Business

Panicky Gov’t Reassures Lenders: We’ll Pay Back Syndicated Loans

Government of Uganda has rushed to reassure financial agencies of its commitment to its public debt after a judge ruled in a court case that the syndicated loans were “illegal.”

The Finance Ministry said it had “received concerns from different development partners and financing institutions regarding its position on syndicated financing arrangements and public debt obligations (external and domestic).”

In this regard, government reiterated 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 Iganda and Section 38 of the Public Finance Management Act (2015).”

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.

Kiggundu 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.

Uganda Bankers Association (UBA) today said the ramifications of the judgement have sent shockwaves across the entire industry and related stakeholders premised on the following five preliminary areas of assessment;

As a result of the judgement and its implications, the syndicated portfolio currently at risk seated with commercial banks is over U.Shs 5.7 trillion (1.53 billion USD) of running facilities across various sectors including real estate, road construction, energy covering hydro electric power, oil and gas and manufacturing among others.

This figure does not include pipeline transactions that were still being processed and have all been halted since judgement came out yesterday.

“The figures exclude syndicated lending to Government of Uganda who is the largest beneficiary of syndicated lending for various development development programmes in the country,” said UBA.

“The wide sweeping nature and sheer weight of shockwaves the judgement has sent to our international partner agencies and lenders and the implications for the country as an investment destination,” added UBA, emphasizing, “The message this judgement is sending to other borrowers with foul intention who can now anchor their default on this judgement that declared syndication illegal.”

Judge’s ruling

Justice Adonyo referred to section 3 (k)) of the Financial Institutions Act (2004) FIA, a financial institution which provides a definition of a company carrying a financial institution business as;

a company licensed to carry on or conduct financial institutions business in Uganda and includes a commercial bank, merchant bank, mortgage bank, post office savings bank, credit institution, a building society, an acceptance house, a discount house, a finance house or any institution which by regulations is classified as a financial institution by the Central Bank”.

The said Act defines, a “financial institution business” to mean “

“ … the business of (a) acceptance of deposits; (b) issue of deposit substitutes; (c) lending or extending credit, including— (i) consumer and mortgage credit; (ii) factoring with or without recourse; (iii) the financing of commercial transactions; (iv) the recovery by foreclosure or other means of amounts so lent, advanced or extended; (v) forfeiting, namely, the medium term discounting without recourse of bills, notes and other documents evidencing an exporter’s claims on the person to whom the exports are sent; (vi) acceptance credits; (d) engaging in foreign exchange business, in particular buying and selling foreign currencies, including forward and option type contracts for the future sale of foreign currencies; (e) issuing and administering means of payment, including credit cards, travelers’ cheques and banker’s drafts;”

With a “foreign bank” defined in the same section to mean;

“ a body corporate or entity incorporated or formed under the laws of a country other than Uganda that—

(a) is a bank according to the laws of any foreign country where it carries on business;

(b) carries on a business in a country other than Uganda that if carried out in Uganda, would be wholly or to a significant extent, financial institution business;”

Going by the above definitions I would find as a matter of fact that there is no doubt that the 2nd Respondent is indeed a foreign bank for the purposes of the transactions between the parties.

However, the submissions by the Applicants are that the Financial Institutions Act applies to both local and foreign banks carrying out transactions.  

Relying on the definition of a financial institution reproduced above find that the said definition applies equally to the 2nd Respondent (DTB Bank Kenya) even if the 2nd Respondent issued credit facilities in Kenya to Ugandan entities without the approval of the controlling authorities as is clearly provided for under the Act for the Act makes it illegal for any ‘money held on deposit’ whether within Uganda and or outside it as seen from section 117 of the Financial Institutions Act, 2004 which requires that a foreign bank to seek authorization of Bank of Uganda before it can engage in such activities, such as lending and extending credit facilities with the only exception to this section is being the taking of deposits. For clarity the said provision of the law states;

Section 117 of the Financial Institutions Act.

“117 (1) A foreign bank may, in such form and in such manner as shall be prescribed by the Central Bank by statutory instrument apply to the Central Bank for permission to establish a representative office in Uganda to engage in such limited activities, excluding the taking of deposits as the Central Bank may approve.”

Given the above provision, I am of the considered opinion that indeed by their very actions the Respondents committed illegalities when money facilities were rendered by the 2nd respondent to the 1st and 2nd Applicants without prior authorization of the Bank of Uganda even where such funds were availed outside Uganda for the import of the Financial Institutions Act is that prior authorization is required of the Bank of Uganda was a prerequisite.

Adonyo issued directives to Bank of Uganda which is the implementing authority under the Financial Authorities Act 2 of 2004 As Amended to “take such necessary actions and measures to ensure that the provisions of the law is implemented in accordance with the intention of the law such as to protect the Ugandan economy from illegal hemorrhages and uncontrolled flows of financial resources and to ensure that financial institutional business in Uganda is operated within the letter of the law to protect the nascent banking business industry in Uganda.”

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