Kenya: How Loan Sharks Are Killing Small Businesses

14 October 2021

In February last year, Mombasa resident Dennis Mwanyanje applied for a Sh20,000 loan from Canva Trading Kenya Ltd, a small microfinance institution.

Canva issues soft loans to small businesses to buy motorbikes for riders on hire-purchase.

Court records show that the loan was disbursed the same month and was to be repaid with an interest of 20 per cent per month.

"The borrower shall pay the loan amount together with the above charged cumulative sum of interest in equal monthly/fortnight/weekly installments of Sh24,000," the loan agreement stated.

But Mr Mwanyanje failed to repay the loan and the Mombasa-based lender would not find him.

In May this year, Canva filed a case in the Micro and Small Enterprises Tribunal in Mombasa seeking to recover the money plus interest.

Through its managing director Eunice Okal, the lender filed a claim for Sh76,000, which included the loan, accrued interest and penalties.

"The claimant is entitled to costs of this cause as I have incurred more expenses while trying to locate the respondent to serve him with the claim," she said.

Mr Mwanyanje, however, did not appear before the tribunal or file documents in response to the claim.

Canva had served him with court papers but when he was contacted to appear, he cited network challenges and did not show up.

The tribunal proceeded with the matter, convinced that it was proper, in the circumstances, to allow the case to proceed.

It determined that the claimant had sufficiently demonstrated that she made every effort to inform the respondent about the claim, the hearing notice and the date.

The tribunal, comprising six people and chaired by Dr Joseph Bett, sought to determine whether the 20 per cent interest rate charged was justified.

They also questioned whether the claimant was entitled to demand Sh76,000.

The tribunal was concerned that the loan had attracted huge interest and penalties in just 14 months.

"There is a perennial vexing nightmare for borrowers who take a relatively small loan from a lending institution, but a few years down the line, the institution drops a bombshell of a demand for the immediate payment of a colossal sum, literally bankrupting the borrower, if not confining him or her to a hospital bed due to depression," the tribunal observed, citing a Court of Appeal decision on a similar case.

While Mr Mwanyanje was bound to pay 20 per cent interest on the loan per month, the tribunal said, Clause 6 (3) of the loan agreement provided for a loan period of one month.

The tribunal also noted that the interest on the principal sum had increased exponentially more than double the principal sum.

"The tribunal notes that whereas it is not for the court to rewrite a contract for the parties, where a contract between parties is exploitative, courts have not been shy to interfere," they noted.

The tribunal also noted that though parties are bound by their agreements and terms, such conditions should comply with the law.

"We, therefore, find that the interest chargeable without clarity on the time limit upon the determination that the loan is non-performing is unmerited," they said.

The tribunal clarified that the court can interfere even where parties have agreed on a rate of interest, as long as it is shown that the rate is illegal, unconscionable or oppressive.

"We, therefore, find that the parties were at liberty to agree on the interest rate chargeable for a determinable period of time. Once the loan is non-performing, it shall be subject to the limitations set out under the in duplum rule," they said.

The rule states that interest ceases to accumulate upon any amount of loan once the accrued interest equals the amount of the loan advanced.

Here, the tribunal noted with concern that the claimant had demanded more than double the principal amount borrowed.

"The claimant, by their own description, considers themselves small and a microfinance institution, we are of the considered view that it should also abide by the in duplum rule as required of any financial institution," they said.

The tribunal concluded that the claimant was not entitled to Sh76,000, as this amount is more than double the loan issued to the respondent.

They also said that the 20 per cent interest rate charged is only applicable for a determinable period, subject to the in duplum rule.

It, however, awarded the lender Sh50,000, principal sum, interest, and cost of the suit.

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