Finance firms no longer at ease as past actions threaten their profits

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.