First Community Bank has been stopped from auctioning 19 apartments owned by one of its clients, who has accused the lender of violating Islamic banking laws by allegedly recovering more profit from a Sh246 million business venture at the heart of the dispute.
High Court Judge Ngenye Macharia stopped the sale of the apartments belonging to Isaac’s Investments Company Ltd (IICL) until the two parties resolve their dispute through arbitration.
The loan agreement called for arbitration in the event of a dispute.
IICL sued First Community Bank in December 2020 claiming the lender was looking to get more than it deserved from the financing deal.
The developer held that First Community Bank had already recovered Sh380 million.
Under the loan agreement, the lender agreed to take home 80 per cent of any profit or loss from the sale of the apartments in Nairobi’s Dagoretti area.
Under Musharakah, the parties agree on a percentage of profit or loss that each party will bear.
If the business collapses, each party endures the percentage of loss assigned at the time of signing the loan contract.
First Community Bank did not specify how much it is claiming from IICL in the court papers.
The lender, in its response, says IICL failed to inform the court that the two parties had tussled in court in the past over a planned auctioning of the same property.
IICL sued the lender in 2018 to stop a planned auction. One year later, the two parties reached an out-of-court deal that was to stop further attempts to auction the property.
First Community Bank adds that when it first tried to auction the apartments in 2018, IICL promised to use money from another loan to pay a Sh120 million instalment to offset the debt.
The Sh120 million was part of a separate Sh500 million loan IICL planned to use to build 560 apartments in Nairobi.
The lender argued that the fresh suit by IICL is bad in law because it involves a dispute that was determined in a past court case.
Justice Macharia allowed the plea by lawyer Benson Nzakyo that the parties agree on an arbitrator “knowledgeable and competent with Sharia Law in view of the unique nature of the Finance Agreement signed between both parties within 60 days”.
The judge also held that the case could not be deemed to be bad in law because the previous case filed by IICL was withdrawn on account of an out-of-court deal.
He held that the withdrawal of the suit meant that contentious issues were not resolved by the court.
IICL is owned by Ali M Isaac, who alleges that his rights are being violated by the lender, which he accuses of flouting its articles of association.
Mr Nzakyo told the court that in sharia law under which the bank was licensed, it is required to carry out its banking business in all aspects without charging or paying any interest on the principal amount lent, deposited or borrowed by its customers.
IICL borrowed Sh245 million to build 90 apartments in Dagoretti.
On November 7, 2011 First Community Bank loaned IICL Sh36 million. The lender loaned another Sh210 million to IICL on December 23, 2012.
IICL says in court papers that some clauses in the second loan agreement gave First Community Bank power to sell the security, which violated Musharakah financing structures under Islamic banking.
IICL says that in a third agreement in 2016, First Community Bank increased its entitlement to 86 per cent. This means that the lender would take home 86 per cent of the profits made from the sale of the apartments.
But that also meant that the lender would carry 86 per cent of losses if the business failed to prosper.
Justice Macharia said evidence presented before her shows the bank sold some 70 units for Sh380 million out of an advancement of Sh246 million. BY DAILY NATION
There's no story that cannot be told. We cover the stories that others don't want to be told, we bring you all the news you need. If you have tips, exposes or any story you need to be told bluntly and all queries write to us [email protected] also find us on Telegram
