A number of court rulings delivered over the past two years have put on
the defensive banks and other financial institutions, for long perceived
to have little concern for the plight of their customers as they
aggressively pursued super profits. PHOTO| FILE| NATION MEDIA GROUP
All is not well in the prestigious banking
industry. A number of court rulings delivered over the past two years
have put on the defensive banks and other financial institutions, for
long perceived to have little concern for the plight of their customers
as they aggressively pursued super profits.
These pronouncements are likely to have a significant impact on the institutions’ future profit margins.
The
firms’ predicament is aptly captured by Mr Justice Eric Ogola in his
ruling in a case pitting Captain James Nyongesa Wafubwa against Housing
Finance.
Lifting the lid that has
covered banks for many years, Mr Justice Ogola said it was time banks
realised that they can no longer “hide behind the contracts they make,
regardless of how unjust they are, to literally destroy their
customers.”
“The time has come for
banks in Kenya to look into the eyes of their customers and answer the
question: Are banks Kenyan or have they just entered Kenya for
business?”
The judge’s ruling was
prompted by a pleading submitted by Housing Finance, raising the defence
of “common practice” to levy additional charges against Mr Wafubwa in
the auctioning of his house.
The
judge unflatteringly compared banks to a robber who, after killing his
victim, insists on “not only attending his funeral, but also carrying
the casket to the grave to confirm that his victim is dead and buried.”
Public auction
In
1989, Mr Wafubwa approached Housing Finance for a Sh650,000 loan
secured by a house. He was to pay back the loan in 18 years. He
admitted that he was unable to service the loan and soon fell into
arrears.
In 1996, Housing Finance
moved to recover its money by selling the house in a public auction that
fetched Sh4.5 million. As is the tradition, the highest bidder paid the
requisite 25 per cent down payment amounting to Sh1,125,000.
The
winning bidder later failed to complete the transaction within the
stipulated time and forfeited the full deposit of Sh1,125,000 to Housing
Finance.
It is here, according to
the High Court judge, that Housing Finance’s problems started. As it
turned out, the forfeited sum was enough to pay off Mr Wafubwa’s loan,
which at the time was Sh1,006,434.45
There
was a further debit of Sh65,002.75 and Sh32,900 being charges for the
auctioneer and legal fees, leaving Mr Wafubwa with Sh20,662.80.
However,
in keeping with “common practice” in the industry, Housing Finance put
the money in its profit-and-loss account and went ahead to sell Mr
Wafubwa’s property for Sh4.5 million in 2009.
Mr
Justice Ogola said the balance of the money collected at the auction
that took place on 8 November, 1996, after deducting the costs and
charges, must be used to reduce the mortgage debt and interest,
regardless of whether the sale aborted or not. The remainder, in this
instance Sh20,662.80, became the property of Mr Wafubwa and should have
been given to him.
“Secondly, there
are absolutely no grounds, whether based on morals of business, justice,
or society, upon which the defendant, a bank, would be the person to
benefit from the deposit paid under a sale or an attempted sale. It is
not the property of the bank that is being sold. Its involvement is as
an attorney of the plaintiff,” Mr Justice Ogola noted.
“The
bank has a duty to keep a very respectable distance from such money.
The submission by the bank that it put the money in its profit-and-loss
account is a mockery of the plight of the plaintiff and is too
insensitive to the justice of business.”
By
the circumstances that were brought about by the aborted sale of the
mortgaged property, a sum, which he described as “windfall” chances, can
only benefit the mortgage account.
“The
said account is already in arrears and both Mr Wafubwa and Housing
Finance are interested in the healthy status of that account. If the
deposit money could be described as a windfall, then the finder must
keep it. The finder in my view is the originator of the action of the
auction, which is the mortgage account and the plaintiff,” the judge
said.
Forfeited money
In
his ruling delivered in 2012 and upheld by the Court of Appeal early
this year, Mr Justice Ogola said Housing Finance should have passed the
forfeited money to Mr Wafubwa’s account, clearing the loan. The company
should also have told Mr Wafubwa that his property had been discharged
and that he was Sh20,662.80 richer. The judge said Mr Wafubwa’s property
ought not to have been sold for a second time.
“That
property was unlawfully sold as at that time the plaintiff did not owe
Housing Finance any money on account of the aforesaid mortgage
transaction. The plaintiff is, therefore, entitled to his property.
“However,
since the property was sold to a purchaser for value without notice and
since the title has passed to the said purchaser upon the transfer
registered on 21 April, 2009, the plaintiff is only entitled to the
value of his property as at the time of the transfer to the purchaser
together with the expected appreciation in value since,” stated the
judge.
The judge also expressed
concern that the mortgage property was sold in February 2009 at Sh4.5
million, the same price it was selling in 1996. He said it would appear
that while all property in Kenya appreciate in value, that of Mr
Wafubwa’s house remained static for 13 years.
Mr
Justice Ogola directed that Mr Wafubwa be paid Sh20,662.80 with
interest at 27.5 per cent per annum with effect from 12 November, 1996
till payment in full and a further Sh4.5 million with interest at 27.5
per cent per annum with effect from February 2009 till payment in full.
The
Court of Appeal upheld the decision to award the Sh20,662.80 to Mr
Wafubwa and also accepted the reasons advanced by Mr Justice Ogola.
However,
it set aside the award of Sh4.5 million with interest saying that the
judge had expressed doubts regarding the value of the property by the
time it was sold 13 years later.
Both Mr Wafubwa and Housing Finance had expressed dissatisfaction at the award.
Mr
Wafubwa will be back in court next week to advance arguments for what
he believes should be paid to him by Housing Finance. The case will be
heard on 27 October, 2014.
In yet
another case, High Court judge George Odunga found that Housing Finance
had unlawfully levied interest on Mr Francis Ichatha, who had borrowed
Sh1.5 million for the construction of a house in Karen, Nairobi.
Mr
Ichatha says Housing Finance owes him Sh4,873,987.44 plus the house,
which is currently valued at Sh80 million, making a total of
Sh84,873,987.44 as the house was not exclusively built by funds from
Housing Finance, which only contributed 25 per cent. In exercising their
statutory power of sale, Housing Finance sold the house after Mr
Ichatha failed to pay the loan.
He
had initially borrowed Sh1.2 million at a rate of 18 per cent per annum
in 1991. However, with an additional advance of Sh300,000 in 1992, the
interest rate was 19 per cent.
Mr
Ichatha had told the court that Housing Finance had, in breach of the
agreement, varied the interest to 26 per cent per annum, thereby making
it impossible for him to service the facility. Housing Finance, he said,
also used a faulty banking computer software, which led to errors in
the calculation of the interest.
Mr
Justice Odunga (right) said Housing Finance had not cited any particular
provision in the contractual documents which entitled it to levy
charges other than those provided for.
“I
have gone through the charge document and I have been unable to find
any provision entitling Housing Finance to charge what it termed penalty
interest, interest on arrears, or default charges. Housing Finance
ought to have expressly provided for such charges in the charge document
in order to entitle it to levy the same. Without any express provision,
it is my view that any levy could only be made with Mr Ichatha’s
consent,” Mr Justice Odunga said.
He noted that given the various errors pointed out by Mr Ichatha, Housing Finance’s calculations were not free from mistakes.
The
court said the bank ought to stipulate all the conditions for the grant
of facilities and ought not to hide some facts from the customer,
only to disclose them later under the guise of “customary practice”.
“A
party ought not to mutate the terms of a contract unilaterally to the
detriment of the other party to the contract. This in my view is what
the people of this republic realised when they enacted unto themselves
Article 46(1)(b) and (c) of the Constitution, which provides for the
right to the information necessary for consumers of goods and services
to gain full benefit from goods and services and to the protection of
their health, safety, and economic interests,” Mr Justice Odunga said.
It
also emerged that although Housing Finance was entitled to vary the
rate of interest, it could only do so on serving Mr Ichatha with not
less than four months’ notice.
“The
necessity for giving the notice is meant to give the borrower a chance
to decide whether to keep the facility alive based on the new terms or
to bring it to an end by either paying the amount due or instructing the
bank to realise the security if in his view he would not be in a
position to service the facility based on the intended variations,” the
judge said.
Having found that there
were illegal charges imposed on Mr Ichatha’s account, Mr Justice Odunga
(right) directed the complainant and Housing Finance to agree to appoint
an independent accountant to calculate the charges and file a report in
court.
He also said parties to the
dispute could each appoint an accountant and then the two accountants
could choose an umpire. The three could go through the documents in the
possession of the parties and prepare a report.
The
Interest Rates Advisory Centre (IRAC), on Mr Ichatha’s instructions,
has filed a report on account scrutiny and interest re-calculation.
IRAC’s
report, filed through managing consultant Wilfred Onono, contains what
Housing Finance ought to have deducted. Housing Finance is expected to
file its own report in due course. The matter will be mentioned on 24
October, 2014.
The case of Ms Rose
Florence Wanjiru and Standard Chartered Bank is also ongoing. In this
case, Ms Wanjiru claims that some charges levied by the bank are illegal
as the bank did not receive approval from the Finance minister, as
required by the Banking Act.
Section
44 of the Banking Act provides that “no institution shall increase its
rate of banking or other charges except with the prior approval of the
minister.”
Last year, judges David
Maraga, G.B.M Kariuki, and J. Mohamed approved an appeal by Ms Wanjiru
allowing her to prosecute her case after Mr Justice John Mwera threw it
out in 2003 on a technicality — that she could not file a representative
case without the court’s permission.
In
reinstating the case, the Court of Appeal criticised the Kenya Bankers
Association’s arguments on the question of whether banks could levy
illegal charges and the culpability of the bankers.
“I
do not see any difficulty in the court determining whether or not
commercial banks in this country are illegally levying banking charges
which have not been approved by the Finance minister.
All
that will be required in evidence from the respondents (bankers) is
that their charges have always been approved by the Finance minister,”
the Court of Appeal noted. The case is open to the public.
Judge Ogola’s observation in judgment on property dispute
- Banks cannot hide behind the contracts they make, regardless of how unjust they are, to literally destroy their customers. Without their customers the banks cannot operate.
- A time has come for banks in Kenya to look into the eyes of their customers and answer the question: Are banks Kenyan or have they just entered Kenya for business?
- Banks in Kenya loom large. “I am reminded of a predator who, after killing the prey, is not satisfied to leave the carcass to the vultures, but becomes both the predator and the vulture, killing the prey and gleaning the meat from the carcass to ensure the prey is really dead.
- I am also reminded of a robber killing his victim and not only attending his funeral, but insisting on carrying the casket to the grave to confirm that his victim is dead and buried.”
- All sectors of our society are undergoing reforms, and banks should not be left behind.
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