Unauthorized foreign bank loans declared illegal by Ugandan High Court




In a landmark decision, the High Court of Uganda sitting in Kampala declared credit facilities advanced by a Kenyan bank, Diamond Trust Bank (K) Ltd (DTBK), to two Ugandan borrowers to be illegal and unenforceable as he was unlicensed to conduct “institutional financial activities” in Uganda.

The decision in Kiggundu et al. V Diamond Trust Bank (U) Limited & Another (the Decision) has drawn mixed reactions as industry commentators attempt to define the impact of the decision on the banking sector and the Ugandan economy as a whole. According to a Ugandan bankers’ statement Association the syndicated portfolio currently at risk as a direct result of the decision is estimated at more than UGX 5,700 billion (approximately $ 1.5 billion).

In this alert, we briefly analyze the case and discuss the potential impact of the decision on the banking sector across East Africa.


Between February 2011 and August 2018, Ham Enterprises Ltd and Kiggs International (U) Ltd (the Candidates), has received various construction and business development credit facilities. The funds were advanced by DTBK with Diamond Trust (Uganda) Ltd (DTBU) (the Respondents) acting as a collection agent in the country. The credit facilities were secured by mortgages on certain properties in Uganda owned by the applicants.

DTBK and DTBU argued that the credit facilities had become non-performing with outstanding liabilities of more than $ 10 million. This non-performance prompted the defendants to make deductions for interest and other charges on the plaintiffs’ accounts in accordance with the relevant loan agreements. The Claimants disputed the apparent breach of their loan obligations and, by their amended charge, argued that they had settled all of the debt obligations and that they in fact owed $ 23 million due to the illegal deductions. carried out by banks.

The applicants therefore brought the request to recover the sums deducted and ultimately to avoid their loan obligations.

An overview of the main arguments

By their motion, the Applicants requested that the written defense of the Banks be struck out on the grounds that it was committing illegalities committed by DTBK and DTBU. The plaintiffs’ arguments were based on the contention that by advancing the credit facilities without authorization to do so, as required by the Financial Institutions Act 2004, DTBK illegally carried out “activities of financial institutions”.

Two definitions are important to understand this statement.

First, Financial Institutions Law 4 of 2004 (the Law) (as amended in 2016) sets out a Financial institution mean “a business authorized to operate or carry out activities of financial institutions in Uganda and includes a commercial bank,… ”. Second, the Act defines business financial institutions to include “the loan or grant of money held in custody or any part of that money, including through (i) consumer credit and mortgage…”.

In fact, the words “held in custody” have been added to the definition of business financial institutions by an amendment introduced under the Financial Institutions (Amendment) Act 2016.

According to the plaintiffs, the activity of the financial institutions referred to in this case started in Uganda, as evidenced by factors such as the mortgage loan facility letter drafted in Uganda by Ugandan lawyers and even seen in Uganda. . In addition, the applicants were Ugandan companies based in Kampala and issued securities for the loan facilities through mortgages, bonds and other securities registered in Uganda. Even though the loan had been advanced by DTBK outside Kenya, and given that DTBK never sought authorization from the Bank of Uganda to operate in Uganda as required, the entire credit transaction went wrong. been considered null and void under the Financial Institutions Act. article 4 (1) (because the court ruled that the loan in Uganda requires a license from the BoU) and article 117

(1) (which obliges anyone wishing to open a representative office to obtain the prior approval of the Bank of Uganda).

Further, the Applicants asserted that no prior approval from the Bank of Uganda and the Central Bank of Kenya was requested for DTBU to act as agent on behalf of DTBK, which contravened banking provisions. from Uganda.

On the other hand, the respondents argued that when making a decision on the conduct of financial affairs in Uganda, the financial institution concerned must proceed with the loan or grant of money. held in custody in Uganda so as to amount to financial institution business in Uganda. Based on the fact that DTBK was not engaged in deposit-taking activities in Uganda and another claim that the credit facilities were in fact from Kenya and not Uganda, no illegalities existed. as claimants claim.

In addition to the above, the parties also considered important technical legal issues such as the appropriateness of the swearing in of affidavits on contentious factual issues by legal counsel rather than by the applicants’ actual agents and expungement. of the respondents’ written statement regarding defense without the benefit of judicial review in the main case, but contained substantive questions of law.

Court orders

To the surprise of many in the banking community, Judge Henry Peter Adonyo agreed with the plaintiffs and found that DTBK was in fact operating as a financial institution in Uganda and that its inability to obtain a license to operate financial institution activities in Uganda made the credit transaction illegal. , void ab initio and therefore inapplicable. The High Court went further by ordering the unconditional release of all collateral and the return of the money taken by DTBK due to the alleged non-performing loans. In essence, therefore, the Court found that due to illegality, the corresponding underlying payment obligation was also null and void.

Ramifications of the decision

Unlike the media, this is not actually a syndicated loan in this specific case as the credit facilities were only advanced by DTBK. However, it goes without saying that any foreign loan in Uganda, whether through a union or not, will have to be reassessed in light of the decision.

In order to reassure development partners and finance institutions on Uganda’s syndicated finance agreements and public debt obligations, the Ministry of Finance, Planning and Economic Development has issued a public statement reiterating Uganda’s commitment to repay its public debt obligations. While assurances are undoubtedly welcome, international development partners will no doubt have to think twice before extending credit facilities to Uganda.

Note also that according to the list of licensed banks maintained by the Bank of Uganda, it is clear that the financial sector in Uganda is dominated by foreign banks many of which are likely to have facilities structured in the same way as DTBK / DTBU. In addition, multilateral creditors make up the largest share of Uganda’s external debt providers, estimated at $ 5.8 billion, according to a report by Uganda’s Ministry of Finance, Planning and Economic Development. This implies that there is a high probability that capital inflows into Uganda from foreign lenders will be severely restricted as a direct consequence of the decision.

Finally, as we wait to see the outcome of an appeal against the ruling, it is clear that lenders need to reconsider the way they conduct their business not only in Uganda, but across the African region of Africa. East. We will continue to monitor the situation and keep you informed of any developments. In the meantime, the Bank of Uganda has just released a statement confirming that foreign lenders do not have to apply for a license to lend money – that only deposit loans taken from the public in Uganda require a license. Licence. See the full statement just released today here.



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