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How Kiggundu court victory brought banks on their knees

Hamis Kiggundu in court earlier

Hamis Kiggundu in court earlier

The ripple effect from last week’s Commercial court ruling in which businessman Hamis Kiggundu defeated Diamond Trust Bank-Uganda and Diamond Trust Bank-Kenya has sent legal and economic experts in a spiral.

While the positivists welcome the ruling for sticking to the strictness of the law and protection of Uganda’s sovereignty, those who differ warn that the ruling could spiral into a banking and economic crisis, writes Derrick Kiyonga.

The Ugandan banking setup is in such a way that borrowers who default on their loan obligations often question the moral standing of banks when the latter hastily auction the security to settle the remaining balance.

Oftentimes, banks argue that they act to the strictness of the law and, therefore, set aside moral sentiments when executing the auction, regardless of the stage of the transaction. 

This perhaps explains why, of late, there are many stories about who has lost property to banks. But on October 7, Justice Henry Peter Adonyo turned the tables when he relied on the written rules and regulations enacted under Uganda’s Financial Institutions Act (FIA) to rule that the transaction in which the banks entered with Kiggundu are illegal.

“I declare that by their illegal actions the respondents/defendants breached the different loan agreements terms entered into with the applicants / plaintiffs,” reads part of the ruling.

“I do order for the recovery by the applicants from the respondents jointly of the Shs 34bn and $23m being monies that were unlawfully taken by them from the applicants’ loan accounts.”

The ruling sent many tongues wagging and, according to several legal and economic experts, the one inevitability is that the banking sector will never be the same.

Short of the long story is that DTB-Kenya lent Kiggundu a cumulative figure of Shs 95bn over the course of nine years and appointed DTB-Uganda as an agent to receive the money on its behalf.

THE BRIEF

Last year, as Kiggundu was servicing the loan, he noted what he termed as illegal extra deductions and went to court to challenge them. Court later ruled that the whole lending transaction is illegal and, therefore, the banks must return all Kiggundu’s money as well as his securities. 

IMPACT

Shortly after the ruling, the 35-member Uganda Bankers Association (UBA) released a media statement in which they decried the outcome as a ‘reckless judgment.’ Without quoting any legal regulation, UBA went on to note that the ruling puts more than Shs 5.7 trillion, most of which involves government, held in syndicated loans, at stake.

This was a strange turnaround that banks are crying foul on matters of morality instead of quoting the law as is always the case. Economist Fred Muhumuza also said the ruling will cause a jump in the cost of credit if financial institutions are unable to use the same arrangement to source foreign funding.

To understand how desperate banks are, they rallied several stakeholders such as the executive, parliament, Uganda Insurers Association, Private Sector Foundation Uganda, Uganda Manufacturers’ Association, Kampala City Traders Association and Uganda Law Society to join their ‘fight against the judicial ruling.’

However, the Kiggundu legal team of Muwema & Company Advocates and Kimara Advocates & Consultants retorted that whereas DTB-Uganda and DTB-Kenya engaged in a syndicated loan transaction with Kiggundu, it is not true that the judgment declared syndicated loans to be illegal. “The judgment declared the syndicated loan involving DTB-Kenya to be illegal because it did not obtain permission from Bank of Uganda (BOU) as required by the FIA to conduct Financial Institutions Business in Uganda.”

In fact, the biggest controversy surrounds the usage of the term syndicated loan and whether the transaction had to be licenced by BOU as per FIA regulations.

According to Isaac Ssemakadde, the CEO of Legal Brains Trust, the Kiggundu-DTB-Kenya deal is a private lending subject to FIA rules and not a public finance through which government borrows. “What this means is that government does not need a license from BOU because BOU is its banker. Government borrowing is controlled by A 159(2)(7). It is authorised by parliament, which in effect provides government with a special licence to engage itself in business,” he says. 

UBA UNITY ON THE TEST

Of the 24 commercial banks under UBA, only three are indigenous ones with the rest foreign-owned. According to sources within UBA, cracks have appeared in UBA after some local players welcomed the decision on grounds that some foreign banks are not fit to conduct business in Uganda.

“To UBA some members, this is comeuppance for banks that use underhand methods to circumvent laws and employ predatory decisions in Uganda,” said a top bank executive official who preferred anonymity. “They deliberately spend most of their capital on government business and leave little for private borrowers, which they expect to fail to pay in order for the banks to sell their securities.”

When The Observer reached out to Wilbrod Owor, the UBA chief executive officer, he said the association has taken a decision not to comment on the matter anymore. “Our legal team is working on everything until further notice,” he said.

ICAMEK IN QUESTION 

The setback for banks further raises doubt whether the UBA-initiated International Centre for Arbitration & Mediation in Kampala (ICAMEK) will ever take off.

The arbitration centre, which was incorporated in 2018 through a partnership between UBA and the Uganda Law Society (ULS), was aimed to be a dispute-resolution mechanism between banks and clients.

However, several ULS members queried the legal basis of ICAMEK and its independence, arguing that it was a move to privatise of the justice system in Uganda.

Subsequently, ULS annual general meeting resolved to halt the process while some members ran to court.

“We realised some banks wanted to go beyond scrutiny in dispute resolutions not based on any law. You cannot take clients to a body whose guarantors are the banks. Banks paying the arbitrator listening to your case? I am glad many lawyers that didn’t understand us then have seen the light,” says Nelson Walusimbi, an advocate and one of the ULS members that petitioned court. “If UBA can attack a judge for basing on law to make a ruling, we now know how arbitrators at ICAMEK will be attacked when they make decisions that banks find unfriendly.”

WHAT NEXT FOR BANKING INDUSTRY?

It is without doubt that banks are now seeing the fatal flaws on how they have been doing business with Ugandans. Last year, a report by the Abdu Katuntu-led Committee on Commissions, Statutory Authorites and State Enterprises (Cosase) berated government for giving foreign banks a leeway to run roughshod in the Ugandan economy.

Cosase was investigating the controversial closure of several local banks and berated government for imposing International Monetary Fund (IMF) regulations that killed many of the local banks. 

The report also noted that key decisions directing foreign banks on investments in the country are not economic or scientific, but driven by the urge to stifle local borrowers.

“So, the banks created an atmosphere of a jungle sector in Uganda where the local banks were eaten. However, in the jungle, things can turn against you,” says Ssemakadde.

This jungle fight, according to some experts, dragged UBA from the legal issues of the Kiggundu case into the media, a battle they were destined to lose.

“I was shocked when UBA chose to fight Kiggundu in the media with several press releases yet it would have applied to be amicus curie and address the judge,” says Ssemakadde.

“The independence of the lawyers representing banks has been completely eroded. Either the banks don’t need the lawyers’ advice or the lawyers have become yes-men.”

All in all, it goes without saying that this battle is far from over and all indications point to a Supreme court settlement, but in the time until the top court in the land pronounces itself, there is bound to be massive changes in the banking sector, particularly how banks deal with borrowers.

For now, though, Kiggundu can bask in the glory of beating the banking industry at its own game.

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