The Supreme Court’s landmark ruling that the $11m syndicated loan which Diamond Trust Bank (DTB) extended to businessman Ham Kiggundu was legal, has saved Uganda’s financial sector from potential collapse.
The court on Tuesday ruled that syndicated loan facilities, a global lending phenomenon practised by local and foreign banks or non–bank lenders, are legal,
“This practice usually stems from the need to spread out, and thus reduce, the enormous risk associated with lending large sums of money. Individual countries may enact laws that place limits on the amount of money a bank can lend to a single borrower; thus encouraging syndicated lending,” said the Supreme Court in a unanimous ruling.
Ham had alleged that the DTB Kenya, which raised money that was channelled to his business empire, Ham Enterprises, did not have a licence to operate in Uganda hence the transaction was illegal.
This was after DTB commenced a recovery process for the money in early 2020. DTB-U was owed USD $4,014,444 while DTB-K was owed USD $6,974,600.
Ham, a shrewd Kampala businessman with interests in the real estate sector, did not offer to return what he described as ‘illegally’ acquired loans but sought to benefit from the illegality.
In 2020, High Court Judge Peter Adonyo agreed with Ham’s reasoning, ordering that credit facilities taken by Ham from DTB-K in the sum of USD $6,974,600 were illegal.
Adonyo also ruled that by their illegal lending, DTB-K with the help of DTB-U had breached the law and therefore the credit facilities taken by Ham from DTB-K in the sum of USD $6,974,600 should not be repaid.
In essence, DTB-U was also to forfeit USD $4,014,444 that it had lent to Ham.
DTB-U and DTB-K were ordered to pay Ham the sums of Shs 34,295,951,553 and USD $23,467,670.61 being money Ham alleged was unlawfully appropriated from his accounts
Ham’s properties and all corporate and personal guarantees issued to secure his borrowings were to be released, sparking protests from DTB and Uganda’s entire banking industry.
DTB, through K&K Advocates (Edwin Karugire, Usaama Sebuufu and Richard Bibangmbah) decided to take on Ham in courts of law.
Law
The Supreme Court on Tuesday said no law was brought to its attention that forbids foreign financial institutions from extending credit facilities to any financial institution or person in Uganda.
“If anything, in furtherance of international trade and investment, financial institutions the world over are known to engage in global financial business transactions by dealing with, or through, financial institutions based in other jurisdictions,” the ruling, authored by Chief Justice Owiny-Dollo reads in part.
“In the case of Uganda, such international financial business transactions are certainly neither governed by the Financial Institutions Act, 2004, as amended, nor the Financial Institutions (Agent Banking) Regulations, 2017, made pursuant thereto. The trial judge (Adonyo) therefore erred in holding that the credit agreements between the parties hereto were clothed with illegality.”
Financial sector
Justice Adonyo’s 2020 ruling sent shockwaves through Uganda’s financial sector considering that a massive chunk of loan facilities are syndicated.
Banks warned that the judgement placed at risk the entire syndicated portfolio currently seated with commercial banks, which was about Shs 5.7 trillion (1.53 billion USD).
These loans run across various sectors including real estate, road construction, energy covering hydroelectric power, oil and gas and manufacturing among others.
For example, the government of Uganda is trying to raise about $2.5bn for the construction of the Standard Gauge Railway from Malaba-Kampala.
No financial institution in Uganda can single-handedly raise this money locally. Standard Chartered Bank will have to use the syndicated loan approach to mobilise this huge amount of money to fund the construction of the Standard Gauge Railway line.
Besides the Shs 5 trillion portfolio in the private sector, Government itself has also acquired an even larger sum in syndicated loans for various development programmes in the country.
“If the courts had insisted that syndicated loans were illegal, international partner agencies and lenders would have pulled out money from the Ugandan financial sector, sending the economy into a free fall,” said a banker who preferred anonymity to speak freely.
“Justice Adonyo’s ruling had very severe implications for the country as an investment destination.”
“You have at least 7 foreign banks with huge market share that do syndication with parent balance sheets quite frequently,” said another top banker, citing Stanbic Bank, the largest financial institution in Uganda which can only lend up to $60m to one borrower.
In 2020, Stanbic Bank lent $300m to the government of Uganda – of which $200m was booked in South Africa.
Asked if loan syndication was backed by law, the banker responded: “It’s common practice. It is covered by a syndication agreement and usually has a local bank as the trustee or arranger on behalf of participating banks.”
Uganda’s Supreme Court said DTB Kenya extended credit facilities to HAM through DTB Uganda, which is a bank duly licensed to carry out financial institution business in Uganda.
“The disbursement of the funds to Ham Enterprises, was not out of the deposits taken and held by DTB Uganda; but rather from funds transmitted to it by DTB Kenya, which it held in an escrow account strictly for the execution of the impugned credit facility transactions agreed on between the borrower and lender,” said Owiny-Dollo.
UBA
In 2020, Uganda Bankers Association (UBA) Executive Director, Wilbrod Owor said loan syndication most often occurs when a borrower requires an amount too large for a single lender to provide or when the loan is outside the scope of a lender’s risk exposure levels.
“Financial markets provide other frameworks through which capital can be mobilised including through the stock exchange and numerous players exist in this space depending on the level of development and attractiveness of the market,” said Owor.
“So commercial banks are just part of a wider financial eco-system and may not necessarily always address every single need and requirement of the market for the simple reason that they are not designed to do so. Development Banks play a big role in long term development finance and these are typically owned by government and institutional long-term investors,” he emphasised.
Another banking executive recently told ChimpReports that Adonyo’s ruling had set “a very dangerous precedent for the industry and the country,” adding, “Uganda is not an island- this model of lending is not unique to Uganda.”
The banker said foreign investors would shun the Ugandan market especially the multinational and the regional banks thus negatively affecting the lending appetite and cycles.
UBA officials said the Ugandan market “has no long term/project funds. So with Adonyo’s ruling, sourcing of funds would only be limited to the local market, ultimately affecting cost of capital and debt.”
Industry players say the top 6 international Banks may have around Shs 3 trillion offshore on both loans and off balance items.
If Adonyo’s ruling was upheld, this amount of money had to be written off hence collapsing the banking industry.
Clients who have benefited from syndicated loans would have also challenged the legality of the loans using Adonyo’s ruling, sending the banks into unfathomable debt and the economy in a tailspin.
Legal experts argued that Justice Adonyo had made some far-reaching findings on foreign lending, syndicated loans and agent banking with directives to the Bank of Uganda to take the necessary measures arising from his findings to stop such lending.
Some of the questions the judgement raised include: “Are the World Bank, IMF, ADB etc. required to get licences from the Bank of Uganda in order to lend to the Government of Uganda?”
Are foreign financiers of foreign investments in Ugandan subsidiaries required to get licences from BOU?;
Are foreign banks that are lending to Ugandan registered companies in association with Ugandan banks required to get licences from BOU?) and most importantly, are all such loans including the national debt null, void and irrecoverable? What does this mean for the credit worthiness of the country as a whole?
Bank of Uganda’s position
Bank of Uganda (BOU) said foreign banks lending deposits held in jurisdictions other than Uganda are regulated and supervised by their home authorities, and it was not mandatory for a foreign bank to establish a representative office 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,” said BOU in the statement in 2020.
Bank of Uganda does not regulate extension of loans/credit or the financing of commercial transactions that are funded using funds owned privately by individuals, corporates, private equity funds local or foreign.
“International and Regional Development Organizations, Foreign Banks, and other Lenders both local and foreign who may choose to appoint any entity or person to act as their agent in Uganda under general contract law do not require approval from BoU,” said the Central Bank.
Such agencies do not fall within regulated agency under the FIA, 2004 and do not require a BoU licence.
According to BoU, Foreign banks lending deposits held in jurisdictions other than Uganda are regulated and supervised by their home authorities.
“It is not mandatory for a foreign bank to establish a representative office in Uganda in order to conduct lending or non-deposit-taking activity,” said the central bank.
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.
However, these powers do not extend to activities of foreign banks outside Uganda licensed by foreign regulators.
It is argued that Adonyo’s ruling would have encouraged other borrowers with foul intention to anchor their default on the judgement that declared syndication was illegal.
Bankers have since welcomed the Supreme Court’s ruling, saying it sends a signal to future defaulters that borrowers can’t use legal gymnastics to elude the long arm of the law.