National Bank of Kenya Cleared to Recover Sh146m from Construction Company

The National Bank of Kenya has secured a court order to recover Sh146.8 million from Golden Cara Investments Ltd, a construction company, over a defaulted Shariah-compliant financing facility. The High Court entered judgment in favour of the bank after finding that it had proved the outstanding amount advanced to Golden Cara under a Musharakah financing arrangement. The court ruled that the company, along with its guarantors, was jointly and severally liable for the debt.

The dispute arose from a financing agreement entered into to facilitate the Kenya Informal Settlements Improvement Project in Nakuru. Under the arrangement, NBK provided capital to Golden Cara for the joint venture, while Hamdi Abdi Mohamed and Mohamed Adan Bare executed personal guarantees, undertaking joint and several liability for the obligations. The bank claimed that the company defaulted on its repayment obligations, while the two guarantors failed to honour their commitments despite statutory demand notices.

The court awarded statutory interest at court rates on the principal sum of Sh146.87 million from the date of judgment until payment in full. However, it declined to award the bank additional profit claimed on the outstanding amount from July 27, 2020, to the date the suit was filed, saying the claim had not been supported by evidence. The court also rejected the bank's prayer for commercial interest, ruling that imposing conventional interest on a Shariah-compliant financing arrangement would undermine the principles governing the contract.

The judge noted that Islamic finance recognises Ta'widh, a form of compensation for late payment intended to discourage default, but said it could not award commercial interest during the contractual period in the circumstances of the case. The court invoked the principle against rewriting contracts, saying it could not impose commercial interest where the parties had entered into an arrangement governed by Islamic financial principles, which prohibit Riba (interest).

The Deputy Registrar entered default judgment on October 14, 2021, after the defendants failed to participate in the proceedings. NBK's witness, Morris Tiema, presented financial ledgers, debentures and guarantees in support of the claim. The court found the documentary evidence sufficient to establish the outstanding principal.

In determining the outstanding claims, the court examined the principles governing Islamic financing, noting that Musharakah arrangements are based on profit-and-loss sharing rather than conventional interest-bearing lending. The court said parties were bound by the terms of their specific agreement, under which returns were to be generated through the joint venture's profits rather than predetermined conventional interest.

The bank's efforts to recover the debt were successful after the court ruled in its favour on November 9. The judgment allows NBK to recover the outstanding amount, and the company is now required to pay the debt. The case highlights the importance of understanding the principles governing Shariah-compliant financing arrangements and the need for parties to honour their commitments.

Key points

• The National Bank of Kenya secured a court order to recover Sh146.8 million from Golden Cara Investments Ltd over a defaulted Shariah-compliant financing facility.
• The court declined to award commercial interest on the financing arrangement, citing the principles governing Islamic finance.
• The judgment allows NBK to recover the outstanding amount, and the company is now required to pay the debt.