Banking and legal circles are keenly waiting to see how courts resolve a case where a judge recently injuncted Stanbic Bank Kenya from auctioning a tea estate in Nandi County belonging to a flamboyant Nairobi businessman, David Langat.
It is a hotly debated issue within the legal and commercial banking fraternity because at stake is a rare occurrence, where a judge has invoked the concept of public interest to justify a decision stopping a lender from auctioning a distressed asset. Neither the legality nor the quantum of borrowing is disputed.
The raging debate in this high-stakes affair was sparked by a recent tweet by a prominent member of Nairobi’s litigation aristocracy — Ahmednasir Abdullahi.
Mr Abdullahi said in the tweet: “In 2000 while granting an injunction against the Housing Finance Corporation in favour of Prof Julia Ojiambo, Justice Onyango Otieno of the commercial court ruled that the case was deserving of an injunction because the 'applicant was a widow,' of Kenya's first heart surgeon."
Mr Abdullahi, the sarcasm undisguised, added that he had remembered Justice Otieno’s ruling after reading the ruling in the case between Stanbic Bank Kenya and Koisagat Tea Estate, where Justice Reuben Nyakundi granted an injunction to stop the auction on the grounds that "the potential impact on over 5,000 individuals directly dependent on the operations of the large tea estate, coupled with the community services at stake, elevated this matter beyond a simple creditor-debtor dispute”.
Apparently, the judge had invoked the concept of public interest on the grounds that the tea estate hosts several facilities, including schools, health facilities and staff housing.
I am not a lawyer and I am only compelled to join the debate in my capacity as a veteran business and economic journalist, who has been tracking what goes on in the banking and financial sector in Kenya for many years. I therefore feel confident to join a discussion on recent twists and turns in the business of lending.
The pertinent question: What should courts be considering when interpreting the concept of public interest, when confronted with a choice between the right of a lender to auction securities on a defaulted loan and broad and fuzzy public interest issues, that have no bearing to plain commercial contracts entered into between a creditor and a borrower?
What we are witnessing from some of these court rulings are examples of how our courts are choosing to interpret the concept of public interest narrowly, by ignoring broader macro-economic consequences of some of their decisions and rulings.
Legal systems can only be considered to be favourable to commerce and to be contributing to stability of the banking system when property rights and legal commercial contracts are enforced without delays.
Indeed, public interest is served better in an environment where lenders are not curtailed by courts and judges from bringing their non-performing loans (NPLs) to manageable levels. Lenders have to comply with the Central Bank of Kenya’s prudential guidelines on NPLs.
When you have an environment where courts keep restraining lenders from auctioning distressed assets; banks will not make credit easily available to borrowers at reasonable rates.
Here is a bit of theory. As a bank; the licence you get is a public charter that gives two privileges that nobody else has; first; access to public deposits; secondly; the right to lend the money to the public.
To make sure that you don’t engage in reckless lending and you do not lose the money you have collected from the public; the Central Bank issues prudential guidelines; including rules which prevent you from lending without collateral and laws that allow you to auction collateral when loans are in default.
Clearly, what should be ranked higher in interpretation of the concept of public interest in disputes involving the lending business, are issues such as macro-economic consequences, likely impact on safety of public deposits, stability of the banking system and risk and exposure to public taxpayer bank bail-outs.
I say so because a commercial bank is ultimately a contingent liability on the taxpayer. When banks collapse, the taxpayer picks up the tabs.
Didn’t we all witness the bail- outs that happened during the global financial crisis? If you track the history of the Consolidated Bank of Kenya, you will discover that it came into being out of a taxpayer bail- out deal, where several banks that fell into problems were merged and hundreds of millions of taxpayer-shillings injected into the bank to rescue it.
My parting shot: When a bank wants to auction a property on account of a large NPLs, it is motivated by public interest.
The writer is a former managing editor at The EastAfrican
Unlock a world of exclusive content today!Unlock a world of exclusive content today!
