BAF3106: BANKING LAWS AND PRACTICE

SEP – DEC 2020 VIRTUAL CAT

a) Six months ago, you grated a loan to your customer Mr. Shah to repay a mortgage to a
building society. As security, you took a charge over the family leasehold property registered in
joint names of Mr. Shah and his wife Zanina. Mr. Shah signed the mortgage charge form in the
bank and you took the forms to their home to obtain Mrs. Shah’s Signature. She was very
anxious to sign the documents as the money would pay off their debt with the building society.

Unfortunately, Mr. Shah has been unable to honour the repayment forcing the bank to apply for
a possession order. Subsequently, you received a letter from Mrs. Shah‟s lawyers claiming the
banks mortgage was invalid because Mrs. Shah’s signature was obtained by undue influence of
the bank and she did not receive independent legal advice.

Required: Explain the validity of the claims advanced by Mrs. Shah’s lawyers and chances of
success in court. (10 marks)

b) You read the following of an interview conducted by your recently appointed assistant John
Kariuki: “Called in to open a current account. Told me he was aged 17 years and had just
started work with Mungamo ltd as a trainee factory manager. Paid in Kshs 15,000 cash to open
the account and will be paying in his salary cheque in future. A cheque book may be issued‟.
You know that Mungano ltd operates a large factory in town and bank with another bank.

Required:

Highlight the comments you would make to your assistant. (10 marks)

c) Your customer Mr. Kiplangat is a successful farmer who operates from a 5,000
acre leased farm. He intends to diversify the horticulture and has approached your
bank for financial assistance. He has presented a viable proposition which the bank
is willing to consider provided he offers a suitable security. Mr. Kiplangat has no
property in his name except the fast assets in the farm which includes crops,
livestock and machinery. He has offered a charge over these assets which your head
office has declined to sanction. Explain the possible reasons that may have caused
the bank to deadline the security offered. (10 marks)

SOLUTION

Mr.Kiplangat operates in 5,000 leased land from where he is conduction agriculture in large scale. He is
running a farm and has offered an agricultural security to an applied loan for horticultural expansion.
The bank has declined the security. Agricultural loans can be secured by either floating or fixed charge.
For these charges to be accepted there should be a search, execution of charge, registration of the
charge, and a times the bank may require that its interest be notified to the existing insurance of the
farm or farmer.

The following reasons could have led to the bank declining the security offered by Mr.Kiplangat;

Farming is a risky business;

Most of the banks are hesitant to offer financing to small farmers because of the risk associated such as
chances of default due to low level of profitability and the lack of assets which can be used as collateral.

Production and yield risk

There is a lot uncertainty in agriculture and one can only wait to see the output. Natural factors such as
the weather, pests and diseases and other production calamities affects farm output directly. Fewer
rains can affect output big time. Diseases significantly influences productivity and yield risk directly. The
bank will not be in a position to know with certainty whether these will not affect Mr.Kiplangat
repayment of the loan.

Moral hazard;

Imperfect information affects lenders in the long run. Most customers fail to disclose all information
when taking up loans. They end up using the loan on the wrong project, a project which had not been
agreed with the banker. Mr.Kiplangat can take the loan and fail to expand in horticulture but buy more
herds of cattle. This will automatically affect the banker incase Mr.Kiplangat defaults as their will no be
any horticulture project to recover the loan from. Again this is the project that was evaluated before the
loan could be authorized. This is a possible reason why Mr.Kiplangat had not been given the loan.

Price and market risk;

Farm produce is highly affected by price uncertainty due to market fluctuations this is meant worse by
scanty information and imperfect markets. This is highly prevalent in African countries like Kenya. Rains
cause prices to fluactuate big time as well as big loses in case of famine. Mr.Kiplangat is no exception
and this could be a reason as to why the bank has declined the request.

Foreign policy;

In Kenya there is a small horticulture market and therefore major markets are in Europe. These markets
have rules and procedures in venturing in them. Mr.Kiplangat will have to undergo rigorous vetting and
prove that he can supply first quality horticultural produce. It is not a guaranteed market to say the
least. The banks interest is loan repayment if a loan is granted. They might have realized the difficulties
that Mr.Kiplangat will face when it comes to sending this produce to foreign markets.

Political risk;

Every election cycle in Kenya political temperatures rise. At this time it is not very clear on what will
happen after elections are conducted. Since produce from the farm mostly is perishable then it may get
bad as the farmer is waiting for the market to be peaceful. This political climate atimes can lead to
political sanctions. If the market Mr.Kiplangat is banking on is sanctioned then the bank will end up
losing. This possibly is one of the reason the bank has declined his request.

Seasonality of agricultural produce;

As agricultural production cycles mean that the agricultural lending business is highly seasonal, this
could have lend to the bank declining the request by Mr.Kiplangat, given the fact that seasonal
agricultural activities are very time-sensitive, loan appraisals must be carried out within a short period of
time and timely loan disbursements must be ensured. Consequently, agricultural lenders must adjust
their institutional capability to these changes in workload during the year.
In conclusion;

Despite the above reasons for loan request decline by Mr.Kiplangats’ bankers, agricultural charges are
still a viable business. Farmers still access loans using the farm charges and therefore this decline is
isolated and only affects Mr.Kiplangat due to possibly the reaons I have stated above.