Banks face Sh195b suit for imposing charges without minister’s approval

Three years ago, the Court of Appeal made a precedent-setting ruling with significant impact to Kenya’s financial sector.

In the infamous 14-year suit, Margaret Njeri Muiruri had sought protection from the Bank of Baroda, which was demanding Sh200 million on a facility that had grown from Sh6 million loan taken 40 years ago.

While obtaining the Sh6 million loan back in 1979, the late Joseph Muiruri Gachoka, father of outspoken political commentator Tony Gachoka, had signed on a 14 per cent interest rate with the bank.

Over the next four decades, however, the bank increased the interest rate payable to 45 per cent on the outstanding balance, with the amount owed hitting Sh200 million by 2014.

This is despite the fact that Mr Muiruri, the account holder, had died in a road accident in 1988 and the bank had already auctioned the secured property and recovered more than Sh12 million from his widow, Ms Margaret Muiruri.

Bank of Baroda’s main pillar in the case relied on a fine print clause in the mortgage agreement that Mr Joseph Muiruri and his wife, like majority of us, had paid little or no attention to.

Full indemnity basis

The clause read, in part, that the Bank “shall in its sole discretion from time to time decide with full power to the bank to charge different rates for different accounts and such interest to be calculated on daily balances and debited monthly by way of compound interest and together with commission, commitment charges, and other usual bank charges law and other costs charges and expenses incurred or to be incurred by the bank in relation to the customer mortgagor or the mortgaged property on a full indemnity basis.”

Such is the language that exists in the fine print of financial products majority of Kenyans sign each day without much thought.

The court found that Bank of Baroda had acted unconscientiously and was morally wrong to adjust interest rates at its discretion without the knowledge of its customer and freed Ms Muiruri of the astronomical debt obligation setting a precedent that numerous other cases may follow.

One such case is currently before the Constitutional Court in Milimani with a petition seeking to claw back more than Sh195 billion that 42 commercial banks in Kenya have allegedly accrued from their clients over the last 28 years.

Paul Okutoyi is suing the Kenya Bankers Association (KBA) and the Central Bank of Kenya on behalf of all present and past customers of banking institutions in Kenya.

In his suit, Mr Okutoyi is seeking to have banks compelled to refund the monies that have accrued from bank charges that have risen over the past decades without the consent of the minister of finance as stipulated in the banking law.

Section 44 of the Banking Act, the foundation of the petition state, “no institution shall increase its state of banking or other charges except with the prior approval of the Minister.”

Okutoyi further seeks to leverage on a statement made by former finance minister David Mwiraria on June 12, 2003 emphasizing that “section 44 of the Banking Act requires commercial banks to seek approval from the Minister before imposing various bank charges and commissions.”

The suit argues that commercial banks have in the last 28 years increased their rates of banking and other charges without the consent of the finance minister contrary to section 44.

Burden of proof

To illustrate the gains made from banks leveraging extra charges on customers, Okutoyi, through his lawyer Gichuki Waigwa, presents as evidence financial statements of the commercial banking industry as at 2011.

According to the figures, between 2001 and 2010, interest on loans and advances increased by 285 per cent from Sh28.4 billion to Sh109.4 billion while net interest income increased by 334 per cent from Sh25.5 billion to Sh110.8 billion. Net fees and commissions income also went up by 231 per cent from Sh12.4 billion to Sh41.3 billion.

In its defense, the KBA which has been sued through Chief Executive Officer Habil Olaka, argues that the industry as a whole has expanded significantly over the same period of time, which should explain the corresponding increase in banks’ income.

“The number of bank accounts grew from 1.68 to 11.8 million, an increase of 604 per cent while the value of loans granted by banks similarly recorded a 413 per cent increase over the same period of time from Sh167 billion to Sh857 billion,” states KBA in its submission. “The number of bank branches went up from 497 to 1,063 over the same period of time.”

This is the second case before the court seeking to compel commercial banks to refund consumers charges made on their accounts over the last two decades.

Another case at the High Court by once Standard Chartered Bank account holder Rose Wanjiru is also “seeking a refund of all income earned from illegal rates of banking charges” and is suing on behalf of all past and present customers of all commercial banks under KBA.

In a ruling made in August 2015 in regards to the case being opened up to other customers to be enjoined, Justice Gikonyo noted that the burden of proof that one’s bank has levied additional charges illegally will rest on each client.

Specific claims

“Each customer will have to show by way of evidence that he has the same interest in the proceedings and that the specific bank with which he had a contractual relationship levied interest and other charges in contravention of section 44 of the Banking Act,” states Justice Gikonyo.

This means that similarly, for the Sh195 billion payout to all consumers to be considered in Okutoyi’s application, each customer will have to provide their own evidence to support their case.

“If found that the banks have been levying illegal charges…it will require, first specific claims of each consumer be made so that each bank can have an opportunity to defend,” reads the Judge’s statement in part. “Those are special damages claims which the law requires not only to be specifically pleaded but also to be strictly proved.”

This boils down to individual contractual agreements that have lengthy and complicatedly worded terms and service agreements which majority of consumers never read before pressing pen to paper.

In the case of Ms Margaret Muiruri, the court argued that while it is not the place of the court to interfere in a contractual matter between two parties, the court will in special circumstances.

Morally culpable

“Before the court will consider setting a contract aside as an unconscionable bargain, one party has to have been disadvantaged in some relevant way as regards the other party, that other party must have exploited that disadvantage in some morally culpable manner, and the resulting transaction must be overreaching and oppressive,” explains the Court ruling in part.

Okutoyi is further seeking to have the court provide a blanket forensic audit of all personal bank accounts in Kenya from 1989 in order to determine the charges banks have levied on their customer(s).