The High Court is considering a case whose outcome could spell out how financial institutions and their clients implement agreements on loans and overdrafts.
This is after an engineering company accused a multinational bank of unilaterally adjusting the interest rate.
Monaco Engineering, a Kenyan company said Standard Charted Bank, Kenya used underhand methods to vary repayment agreements.
In one instance, Monaco alleges it was charged up to 41 per cent in interest rates yet the agreement indicated 18 per cent.
When the company noted the anomaly the bank acknowledged “the error” and undertook to compensate the company.
In yet another instance, the bank is said to have informed the company that the Central Bank of Kenya had increased interest rates and, therefore, repayment would be affected.
However, instead of increasing money payable by Sh13,000 to accommodate the new rates the bank demanded an increase of Sh115,000. This, according to the suit, did not reflect CBK rates.
The engineering company is seeking Sh590 million in compensation, but the bank has denied any deliberate wrongdoing.
Documents filed in court — including an affidavit sworn by Mr Stanley Njogu Karari, a director of Monaco — indicated that the engineering company got an overdraft to finance a tender in 2013.
The bank offered the company Sh9.6 million at 18 per cent interest rate to enable the company to build a boundary wall at the Jomo Kenyatta University of Agriculture and Technology.
But following a court case involving the university and its neighbours, a judge gave ordered the construction stopped.
“I was compelled to return to the bank, to have the facility revised to a term loan as the urgency that had necessitated the overdraft facility was no longer there,” states Mr Karari.
The bank agreed, proposing a 24 per cent interest rate for two years but the parties later settled on 15.9 per cent.
In the meantime Monaco was pursuing recognition by international development financiers, which partly required proof that they held an account with an internationally recognised bank.
Consequently Monaco gave various documents, including statements of account, to Fakia Group International, an American entity that the Kenyans were in talks with.
Fakia rejected the documents and cancelled all relations it had established with Monaco after the Americans reportedly doubted the authenticity of the documents since the bank had been charging rates ranging from 34pc to 41pc on the overdraft in diverse dates despite the agreement stating that the standard rate was 18pc.
Monaco alleges that when it sought an explanation, the bank instead reported the company to the Credit Reference Bureau for defaulting on payment while awaiting clarification on the discrepancies.
Consequently, claims the company, it lost project financing for two critical tenders it had won at Klin Apartments on Mombasa Road and ongoing Pipeline upgrade.
Its relationship with American financiers was also damaged.
Mr Karari said to his “utter shock and disappointment” he and his co-director received a demand letter for default of payments.
In their defence through a replying affidavit sworn by Martin Marete, the bank’s Relationship Manager Business Clients, Standard Chartered said any errors brought to its attention on the status of the overdraft or the loan were corrected.
“The error in the rate of interest rates in the first eight months of the term loan has been rectified. The defendant is a large commercial bank and is well able to meet any damages which the court may hold the plaintiff has suffered,” said Mr Marete.
The case will be mentioned on March 23 at Milimani Commercial Courts.
The case comes as MPs are discussing a Bill that if it becomes law will arrest runaway interest rates.
The Banking (Amendment) Bill, 2015 by Jude Njomo (Kiambu) seeks to regulate interest rates at no more than four per cent of the base rate set and published by the Central Bank of Kenya .