One of the KCB branches. High Court Judge Eric Ogola, in his judgment
dated June 25, 2014, declined to grant orders that two defaulters pay
the bank amounts which would have in effect exceeded the principal when
their loan became non-performing, citing provisions of the Act. FILE
PHOTO | NATION MEDIA GROUP
Banks and financial institutions are
mulling new provisions of the Banking Act which cap the maximum amount
recoverable from a defaulter.
Section 44 A of the
Banking (Amended) Act 2007, which came into effect on May 1, 2007,
states that an institution shall be limited in what it may recover from a
debtor with respect to a non–performing loan.
Recent beneficiaries of this law include the directors of Rupa (K) Ltd, Mr David Karanja Kamau and Mr Cyrus Buimwe Kamau.
High
Court Judge Eric Ogola, in his judgment dated June 25, 2014, declined
to grant orders that the two pay Kenya Commercial Bank (KCB) amounts
which would have in effect exceeded the principal when their loan became
non-performing, citing provisions of the Act.
MAXMUM AMOUNT
The
maximum amount recoverable by a bank is the sum of; the principal owing
when the loan became non-performing, and interest in accordance with
the contract between the debtor and the institution, but not exceeding
the principal owing when the loan became non-performing.
In
addition, the said law provides that the bank will recover expenses
incurred in the recovery of any amounts owed by the debtor.
The
suit filed by the bank was premised on continuing guarantees and
indemnities dated February 29, 1996, signed by the two directors in
consideration of KCB granting Rupa (K) Ltd certain banking facilities.
The
court heard that the directors bound themselves to the payment to KCB
on demand of any sums due under the said guarantees and indemnities.
The
relationship between the directors and the bank flourished until April
30, 1995, when they alleged that the bank started levying unlawful rates
of interest. Irreconcilable differences emerged in the years that
followed and the matter was filed in court by the bank seeking unpaid
balances.
The bank demanded a sum of Sh3,197,396.96
plus interest, from the defendants after having closed the account,
which became non-performing since July 31, 2002.
“Section
44 A of the Banking Act Cap 488 of the Laws of Kenya necessarily comes
into play to limit the amount that KCB can recover with respect to a
non-performing loan,” said Mr Justice Ogola in his judgment. He
substantially reduced the claim by the bank to be in line with the law,
taking into account the time it became operational.
The
judgment by the High Court is a reprieve to loan defaulters whose
non-performing loans have been the reason they are being hunted down by
banks claiming accrued interests dating back many years, and which have
accumulated to exceed the outstanding principal sum.
According
to Mr Wilfred Onono, managing consultant at the Interest Rate Advisory
Centre (IRAC), Section 44 of the Banking Act is one of the latest
interventions on banking issues.
LEGAL PROTECTION
The
judge acknowledged that banks should not continue to charge interests
forever. “When a person has defaulted and can’t service a loan, the law
has provided protection and the maximum interest charged by the bank,”
Mr Onono.
He added that according to the Central Bank
of Kenya guidelines, a loan is classified as non-performing when the
borrower fails to service it for three months.
“It is at this point when Section 44 of the Banking Act comes in to limit interests.”
Mr
Thomas Manyura, consultant and credit analysis at IRAC, said the law
makes it mandatory that banks give 30 days’ notice before making
adjustments on interest
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