Overview (September 2001)

Legislative Framework
Case Law Developments

Legislative Framework

The two principal statutes concerned with banking law in Kenya are the Central Bank of Kenya Act (Chapter 491, Laws of Kenya) and the Banking Act (Chapter 488, Laws of Kenya).

The Central Bank of Kenya Act establishes the Central Bank of Kenya (CBK), which is empowered to:

• formulate and implement monetary policy;
  
  
• promote the operation of payments, settlement and clearing systems; and
  
  
• license and supervise authorized banks and foreign exchange bureaux.

The Banking Act is concerned with the regulation of the business undertaken by banks, financial institutions and mortgage finance companies in Kenya. The act:

• sets out a licensing regime and minimum capital requirements;
  
  
• imposes restrictions on certain types of advances and credit facilities;
  
  
• restricts banks and financial institutions from carrying on certain trading activities and investments; and
  
  
• establishes eligibility criteria for determining the moral and professional suitability of persons proposed to manage or control banks or financial institutions.

The Banking Act also sets out a statutory management procedure for distressed banks and financial institutions which has been employed in several cases in the recent past.

The entire banking industry in Kenya is in a state of flux in light of a major piece of legislation which was recently enacted by way of a private members' bill. The legislation is the Central Bank of Kenya (Amendment) Act 2000, which makes it unlawful for specified banks and financial institutions (being banking and financial institutions licensed by the CBK) to lend or advance monies at interest rates which exceed a particular monthly Treasury Bill rate published by the CBK plus 4%. Further, the act makes it unlawful for borrowers to be charged any bank fees or tariffs, as the only permitted charges are now interest (subject to the above restriction on rates), legal fees, valuation fees and statutory charges on a bank's securities such as stamp duties and registration fees. The act also imposes a minimum rate of interest which specified banks and financial institutions must pay to depositors on deposits held in interest earning accounts. In addition, the act provides that no loan or advance made by a specified bank or financial institution to a company may be guaranteed by a director of that company.

The effect of the Central Bank of Kenya (Amendment) Act is far-reaching. Since the early 1990s banking and financial institutions have been free to set their own rates of interest and fees. In addition, there were no restrictions on a bank's ability to obtain a guarantee from a director of a corporate borrower by way of additional security. The act runs counter to the liberalization policies adopted since 1995 by the Kenyan government.

There is much speculation as to how the banking industry in Kenya will adjust its operations to implement the changes, but the restrictions in the Central Bank of Kenya (Amendment) Act 2000 are likely to result in, among other things:

• loans being available only to customers with a proven track record;
  
  
• more reliance being placed on securities over land (although land values in Kenya are currently depressed) and securities over tangible assets such as cash deposits; and
  
  
• banks and their legal advisers attempting to negotiate the restrictive nature of the act (which is poorly drafted and leaves many questions unanswered) to develop products which will meet market demands and at the same time not adversely impact on bank profitability.

Unfortunately, the act does not address a number of fundamental issues, including whether:

• indemnities (as opposed to guarantees) from directors of a corporate borrower are permissible;
  
  
• the restrictions on interest rates apply to loans or advances made in currencies other than Kenyan shillings; and
  
  
• the restrictions mean that specified banks and financial institutions cannot charge arrangement fees or commitment fees in respect of loans or advances prior to the loan or advance being made.

The Kenya Bankers Association has instituted proceedings against the attorney general and others challenging (among other things) the right of the National Assembly to pass the Central Bank of Kenya (Amendment) Act. In turn the attorney general is seeking to introduce another bill in Parliament which, if passed, will make redundant the changes introduced under the act.

Case Law Developments

The following recent cases also saw interesting developments to Kenyan banking law.

In Unibilt Kenya Limited (in Receivership) v Giro Commercial Bank Limited (HCCC Nbo Misc Application (704 of 2000)) the court held that a debenture pursuant to which a company had created fixed and floating charges over all its assets and undertakings (including a fixed charge over its land) could not create any security interest over the land such that a receiver appointed under that debenture did not have any rights to deal with the land. The case is authority for the proposition that a bank which wishes to secure effectively a corporate borrower's real property must do so by way of a specific charge over the property which complies with the land law relating to that property, and not rely on an all assets debenture from such borrower.

In Kenya there are two substantive legal systems of land law and five separate registration systems. The two substantive systems of land law are those created under the Registered Land Act and the Transfer of Property Act of India 1882 (as applicable in Kenya). Both acts contain provisions relating to the creation and enforcement of security over immovable property. The Registered Land Act does not recognize the concept of an equitable charge. Further, both acts contain provisions relating to, among other things:

• the form and content of instruments creating security;
  
  
• the method of execution of these instruments; and
  
  
• the registration requirements that must be fulfilled to perfect security interests.

None of the formalities that must be fulfilled under the acts would be satisfied where a company creates a fixed charge over its immovable property in an all-assets debenture.

In the circumstances the judge in the Unibilt Case held that to create an effective security over immovable property it is necessary to satisfy the requirements of the Registered Land Act or Transfer of Property Act of India (as the case may be); if this is not done, no effective security interest can be created.

Meanwhile, Fina Bank Limited v Spares and Industries Limited has set a dangerous precedent resulting in banks having to re-evaluate their security portfolios of debentures. In the Fina Bank Case the appointment of a receiver by a bank was set aside by the courts on the grounds that the appointment would have the effect of "grounding the company", which would "constitute irreparable damage to the company", and that the appointment of a receiver by the plaintiff had been exercised "oppressively". The decision does not reflect what had previously been generally accepted as law, namely that a secured creditor can exercise its rights to appoint a receiver at any time upon the occurrence of an event of default.

This decision is all the more bizarre because the court in the Fina Bank Case recognized that the borrower company was in default of its obligations to pay principal and interest to the bank. Further, the Court of Appeal recognized that parties are generally free to enter into a contract in whatever terms they like without interference from the courts.

For further information on this topic please contact Karim Anjarwalla or Sonal Sejpal at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337 625) or by fax (+254 2 337 620) or by e-mail ([email protected] or [email protected]).