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15th May 2022

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Ideas & Debate

Uganda judge strikes a blow for cross-border banking

Monday May 10 2021


DTB Centre in Uganda. FILE PHOTO | NMG

carolmusyoka_img By CAROL MUSYOKA
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  • It is fairly common throughout the world for local subsidiaries of banks to draw on the strength of the parent bank’s balance sheet simply because of lending limitations of the subsidiary in its jurisdiction.

In November last year, I wrote about an interesting Ugandan High Court ruling that had the danger of setting a dangerous financial and economic precedent in the country. Just as a reminder, I wrote that a Ugandan businessman borrowed a series of loans running in the tens of millions of US dollars from a Ugandan subsidiary of a Kenyan bank, part of the borrowing of which was lent by the Kenyan parent bank.

It is fairly common throughout the world for local subsidiaries of banks to draw on the strength of the parent bank’s balance sheet simply because of lending limitations of the subsidiary in its jurisdiction.

I also wrote that this kind of lending is not only limited to the private sector. Governments also take on commercial loans from foreign banks in what are known as syndicated loans where a group of banks, some of which may have local presence, provide a loan to the government and appoint one bank as the collection bank.

As is wont with some businesses, the Ugandan businessman was unable to service his loans and decided that the best defence was an offence. He sued both the Ugandan subsidiary and the Kenyan parent banks claiming that attempts at collecting the loan repayments were tainted with fraud, and that the Kenyan parent of the bank was not licensed to conduct the business of a financial institution in Uganda by the regulator Bank of Uganda and therefore the loan from the Kenyan parent was illegal from the onset.

Well, the High Court judge in Kampala issued a judgment in October 2020, finding in favour of the businessman’s convoluted argument that the Kenyan parent bank did not have licence to conduct business in Uganda thus the loan was invalidly issued, neither did it have authority from Uganda’s banking regulator to appoint its Ugandan subsidiary as the loan collecting agent.

Finally he ordered that all the mortgages that had secured the loan be released back to the businessman and that the monies that the bank had recovered from the borrower in trying to enforce payment be reimbursed.

The dangerous precedent that was being set here was that there were millions of dollars of loans in the Ugandan banking system in both private and public sector that ran the danger of being labelled illegal, thereby potentially setting off a series of defaults were the borrowers to be the kind that sipped from the same mischievous cup of balderdash.

The Ugandan bank and its Kenyan parent rushed to court to obviously forestall the execution of this judgment, with the banking industry on both sides of Lake Victoria vigorously waving cheerleading pompoms. The stay of execution pending appeal was granted.

A three-judge bench of the Court of Appeal handed its judgment on May 5, 2021 with a stinging indictment on the High Court’s erroneous interpretation of contract law and the Civil Procedure Rules that it had relied on to bolster its turbo-charged assault on the international banking system.

Deputy Chief Justice Buteera schooled the Ugandan businessman on how to come to court with clean hands by saying that “In law it is not possible for a plaintiff to recover by a claim based on the medium of and by aid of an illegal transaction to which he was himself a party.”

The Deputy Chief Justice went further to state that “I know of no law that makes it illegal for a Ugandan citizen or foreigner resident in Uganda to borrow or pay back money borrowed from a foreigner or foreign institution, a bank or any other organisation unless the transaction involves the perpetuation of a criminal offence such as terrorism, money laundering, human trafficking or any other offence. The loan agreement tainted with perpetuation of an offence would not be enforced by a Ugandan court.”

In my view the judge stopped short of calling the Ugandan businessman a schoolyard bully who wanted to use the law to claim an illegality of a transaction that he himself had happily signed up to and merrily spent the proceeds therefrom with nary a peep of discomfort. The criminality that is actually in question here was whether the businessman ever had any intention of paying the loan in the first place. We will never know that.

But what we do know is that the Ugandan Court of Appeal put paid to the basic tenets of a good investor relations climate: executing the judicial process with speed, righting judicial wrongs that infringe on the foundation of contract law and, most importantly, sending that case back to the commercial division of the Ugandan High Court with instructions that the suit should be expeditiously fixed and heard by another judge.

These are some of the very foundations that the ease of doing business in a country are based upon.

[email protected] Twitter: @carolmusyoka

2021-05-10 07:06:00

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