Why court has quashed bid to block law on blacklisting loan defaulters

The High Court has dismissed a case challenging the legality of regulations giving lenders and telecom companies the authority to blacklist loan defaulters.

Justice Lawrence Mugambi, in his judgment, said the orders by Kathambi Ruchiami, Alex Gabriel and Boda Poa Group amounted to an “academic exercise,” as the same regulations had been declared unconstitutional by a different judge.

He said the contested regulation 18(7), which forms part of the banking (Credit Reference Bureau), cannot be applied unless the Court of Appeal revives it.

“The practical effect of this is that, as things stand now, no reference can be made to such regulations, as they are of no legal effect whatsoever. Whether or not the Court of Appeal will bring them to life, that is speculative, and this court cannot be invited to rule on the constitutionality of a regulation on a mere hypothesis,” said Justice Mugambi.

In this case, the trio argued that following the coronavirus pandemic announcement in the country, senior government officials met with mobile money services providers and banks and agreed that the listing of all defaulters would be suspended to keep the economy afloat.

The court heard that the same was communicated, including barring institutions from sharing adverse credit information.

However, they said, the National Treasury lifted the six-month moratorium and changed the regulations.

According to the team led by Kathambi, the regulations were introduced without the involvement of all the stakeholders, including the Micro, Small and medium Enterprises (MSMEs) and members of the public. Furthermore, they asserted that it contravened the Banking Act.

According to former President Uhuru Kenyatta, all MSMEs with loans of less than Sh5 million were not be listed in the CRB for a period of one year. Justice Mugambi heard that the olive branch was also extended to individual borrowers.

They argued that the president had usurped the treasury CS’s powers and had caused problems for other small-scale business borrowers as well as the Credit Reference Bureaus, which mainly depend on credit reference information data. The Attorney General opposed the case. According to the government legal advisor, eight per cent of businesses had benefited from the suspension of the credit reporting to CRBs, accounting for the third most effective measure taken by the government during the period.

According to her, the decision to issue a moratorium was based on empirical, scientific, and logical considerations rather than political ones. She asserted that Regulation 18(7) was a by-product of the consultations that began in 2018, which involved engagement with the relevant stakeholders and the public.