The High Court has ordered a full reconciliation of accounts in a Sh1.95 billion loan repayment row between National Bank of Kenya (NBK) and Kencom Sacco, which claimed that the lender had breached terms and introduced illegal terms of the Sharia-compliant debt.
Justice Freda Mugambi said the bank had the duty to provide accurate and up-to-date statements on loan repayment engagements with its clients.
“From an examination of the loan statements (on pages 59-61 and 77 of the Bank’s bundle) covering the period between October 4, 2013, and April 26, 2015, it is evident that the bank had in fact been charging interest on the facility,” said the judge.
“This was in breach of the agreement between the parties and the core fundamentals of Islamic banking. While the Sacco acknowledges it’s indebtness to the bank, it would be unjust to allow the bank to benefit from its own breach and proceed to exercise its statutory power of sale based on an erroneous demand. I do, therefore, find that the demand by the bank based on interest rates as proved is unlawful” Justice Mugambi added in her ruling dated February 7, 2025.
Kencom Sacco secured a Sh1.95 billion loan from NBK to develop a housing project.
The loan was advanced under the Islamic banking principles of Musharaka and Mudaraba. Court filings showed that Clause 2.6 of the financing agreement granted the Sacco the exclusive right to occupy and use the property, including the bank’s share.
However, in line with the Musharaka concept, which involves a gradual transfer of ownership from the financial institution to the customer, the bank was not meant to retain ownership of the units.
These units were to be eventually bought out by the Sacco at an agreed buyout price. This arrangement would ensure that the bank’s interest in the property diminishes over time. From the offer letter and the replacement charge, the buyout price was set at a profit rate of 15.45 percent on the units sold.
The Sacco claimed that it had already paid Sh2.4 billion and disputed the bank’s demand for an additional Sh982 million. It further accused the bank of breaching Islamic principles by charging interest instead of following the agreed Musharaka profit-sharing structure.
The Sacco further argued that any amount over and above the principle amount ought to be treated as profit and therefore nothing was due to the bank.
In defending itself, the bank insisted that Kencom Sacco had defaulted on the agreed payments and failed to deposit proceeds from the housing project into an escrow account as required.
The bank argued that it was entitled to exercise its statutory power of sale over the charged property. The lender further took issue with the accounts submitted by the Sacco in support of the contested loan repayment figures.
Justice Mugambi, however, ruled that the bank had indeed charged interest in violation of Islamic banking principles, rendering its demand unlawful.
“It is unreasonable for the bank to claim that it is not responsible for disproving the Sacco’s assertion. The bank holds the statements of accounts for the Musharaka and the escrow accounts, making it their duty to provide accurate and up-to-date statements” said the judge.
“These statements should detail the proceeds of sales paid so far, the profits from these sales, and the outstanding amounts in terms of both profits and the principal amount due to the Bank…The implication of this is that I agree with the Sacco on the necessity for proper accounting to accurately determine the amount legitimately owed to the Bank,” the Judge added.
