In Summary
  • The fall of Kenneth Matiba's empire is not only linked to politics but also a pileup of bad debts.

  • When Parliament passed a Bill to cap interest rates, it was acting out of the frustration many Kenyans had faced when banks arbitrarily increased the rates.

  • Untamed interest rates have seen banks earn billions of shillings in profits, even when other sectors of the economy are faltering.

What was Kenneth Matiba’s flagship Jadini Beach Hotel lies in ruins, with the jungle taking over from where a ballooning loan pushed him.

The fall of Matiba’s Alliance Group of Hotels, as well as his Hillcrest Schools, remain a painful reminder of what happens in a regime with high interest rates.

Jadini was splendid: 60 acres of land and a beachfront of 300 metres. It was sold by Barclays Bank of Kenya for Sh900 million. Barclays also sold off the schools to recover a defaulted loan that had grown to Sh620 million.

The fall of the Matiba empire is not only linked to politics but also a pileup of bad debts.

When Parliament passed a Bill to cap interest rates, it was acting out of the frustration many Kenyans had faced when banks arbitrarily increased the rates. Untamed interest rates have seen banks earn billions of shillings in profits, even when other sectors of the economy are faltering.

Now that hurdle is at the doorstep of President Uhuru Kenyatta, who promised in his 2013 presidential campaigns to bring down interest rates. An excuse for the high, seemingly unregulated runaway interest rates was that the Judiciary and the Executive have failed to protect borrowers when called upon to do so.

Previous attempts to cap interest rates have faltered. In 2000, President Daniel arap Moi rejected the "Donde Bill", which sought to tame the interest rates. He argued in a memorandum to Parliament that state control of interest rates would be against the spirit of the liberalisation policy.

While President Mwai Kibaki had supported the Bill, asking the Moi regime not to be intimidated by commercial banks, he also failed to tame the banks when he took office and they snubbed his order to lower interest rates.

The Judiciary has not been of help either. While some Kenyans had their properties auctioned in silence others tried to fight through the courts. A few were victorious but many lost. In most cases, courts ruled that the Banking Act gave banks the right to increase rates without informing the borrower—or without approval of the Finance minister.

ENGLISH LAW

The courts have always relied on an English law principle that no amount of dispute as to the sums of money owed by an applicant can permit the courts to stop the sale of a property. This has given banks the right to auction property even when there was a dispute on the amount owed.

“Provided that an applicant is indebted to the respondent in whatever way…court cannot stand in its way,” ruled Justice Leonard Njagi in a case pitting businessman John Kanya against Barclays.

Before taking loans, customers sign a letter of offer stipulating the interest rates but usually fail to read the fine words in the deed of agreement, which normally states that “the borrower shall pay commission, interest, fees and charges to date of payment at the rate and upon the terms from time to time agreed with the bank or, if not so agreed, at such rate or rates (not exceeding any maximum permitted by law and subject to a minimum rate of six per cent per annum over the base rate of the bank from time to time) as the bank may, in its absolute discretion, determine”.

Page 1 of 2