When the late businessman Muiruri Gachoka approached Bank of Baroda for financing to boost the family business in Thika, he had no idea he was mortgaging his loved ones into deep trouble that would haunt them long after his death.
The loans, first secured in 1979, had difficult repayments causing the timelines to drag beyond the agreed period and growing more than tenfold.
The Sh6 million borrowed had grown to Sh200 million by 2014 when the widow, Mrs Margaret Njeri Muiruri, sought arbitration by the Court of Appeal after her first attempt at saving the remaining property from being sold by the bank following her husband’s death.
The bank had been increasing the loan’s interest to more than three times its original rate to an exorbitant 45 per cent without informing the borrower, thanks to a malicious clause that gave the lender powers to do so at its discretion.
A three judge bench in October 2014 expressed shock at the turn of events and made an eye opening decision that dealt a blow to banks that inflate interest rates arbitrarily without informing clients.
“While we agree that the clause does appear to give the respondent discretion to vary the rate of interest, we do not accept that this discretion was absolute,” read the decision by judges Philip Waki, Mohammed Warsame and Gatembu Kairu.
They added: “Once interest is agreed upon, and an agreement is entered into, which in effect gives a lender the discretion to vary the interest, it is our view that the discretion cannot be exercised willy nilly to charge exorbitant interest.”
The loan, which was to be repaid over eight years, had no indication at what point, or what time, the interest rate increased as the Gachokas were not notified. The judges termed the explanation that the interest was loaded pursuant to the contract they entered into with the bank ‘hollow’. They could not find any circumstances that necessitated the increase.
“We are unclear as to whether it was as a result of the appellant’s default, or whether there was an economic change that altered the bank’s base lending rate, or whether it was due to the loss of value of money,” they said.
The bench said the decision to increase rates appeared to be whimsical and not supported by any relevant factors.
Said the judges: “An increase of interest rate from 14 per cent to 45 per cent in this matter is by any standards a substantial increase, and the respondent cannot hide behind a clause in the mortgage that allows it to vary interest.”
The bench overturned an earlier High Court decision that had justified the bank’s behaviour.
That the bank did not notify the borrower of the changes was faulted especially after several undertakings were made to clear the loan which had been paid to well above the original principal.
The bank descended on the property of Mr Gachoka, the father of political activist Tony Gachoka, after he died on the January 19, 1988 followed by his family’s failure to service the debt due to business.
Two pieces of land in Thika, belonging to his company, the Central Kenya Agencies Ltd, were disposed of by the bank. The family’s intention to sell another land to offset the balance was overtaken by the bank’s action to sell it on January 29, 2008 and raising a further sum of Sh38 million, the whole of which the bank has retained.
Efforts by the family to save other valuables, including through a fundraiser, saw the loan repaid up to Sh12 million but the bank still targeted the family’s Eastleigh property, igniting the legal battle.
Even after selling a property for Sh8 million and receiving some additional payments towards the loan settlement, the bank still wanted Sh70 million which the widow could not afford. The amount kept increasing.
Asked whether the bank had complied with the requirements of section 44 of the Banking Act in adjusting the interest rates, a bank official called as a witness, told the court that he was not familiar with the Act, and was not aware that the bank would be required to get approval from the minister in order to vary interest rates.
“We find and hold therefore, that the burden remained on the bank to prove that the rate of interest that was being charged was charged with the consent of the minister. This is especially so because Section 44 of the Banking Act places the burden on the bank to seek the approval,” the judges ruled.