A National Bank customer has asked the High Court to shut down the lender’s Islamic banking wing while demanding Sh3.7 billion compensation over a loan repayment dispute.

Tulla Reserve Supplies Limited has sued the lender for allegedly changing the terms of a Sh145 million loan it took under the lender’s National Amanah, a move the grains supplier says has led to a loss of business worth Sh3.7 billion.

The firm claims National Bank illegally changed his facility from a fixed term loan to a revolving musharaka loan, effectively raising the interest rate from 18.5 per cent to an Islamic profit-sharing equivalent of 19.5 per cent.

He now wants the court to order the Central Bank of Kenya to shut down the lender’s Islamic Banking wing.

Under the revolving musharaka loan, terms of Islamic banking are revised but the borrower and the lender open a joint account in which all business proceeds are deposited before each party is paid their dues.

Tulla claims that it only agreed to a regular Islamic banking loan under which the grains supplier and National Bank were to share proceeds of its business at a ratio of 55.3 to 44.7 respectively.

Director Diba Hussein Dado holds that the alleged switch to a revolving musharaka loan left his firm owing Sh922 million to National Bank, against the Sh737 million his business made between 2014 and 2015.

His firm supplied grains to Kenya Prisons, Unga Limited and World Food Programme (WFP).

But National Bank insists that the contracts it signed with Tulla in 2014 and 2015 were for revolving facilities and that the firm was to pay both the borrowed sum and profit owed to National Bank within 150 days, or earlier in the event that the grains supplier’s customers paid for goods early.

“National Bank deliberately duped Tulla Reserve Supplies and manipulated its accounts with the resulting effect being that the facility taken by Tulla was in the nature of a fixed term loan acquired the nature and character of a revolving musharaka,” Tulla says in court filings.

“Tulla became exposed to an alleged drawdown of Sh922 million. National Bank utilised Sh737 million from the escrow account towards reduction of the plaintiff’s alleged indebtedness.”

National Bank head of credit organisation Leonard Obuna says Mr Diba was aware of the nature of the revolving loan he signed up for, and that the lender has tried to explain the terms to him several times.

He says Mr Diba has opted to feign ignorance in the hope of building a case against National Bank.

The lender adds that Tulla was initially to make loan payments to the escrow accounts within 90 days but the bank extended the repayment period to 150 days because the firm’s cash flow was low.

“The reason the loan did not reduce, which Tulla has not disclosed to the court, is that whenever a payment was received by the bank, Tulla will on every occasion instruct the bank to apply the money towards the loan and immediately apply that a similar amount be disbursed as a new loan to enable it continue its business,” Mr Obuna adds.

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