CBK punished for shutting down Akiba micro-finance

BY WAHOME THUKU

On January 29, 2004, businessman Gideon Mwiti Irea incorporated Kenya Akiba Micro Financing Ltd to lend out money to entrepreneurs.

The company opened offices in Nairobi, Kitengela, Ongata Rongai and Voi and began issuing out loans.
On November 2, 2005, policemen, officers of the Banking Fraud Investigation Unit (BFIU) and Central Bank of Kenya (CBK) officials raided all the offices of Akiba and carried away computers, customer files, title deeds, loan documents, 3,000 logbooks, banking records, receipt books, company seals and rubber stamps and other office equipment they could access.

They accused the company of carrying out illegal banking business. Their accounts in three banks were frozen and the company was completely shut down.

The officers were led by Ezekiel Chebii and Moses Gituma (now deceased) both employees of CBK.
By then, the company had 6,000 customers and 300 employees. Three days later, the company moved to court claiming over Sh930 million in damages. The named 13 senior police officers and CBK employees involved in the raid, CBK and Attorney General on behalf of BFIU as the defendants. Meanwhile, Mwiti and three others were arrested and charged before Nairobi Chief Magistrate with carrying out banking business without approval contrary to Section 3(1) and 3(2) of the Banking Act and unlawfully accepting deposits without valid licence contrary to Section 16(1) and (9).

Rigours of Banking Act
Seventeen witnesses testified in that criminal case. After six years, on September 23, 2011, Mwiti and group were acquitted, with the court holding that they did not break any law.

The civil suit was heard by Nairobi judge Alfred Mabeya. On October 28, 2011, Akiba applied to have the defence filed by the defendants struck out and judgement entered against them.

They also applied to have CBK ordered to release their property or to deposit Sh2 billion as undertaking for damages. In his affidavit, Mwiti explained the nature of their business in details. He told the court that at the incorporation of his firm, there was no specific law governing micro-finance institutions.

The company targeted borrowers who did not wish to be subjected to rigours of the Banking Act. Through lawyer Peter Simani, the company denied engaging in banking business saying they were only involved in hire purchase business as a micro-finance institution. Simani said the criminal court had already established that his client had not broken any law.

Ms Naela Wanjala of CBK in defence said the company should not have used the name “finance” since Banking Act prohibited that. The company’s licence did not permit it to carry out financial business, she said, adding that Akiba was taking deposits and lending money illegally.

CBK claimed the BFIU was not a department of the bank.

The AG through Senior Principal State Counsel Anthony Ombwayo argued that BFIU was a unit of CID seconded to CBK’s investigations branch. It was answerable to CBK, which sanctioned its actions in conjunction with CID directorate.

Justice Mabeya considered Section 2 of the Banking Act. Under that law, one can only be said to be in banking business if he is accepting deposits from the public repayable on demand or notice, receiving money on current account, payment on and accepting cheques and investing the monies on his own risk. In her affidavit, Wanjala had admitted CBK was not aware how Akiba carried its trading activities.

The judge interpreted that to mean even as CBK officers raided the company six years back and took away all its trading tools, they did not know what was the nature of the business.

“How can it be that the 14th defendant (CBK) does not know how the plaintiff carried out its trading activities yet it has been in possession of the records for over six years,” Mabeya queried.

He said he had examined Mwiti’s affidavit and concluded the details did not show Akiba’s activities amounted to either banking business, financial or business of deposit taking in terms of Section 2 and 16(5) of the Act.

“The defendants have had the documents and trading records since November 2005. It cannot be said that six years later, they have not been able to analyse the records and come up with a conclusion as to the nature of the plaintiffs business,” he said.

The fact that no thread of any such evidence was forthcoming from the defendants leaves the court with no alternative but to conclude there was none.
Five customers, Harris Thuku Mwangi, Hellen Osito Matika, Maria Wanjiku Kanyau, Nathaniel Chomba and Jane Wambui Macharia had testified in the criminal court that they never operated accounts or chequebooks with the company. Their deposits were to finance matatu business.

Analysing evidence
“I am satisfied the contention that the plaintiff was carrying out banking business is a red herring being raised by the defendants to cushion themselves from liability for blatant, illegal and uncalled for raid of the premises on November 2, 2005,” the judge concluded after analysing the evidence.

“That raid not only broke the plaintiff’s backbone as a commercial entity but also ruined many businesses of its customers,” he added. The judge held there was no other evidence the defendants could adduce. “The parties have put their best foot forward and I have made a finding there is no evidence the plaintiff was carrying on banking business. They tried before the criminal court and they failed,” he ruled adding that letting the case go on would be a waste of time.

Failure to agree
Further, Mabeya ruled that even if the word “finance” was illegal as CBK claimed, that did not give it a right to engage in “brutal and high handed” action of violent closure of the business. Noting that the name had been registered by the Government, he asked, “Why should the agents of the same Government now seek to punish the plaintiff for the Government’s mistake? That won’t do and this court can’t allow it.”
He analysed CBK’s organisation chart and the defence of the AG and concluded that BFIU was under CBK governor. The bank could thus not be exonerated from blame and was liable like all the other defendants.

The judge dismissed their defence and ordered CBK and its officers to release all the properties taken during the November 2, 2005 raid.
He further ordered Akiba and CBK to negotiate a suitable compensation for damages and report back to court in 30 days.

Failure to agree, the matter would be listed for assessment of damages by the court in 45 days. The defendants were also ordered to pay all the costs of the suit to the company.

The writer is a court reporter with the Standard Group
Email: [email protected]