Chief Executive Officers (CEOs) of commercial banks in Uganda have been thrown into panic after a Commercial Court judge ruled that syndicated loans are illegal.
For example, a top Bank‘s top leadership has called a crisis meeting this Wednesday evening to discuss the ramifications of the ruling.
Uganda banks’ syndicated loans amount to over Shs 3tn. If written off, the financial sector could collapse, sinking the economy.
The Commercial Division Judge, Henry Peter Adonyo on Wednesday ruled that DTB Kenya (DTBK) acted illegally in lending money to Ham Enterprises owned by businessman Hamis Kiggundu.
DTB is battling Kiggundu over Shs 39.7bn which the businessman acquired to facilitate his businesses and defaulted on payment.
Ham had acquired the money in four tranches: $6.2m, $3.2m, $458,604 and Sh2.8b from both DTB Uganda and DTB Kenya between February 2011 and September 2016.
The loans were consolidated later in 2018 and were to run for five years, ending August 23, 2023.
Justice Adonyo ruled that DTB Kenya didn’t have the license from Bank of Uganda as provided for under the Financial Institutions Act 2004.
Kiggundu, through his lawyer, Fred Muwema, argued that DTBK, was carrying out illegal banking business in Uganda by lending money to the first Plaintiff, Ham Enterprises.
Kiggundu further stated that Diamond Trust Bank Uganda was “facilitating and abetting the illegal conduct” of Financial Banking Business in Uganda contrary to the Financial Institutions Act.
Justice Adonyo also faulted DTB Kenya for appointing its counterpart in Uganda to collect the loan facility from Ham Enterprises without fulfilling the set legal requirements.
The judge described the appointment of agents as “illegal, unethical and breach of trust.”
Justice Adonyo further said the “The Act contravened Financial Institutions Regulation number 5 and the first respondent (DTB Uganda) is culpable of breaking the law and is penalized for taking part in an unauthorized transaction.”
One of the top Bank‘s management said in a note to its stakeholders that, “The judgement has huge ramifications for the industry, for syndication, for Uganda as investment destination and capital flows.”
The note read: “The Executive Directors had called to request us to URGENTLY assist with info before 5pm. Info requested is value of syndicated loan portfolio at risk because of this judgement. This includes intercompany or group, or other independent non-resident syndicate partner funding. It includes both direct loan facilities as well as off balance sheet e. G LC lines, Guarantees etc.”
Speaking on condition of anonymity as this is a court matter, a prominent banker said the implications of the ruling on the banking industry would be massive.
“You have at least 7 foreign banks with huge market share that do syndication with parent balance sheets quite frequently.”
The official gave the example of Stanbic Bank, the largest financial institution in Uganda which can only lend up to $60m to one borrower.
Stanbic Bank would need foreign balance sheets to grow the country.
“This was a very short sighted and selfish ruling,” said the banker.
For example, the $300m Stanbic lent to government of Uganda a couple of months ago. $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 Bankers Association (UBA) Executive Director, Wilbrod Owor recently 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 mobilized 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 top banker separately told ChimpReports that, “This ruling has to be appealed. It sets a very dangerous precedent for the industry and the country.”
Asked how serious the situation was, the official observed: “Uganda is not an island- this model of lending is not unique to Uganda.”
He said foreign investors will shun the Ugandan market especially the multinational and the regional banks thus negatively affecting the lending appetite and cycles.
Sources are telling us that Justice Adonyo has since refused to sign the ruling, a development this website is investigating.
UBA officials said the Ugandan market “has no long term/project funds. So with that ruling, sourcing of funds will only be limited to the local market, ultimately affecting cost of capital and debt. Ham might think he is winning the battle but it will cost the industry and the country. This ruling must be appealed immediately and government should also be interested.”
Industry players say the top 6 international Banks may have around Shs 3 trillion offshore on both loans and off balance items.
If this ruling is true and upheld, it means the amount has to be written off hence collapsing the banking industry.
Clients who have benefited from syndicated loans can now challenge the legality of the loans using today’s ruling, sending the banks into unfathomable debt and the economy in a tailspin.
For example, Equity Bank Kenya and Equity Bank Uganda pooled $2.5m each to lend to Simbamanyo Estates in Kampala.
After utilizing the $10m credit facility, Simbamanyo later claimed that it was only aware of $7.19m and accused Equity Bank Uganda of providing Equity Bank Kenya with an “illegal cover to conduct business in Uganda where it has no jurisdiction.”
Simbamanyo said there was no way it could be indebted to Equity Bank Kenya where it had never applied for a loan or even run an account.
While Equity Bank Kenya can argue that Simbamanyo was aware of its obligations, the real estate company can rely on the ruling in the DTB Bank- Ham case to challenge the legality of the $10m facility.
East Africa has roughly $36 bn of outstanding loans.
Kenya has $25 bn, Tanzania has $8bn and Uganda a paltry $ 4 bn.
A banker wondered: “So who needs whom? On profit after tax, Kenya is over $1 bn. Uganda made $230m, less than 25%. “We do not have the financial depth to serve the country.”