There is this JUDGEMENT from small claims court where one of the #MicrofinanceInstitutions
had SUED a customer claiming Ksh. 700k from the customer.
The customer had taken a loan of 1.3M.
Repaid about 900K and defaulted for one month.
The Microfinance institution repossessed the car valued at 2.5M and sold it at 1.5M.
They claimed the client still owed them 700k.
So they sued her.
This is how the case went:
The client denied the claim and urged the court to dismiss it in its Response to the Statement of Claim.
She stated that there was no evidence that the motor vehicle was sold and that if it was, it was transferred without her knowledge and consent.
She further stated that the motor vehicle was auctioned at an undervalue. She stated that the Appellant changed the terms of the loan facility from 14% per annum to 10 % per month without informing her & that the interest was extremely high contrary to the prevailing lending rate
The court RULED that the Banking Act
(Chapter 488 of the Laws of Kenya) and Central Bank of Kenya Act (Chapter 491 of the Laws of
Kenya) applied to the #MicrofinanceInstitutions
interest rates and penalties charged by the Appellant were exorbitant and unconscionable.
The court further RULED that the interest rate applied by the Microfinance institution was unconscionable.
The court relied on the decision in Kenya Commercial Finance Company Ltd v
Ngeny and Another  1 KLR and Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited
 that had concluded as follows:
"Even though parties freely entered into the loan agreement, the exorbitant interest and penalties
charged call upon the court to intervene to protect the respondent from a bad bargain."
The court ruled that the amount received from the sale of the vehicle was sufficient and reasonable in offsetting the loan amount considering the period of default and the
claimant’s claim was untenable in light of the exorbitant and unconscionable interest rates charged.
The COURT DISMISSED the case in favour of the CUSTOMER.
The Microfinance institution APPEALED the ruling.
This what HAPPENED when the microfinance institution APPEALED:
In its submissions, the Microfinance institution raised four issuea for determination:
First, whether the the institution is a financial institution regulated by the Banking Act and
whether the in duplum rule applies to it.
Second, whether the interest rate cap applies to the institution as a microfinance institution.
Third, whether the interest charged by the institution was justified and in accordance with law.
And Fourth , whether the interest was unconscionable and exploitative.
The court placed upon the client the burden of proving that indeed the Microfinance institution was actually regulated which the client couldn't.
The client’s case hinged on the application of section 44 of the
This section incorporates the in duplum rule which basically limits the amount a bank or financial institution may recover from a non-performing loan
The provision of the section 44 of Banking act states, in part, as
(1) An institution shall be limited in what it may recover from a debtor with respect to a nonperforming loan to the maximum amount under subsection (2).
(2) The maximum amount referred to in subsection (1) is the sum of the following;
(a) the principal owing when the loan becomes non-perfo
(b) interest not exceeding
the principal owing when the loan becomes non-performing;
The High Court agreed that indeed the Microfinance institution was not a deposit taking institution.
While it is true that a micro-finance institutions are regulated by the Central Bank of
Kenya and the regulation of interest rates is
governed by section 44 of the Banking,the court agreed this does not apply to the NON DEPOSIT TAKING MICROFINANCE INSTITUTIONS.
The rresistible conclusion was that:
The rate of interests, whether high or not ,is governed by contractual provisions set out in the LOAN AGREEMENT between the microfinance institution and the customer and the court cannot revise the agreement.
From the case above,
This is the CONCLUSION:
1. Customer & these #MicrofinanceInstitutions
are BOUND by the contractual agreement the customer signs when getting the loan.
2. Read that AGREEMENT. Understand it & have your own copy.
3. There is need for REGULATING them.