Customers now boldly take on banks in court

Hotelier Geoffrey Muotia walked into National Bank of Kenya in April last year looking for a loan to finance his business.

Mr Muotia, who owns Nairobi Upperhill Hotel, secured Sh281 million from the bank, a loan that was charged on his property.

It comprised a Sh10 million overdraft facility to be repaid in 12 months, a commercial mortgage and a term loan of Sh35 million repayable in 12 months.

The purpose of the loan was to pay off another loan with ABC Bank, and finance the completion and furnishings for another hotel owned by Nairobi Upperhill Hotel.

However, according to a court ruling, the disbursement was delayed, attracting Sh13 million in liabilities from ABC Bank and forcing Muotia to go back to the same bank for a top up.

But before this was completed, National Bank listed Muotia and his hotel with a Credit Reference Bureau, which made it difficult for the hotelier to seek alternative loan facilities from other financiers.

Growing trend

And then in December 2014, National Bank issued a notice to sell Muotia’s property. This has now seen the lender’s managing director, Munir Ahmed, risk a jail term for attempting to sell the hotel against court orders.

The case exemplifies a growing trend that is set to put the brakes on the speed at which banks auction property.

Mr Ahmed and the bank’s company secretary, Habil Aswani, have been cited for contempt of court in Nairobi.

Justice Farah Amin found the two guilty of attempting to sell a hotel valued at Sh550 million in violation of a court order that had been served, resulting in “massive harm” to the owner of the hotel.

The bank was looking to sell Upper Hill Hotel at Sh330 million, which is more than Sh200 million below its valuation report.

Muotia has also accused the bank of unlawfully issuing a “notice to sell” on his property. National Bank had instructed Garam Investment Auctioneers to sell the hotel in an effort to recover an outstanding loan.

“The defendant’s [National Bank] actions are unlawful and in breach of the law and the mortgage agreement,” the court papers read.

“The plaintiff’s [Muotia] complaint relates to quantum and the procedure used for serving statutory notices, which claims do not comply with the Land Act 2012, and the defendants have acted in a way that has prevented him from obtaining alternative financing.”

The bank has appealed against the judgement.

An order blocking the sale of the property was made on January 23, while the bank advertised its sale on January 26.

The judge asked how the bank’s executives decided that Muotia would not repay his loan, and dismissed the lender’s defence that it had not been made aware of the order in good time to stop the for-sale advertisement.

The court also extended the order stopping interference with Muotia’s property.

Last resort

But National Bank maintains it has long appealed the contempt of court ruling issued against it by a judge, saying its managing director and company secretary were at no risk whatsoever. It added it would continue with its efforts to pursue defaulters.

“The bank, in full compliance with the standard laid-down procedure that guides debt recovery, is seeking to reclaim its money .... We are taking this measure as an option of last resort,” the bank said in a statement last week on the Muotia case.

“Like all banks that enjoy long-standing relationships with their customers, we are always sad when we have to take such action on a ... borrower, and always prefer customers to service their loans when they fall due. The foreclosure is always, therefore, a process of the last stage of recovery, after all avenues to recover outstanding facilities have been exhausted.”

The wrangle comes at a time when customers are increasingly taking on banks in court, a situation that is now forcing banks to change how they pursue loan recoveries.

Another high profile case is that of Nairobi businesswoman Sharok Ali Hirji, who has obtained court orders attaching the property of mortgage lender HF Group. She is seeking to recover a Sh722 million compensation payout the High Court awarded her in 2009.

The businesswoman recently slapped HF with a Sh726 million demand and a notice attaching equipment in four of the lender’s Nairobi branches.

The late Justice Joyce Khaminwa awarded her the money after finding that the mortgage financier illegally sold her matrimonial home to recover a disputed Sh600,000 loan it had granted her in 1985.

The Sh726 million demand Ms Hirji has made to HF includes the judgement amount plus auctioneers’ fees and accrued interest.

Assertive customers

The warrant of attachment targets assets from the bank’s Rehani House head office, Gill House, Masera House and Epren Centre, all in Nairobi.

Justice Khaminwa awarded Hirji Sh20.4 million in November 2009 after finding that the lender sold her Runda home for Sh6 million nine years earlier to recover the disputed loan.

The judge ruled that HF had raised interest rates on Hirji’s loan from 13.5 per cent to 26 per cent without notice and had, therefore, fallen foul of the law.

HF has also appealed against the ruling. If unsuccessful, the award could wipe out more than half of its annual profits.

Banks are also are fighting a class action suit in court over ‘illegal charges’, as consumers get more assertive.

Rose Florence Wanjiru filed a suit in 2003 on behalf of bank customers, seeking compensation for charges levied on accounts without the approval of the Finance minister. The case could have far-reaching consequences for the banking industry,

Ms Wanjiru is also seeking to amend her suit to rope in non-bank finance institutions.

Equity Bank is facing the highest number of complaints in the class action, which has now attracted 187 other depositors. The lender faces 42 compensation claims.

Other banks facing complaints include Barclays Bank of Kenya (37), KCB (34), CFC Stanbic (6), NIC Bank (4), Consolidated Bank (2) and Family Bank (2). Diamond Trust Bank, Chase Bank, Oriental Commercial Bank, HF and Gulf African Bank each face one claim.

If successful, the suit promises to shake the banking industry to its core, as lenders could be forced to part with millions of shillings in compensation.

Ms Wanjiru is demanding Sh195,000 from her bank for ledger and ATM fees charged on her Standard Chartered account, but has left it to the court to decide how much she and other depositors should get in damages.

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