Ugandan Court Suspends Judgement Outlawing Cross-Border Lending

Ugandan High Court has suspended the enforcement of a ruling that banned foreign banks from participating in syndicated loans in the Ugandan banking sector, pending the hearing and determination of the matter.

On October 13, Justice Flavian Zeija the principal Judge of the Court's Commercial Division in Kampala issued an interim order for stay of execution of the decree in High Court Civil Suit No.43/2020 and Miscellaneous Application No. 654 of 2020 pending the determination of the main application for stay of execution.

Justice Henry Peter Adonyo had earlier ruled on October 7 that Kenya's Diamond Trust Bank (DTB) together with its Ugandan subsidiary (DTB Uganda) acted illegally by jointly lending money to Ham Enterprises Ltd and Kiggs International (U) Ltd owned by Ugandan businessman Hamis Kiggundu.

The judge also ruled that it was illegal for DTB Uganda to act as an agent for its parent firm (DTB Kenya) in the syndicated loan without written approval from the Bank of Uganda.

The judge declared that DTB Uganda and DTB Kenya breached the different loan agreement terms entered into with Ham Enterprises Ltd and Kiggs International Ltd between February 2011 and November 2019.

He declared that the credit facilities have been settled and ordered for the recovery of Ush34.3 billion and $23.46 million recovered by the banks from Kiggundu's account.

The ruling effectively outlawed cross-border lending in the country, and thwarted efforts by other foreign banks seeking to make inroads into the country for lending purposes.

The development could also have put on freeze an estimated $130 million worth of intra-EAC lending and undermine the on-going regional financial integration process.

Uganda's syndicated loan market is estimated at $1.53 billion, excluding syndicated lending to the government of Uganda, while globally, the syndicated loans market is valued at over $18.3 billion, with North America being the largest geographic region accounting for over 50 percent of the loans, according to data from a global consulting and research firm Business Research Company.

DTB noted with concern Justice Adonyo's judgement and in consultation with its legal advisors filed a notice of appeal against the ruling.

Last week the Bank of Uganda (BoU) clarified that foreign banks lending deposits held in jurisdictions other than Uganda are regulated and supervised by their home authorities and it is not mandatory for them to establish representative offices in Uganda in order to conduct lending or non-deposit-taking activity.

"Bank of Uganda's regulatory and supervisory powers only apply to financial institution business conducted by BoU licensed entities in or outside Uganda or activity which should be licensed as such in Uganda. These powers do not extend to activities of foreign banks outside Uganda licensed by foreign regulators," Governor Prof Emmanuel Tumusiime-Mutebile said in a statement.

This came as development partners and financing institutions demanded clarification over the country's position on syndicated loan arrangements and public debt obligations (domestic and external) in view of Justice Adonyo's ruling.

"In this regard, the government of Uganda wishes to reiterate its commitment made to all its financing partners in respect to all procured and future syndicated loans and assure them that it will undertake all its obligations and duties under the different frameworks in line with Article 160 (1) of the Constitution of the Republic of Uganda and Section 38 of the Public Finance Management Act (2015)," Uganda's Finance Ministry said in a statement.

According to the Uganda Bankers Association, Justice Adonyo's judgement has sent shockwaves across the entire industry and related stakeholders.

"This judgement is sending a message to other borrowers with foul intention that they can now anchor their default on this judgement that declared syndication illegal," said UBA.

Mr Kiggundu through his companies Ham enterprises and Kiggs International (U) Ltd sued DTB branches in Kenya and Uganda for deducting money from his accounts as part of the lenders' efforts to recover a loan which he was granted between February 2011 and September 2016 and which had turned out to be non-performing.

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