Lusaka High Court reprimands Finance Bank

Judge Albert Wood has ruled in favour of Rajan Mahtani, the chairman of Finance Bank Zambia Limited in a case in which Hotelier Limited sued against compound interest charged on a loan that should have attracted simple interest for the construction of Rdison Blue Hotel.

The High Court has since reprimanded FBZ for flouting the Bankers Association of Zambia Code of the Banking Practice by engaging in inside borrowing and loaning US$ 7 million to Hotelier Limited without guarantee and a letter from the approval committee.

According to the judgment delivered by Judge Wood in a case in which Finance Bank Zambia Limited in which Rajan Mahtani is the chairman and Hotelier Limited, it has been ruled that Hotelier Limited must pay Mr Mahtani’s bank compound interest at the rate of 37 percent on a US$ 7 million although the lending bank totally ignored the basic tenets in the Bankers Association Code.

It was submitted by the witnesses to Hotelier Limited that included former Finance Bank Zambia Limited employee Simata Simata and Wilfred Mwanza who testified that there was no separate agreement between Finance Bank Zambia Limited owned by Mahtani and Hotelier Limited to have compound interest charged on the loan given the later.

It was also the testimony of the witnesses of Hotelier Limited that Finance Bank Zambia broke the regulation of capital benchmarks and that the transaction between Mahtani’s bank and Hotelier Limited was an approved overdraft without terms and conditions which were outside the Bankers Association of Zambia Code of Banking Practice.

Mr Simata testified that since there was no loan facility letter to the US$7 million for which FBZ was demanding compound interest, the said loan was therefore not legally approved and that the compound interest being demanded was illegal.

Mr Simata told Judge Wood in his testimony that FBZ should not have continued lending Hotelier Limited when the debt had grown to a figure exceeding 10 percent of the lender’s regulatory capital

The former Finance Bank of Zambia employee also told Judge Wood that an account opening form was not recognized as a means of determining and advising a customer of the interest to be charged on a loan facility for which the FBZ was claiming compound interest.

Another witness in the name of Mr Ndhlovu in his submissions explained that the transaction between FNZ and Hotelier was illegal in the manner it was performed as the chairman of the FBZ chairman Mahtani took it upon himself to approve the loan hence violating the provisions of the Banking and Financial Services (Insider Lending) Regulations.

In his ruling, Judge Wood stated that there was unsound and unsafe banking practices conducted by Finance Bank Zambia Limited which the Bank of Zambia should have dealt with  in accordance with the Banking and Financial Services Act .

Judge Wood said while it was apparent that FBZ did not observe the basic minimum banking requirements when dealing with Hotelier, the breaches could not in his view be used to shield to a claim for compound interest that was being demanded.

“It is quite clear to me that Finance Bank Zambia Limited totally ignored the basic tenets espoused in the code of conduct. There is no evidence that Hotelier Limited was advised generally on business conduct or that Hotelier Limited was advised on the charges or interest rates applicable as indicated.

There are genuine concerns by Hotelier Limited as their non disclosure mystified banking and raises suspicion. The code of banking practice is not enforceable and cannot be used as a basis of refusing to pay interest,’ Judge Wood ruled.