Companies sue Islamic bank over loan interest

A bank has been accused of deceiving borrowers into signing for non-existent Islamic loan facilities.

Lawyer Hassan Lakicha yesterday told the Mombasa High Court that First Community Bank lied to its Muslim and non-Muslim clients by advertising interest-free products, then went ahead to impose hefty charges.

Mr Lakicha, who is representing Mombasa Beach Houses Company Ltd and Aayo Investment and Services Ltd, claimed that his clients were duped into signing for a Musharakah loan in the belief it would not attract interest.

“The bank is deceiving borrowers that this (facility) is Sharia-compliant, yet it is giving conventional loan facilities and charging interest,” said Lakicha, adding that the bank “was exploiting customers because there is no legal framework (for Sharia-compliant banking) from the Central Bank of Kenya”.

Lakicha said that under Islamic law, two facilities were available: the diminishing Musharakah and Muraba’a, both of which do not attract interest.

In the first instance, the lawyer said, a bank gives a loan to finance a project which it co-owns with the borrower and only benefits from profit determined during the making of the loan agreement. This profit does not fluctuate or change.

Under the Muraba’a concept, a bank buys a property on behalf of someone for a profit.

But the bank’s lawyer, Peter Wafula, denied the claims before Justice Patrick Jeremy Otieno and insisted that the two companies were offered an interest-free loan but after defaulting on payment, they had been slapped with ‘default charges’.

According to court documents, in February 2012 the plaintiffs pledged two of their properties to secure a Sh50 million loan to build 10 residential houses.

They were credited with Sh48 million in compliance with the diminishing Musharakah principle where the bank was to jointly own the project with the borrowers, including sharing profits and losses, and later surrender its interest after the repayment of the loan is completed.

Lakicha told Justice Otieno that trouble for his clients began when a director in one of the firms died after they had paid Sh47 million to the bank.

“The bank continued to charge interest notwithstanding the agreement of Musharakah law and the loan ballooned,” he said.

The judge asked the lawyers to clarify how much money the borrower ought to have paid the bank to qualify to have repaid the loan in full, and whether this amount would change when the borrower defaulted.

Mr Wafula said the amount payable would not change even if the borrower defaulted but it was not clear how much the bank was still demanding for defaulting on repayment.

While Lakicha said the letter of offer introducing the loan to his clients promised interest-free loans, Wafula countered that there was a second letter that Lakicha was not referring to.

Justice Otieno ruled that the bank could not auction property belonging to the two firms pending the determination of the lawsuit.