Court reopens 10-year battle over legality of bank charges

The Court of Appeal has reinstated a case in which a customer is seeking compensation for all commercial bank charges levied without the Finance minister’s approval, renewing a legal battle that could open a floodgate of suits against the lenders and send shockwaves across the financial services industry.

Rose Wanjiru had, in a petition filed in 2003, sought to challenge the legality of interest rates and other bank charges since the enactment of the Banking Act in November 1989 but was dismissed on a technicality.

The appeals court has, however, taken commercial banks back to the drawing board in its latest finding that the High Court erred in its dismissal of the suit on grounds that the petitioner had failed to seek the court’s permission to sue on behalf of other customers.

“The major issue for determination in this case is whether banks have been levying illegal charges and that is common to all customers in all banks,” the appeals court said.

“There is therefore a commonality of interest and that issue can be conveniently determined in one suit. We therefore find that the learned judge (High Court) erred in dismissing the entire suit.”

The petitioner had sought a court order compelling Standard Chartered Bank and other lenders to return all charges they had levied their customers without the approval of the Finance minister as required by the Banking Act of 1989.

“No institution shall increase its rate of banking or other charges except with the prior approval of the minister,” says Section 44 of the Act.

The High Court, however, dismissed the case in 2004, forcing the petitioner to move to the Court of Appeal with prayers for reinstatement.
The decision takes the petitioner back to the High Court where he will seek evidence from the bank that it actually sought and obtained the minister’s permission to levy the charges.

Failure to adduce such evidence would imply that commercial banks have been illegally levying various fees, charges and interest rates since 1991, opening the floodgates for more suits.

The suit is even more defining in the fact that an order requiring banks to compensate the customer for illegal charges levied since 1991 would affect the financial results that commercial banks have declared for 13 years ago and ultimately the taxes charged on the profits.

The Kibaki government in anticipation of the huge compensation crisis and its impact on government revenues unsuccessfully tried to delete Section 44 of the Banking Act in 2004 through an amendment in Parliament.

The amendment sought to regularise all charges levied without the minister’s prior approval by deleting the section and inserting a clause that deemed charges levied between 1991 and 2004 to have been approved by the minister.

“All increases in the institutions rate of banking or other charges that were made before the deletion of Section 44 shall be deemed, for the purposes of past application of that section to have had the prior approval of the minister,” said the proposed insertion that Parliament rejected.

President Kibaki said in a memorandum to Parliament supporting the amendment that the revision of financial statements of commercial banks and non-bank financial institutions would impact negatively on the country’s financial stability.

Mr Kibaki said the adjusted accounts would result in losses or lower profits and the Treasury would be required to refund large sums of corporation taxes paid on the basis of profits earlier declared.

Ms Wanjiru had accused commercial banks of levying bank charges and varying interest rates without the approval of the Finance minister as required by law.

Kenya Bankers Association (KBA) has filed notice of intention to move to the Supreme Court for orders quashing the Court of Appeal’s decision.

“Take notice that Kenya Bankers Association being dissatisfied with the decision of the Court of Appeal given at Nairobi on October 8, 2013 intends to appeal to the Supreme Court,” reads the KBA notice filed on October 22.

Lawyer Samuel Gichuki, representing the petitioner, has, however, written to KBA expressing his client’s intention to reinstate the case.

Mr Gichuki said his client would, through advertisements in the newspapers, invite any bank customer who has been affected by the ‘illegal’ bank charges to apply to be enjoined in the suit.

The lawyer has further advised KBA to ask its members to prepare financial statement since 1991 when the Banking Act came into effect in readiness for claims from aggrieved customers.

Ms Wanjiru has listed Kenya Bankers Association, the Central Bank of Kenya and Standard Chartered Bank as respondents in her case.

She accuses the bank of failure to seek the minister’s approval before levying the charges while the CBK is accused of failing to regulate the banks and allowing them to arbitrarily increase charges. Ms Wanjiru is seeking a declaration that all income accruing to the banks from charges levied without the minister’s approval since November 1989 are refundable to account holders.

Former Finance minister David Mwiraria in the June 2003 budget speech had sought to enforce the provisions of Section 44 of the Banking Act with little success. Mr Gichuki in his letter to KBA says that despite this direction there is no evidence that commercial banks complied with the same.

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