A Nairobi court has put the Central Bank on the spot over its raid on a micro-finance institution in 2005. CBK could pay close to Sh1 billion after it was ordered to enter an agreement on damages with the firm which is demanding Sh930 million. Photo/File
The Central Bank of Kenya (CBK) has been ordered to pay a micro-finance company close to Sh1 billion after the court decided that the regulator acted arbitrary in closing down the business seven years ago.
Commercial Court judge Alfred Mabeya said the raid on the offices of the Kenya Akiba Micro Finance Ltd by the Banking Fraud Investigation Unit (BFIU) in 2005 was “unlawful, unconstitutional and unacceptable”.
The company was closed at the height of the pyramid schemes crisis.
Unless CBK successfully appeals the ruling, tax payers will foot the bill while CBK regulation of the financial markets will come under major challenge.
Upon raiding Kenya Akiba Micro Finance head offices at Lonrho House, Nairobi, the CBK police unit confiscated log books, computers, title-deeds and other financial records. But last Friday, the judge ordered the documents released to the micro-finance.
Kenya Akiba moved to court on November 10, 2005 seeking Sh930 million in damages, interest and cost of the suit, alleging that the Central Bank acted unlawfully by closing down its business at Lonrho House and other branches in Ongata Rongai, Kitengela and Voi.
The judge concurred with the micro-financier’s arguments and directed CBK and Kenya Akiba to resolve the issue of quantum of compensation payable to the latter as claimed in the amended plaint.
He said the negotiations should be carried out and concluded within one month.
“In default, this matter may be listed for assessment of damages within 45 days,” he ruled.
CBK was further ordered to unfreeze the micro-finance’s bank accounts at KCB, Housing Finance and Equity Bank.
CBK had closed the accounts on accusations that the company was using the unauthorised terms like “Finance and Bank” indicating the transaction of financial business.
CBK argued that Section 3(1) prohibits the use of “Finance and Bank” by companies which solicit or accept deposits as defined in the Act except for institutions that are licensed and operate under the Banking or Building Societies Act.
However, Mr Justice Mabeya said the allegations by CBK that Kenya Akiba carried out banking business contrary to the Banking Act, was a red herring aimed to cushion the mother bank from liability for the blatant, illegal and uncalled for raid.
The judge said the raid on the company’s head office and branches not only broke the firm’s backbone as a commercial entity but also ruined many businesses of more than 6,000 Kenya Akiba’s customers and affected the livelihood of 3,000 employees.
“Having analysed the company’s business activities through the records which have been in CBK’s custody for the last seven years, the bank has not produced any material to show that Kenya Akiba was doing was anything other than offering hire-purchase and to assist in financing sale of motor vehicles and goods,” ruled Mr Justice Mabeya.
He said the raid and detention of the Kenya Akiba properties in the manner in which it was undertaken by the Central Bank “is not only unconstitutional but unacceptable in a society that that prides itself to be under the rule of law.”
The judge struck out the Attorney General’s and CBK’s defence, saying they were not only frivolous and vexatious but had sought to justify the raid which “in my view was out rightly illegal” given that it drove the Kenya Akiba and its customers out of business.
Further he observed that to sustain the defences and allow the trial to proceed would be an abuse of the court process and a waste of judicial time.
After the raid, BFIU arrested the micro-finance directors and hauled them to court on charges of carrying out a banking business.
However, the magistrate’s court acquitted the managing director, Gideon Mwiti Irea, and co-directors after the prosecution failed to prove the charges against them.
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