this article.


In the last few years, the country has experienced a hyperinflationary situation. This was worsened by a promiscuous monetary policy pursued by the authorities prior to the monetary review made by the Reserve Bank of Zimbabwe in December 2003.


The effect of that policy was to restrict money supply. In turn, interest rates skyrocketed to unprecedented levels. At the time of this rude disturbance however, institutions and individuals had committed themselves, either as lenders or borrowers. The ballooning interest rates were enough to wrong foot the most well laid out cash flow projections.


The monetary policy of December 2003 did not mean the immediate decline in inflation. In fact, it initially continued on its upward path. Although it later slowed down somewhat the fact is amounts initially loaned at earlier periods now purchased far less than they could at the time of the making of the loan.


However, because interest rates remained high over the period, the amounts that would have been reflected as due on loans and overdrafts now bore little relation to the amounts initially extended. In extreme cases, amounts almost five or six times the amounts initially extended would on the face of it appear as due.


The effect of the application of the rule in inflationary times therefore is to accentuate a redistribution of income from lenders to borrowers. Thus, an amount of one million dollars which was a fortune way back in 1999, is of very little value now, even if its double of another one million dollars were to be repaid now.


It would therefore follow that debtors who by hook or crook managed not to pay any amounts due on loans or overdrafts over a lengthy period of time, can now boldly approach their creditors, pay the double of amounts borrowed in the past, and lo and behold, they are free of the debt!


To avoid such situations, the creditor should insist on punctilious payments of all amounts due in terms of the credit facility, as and when they are due. This may be well and good if the loan agreement anticipates the adjustments necessary to make in the future to cater for inflation. If, however, a fixed form of regular payment is agreed upon, then the creditor remains at a disadvantage.


In spite of the surge in interest rates, he may be unable to insist on accelerated repayment schedules if he has tied himself to an agreement. This same argument goes for credit stores where goods are purchased on credit and monthly instalments are expected to extinguish the value of the credit extended.


To cover themselves, credit stores often stipulate that they are at liberty to determine the extent of the instalments payable by the customers. Whilst this might appear as adequate cover, it may become negated if borrowers contest this condition.


In seeking to mitigate the effects of the operation of this rule, however, a creditor cannot simply agree with the debtor that the in duplum rule shall not apply to their transaction. Such an agreement would be contrary to the public policy of Zimbabwe, and would be unenforceable.


However, the remedy might lie in inducing the debtor to agree to abandon his rights under the earlier agreement, and enter yet another agreement, whose effect would be to consider all amounts up to the date of the new agreement, due.


Once the debtor has been thus hoodwinked, such an agreement can thereafter be enforced if the debtor defaults. If he can, the debtor can neutralise this manoeuvre by declining the creditor’s enticements.


The in duplum rule can have far reaching effects in relations between creditors and lenders, particularly if the hyperinflationary situation prevalent now persists. However, this can only occur if borrowers utilise the advantages it confers upon them, or conversely, if lenders, aware of the negative results that may attend in delay, seek to minimise its operations by calling in loans in arrears, timeously.


* Peter Kawonde is a legal practitioner and can be contacted at coined@africaonline.co.zw