OPINION: This is the implication of the May 5th Court of Appeal decision on the regulation of cross-border financial services The October 2020 Commercial Court ruling in the case of Ham Enterprises & Others vs. DTB Uganda and DTB Kenya (High Court Civil Suit No. 43 of 2020) sent cold shivers down the spine of the financial services. The decision had a net effect of declaring syndicated lending by foreign funders illegal putting at risk both existing and potential multibillion-dollar portfolios. But following an appeal by the two banks, the Court of Appeal has dismissed the decision of Justice Henry Peter Adonyo and order a retrial by another judge. In this opinion, contact Blaisie. N. Paulsen, a partner at Byenkya, Kihika & Co. Advocates and a seasoned lawyer with over 25 years of experience in the field of banking and finance, shares her opinion on what the ruling means for cross-border lending to Ugandan based entities.

In 2020 the borrower, Ham Enterprises applied to the high court of Uganda for orders among others that the lending by Diamond Trust Bank Kenya (“DTBK”), a Kenyan bank to the borrower Ham Enterprises (a Ugandan entity) was illegal on the basis that the Kenyan Bank engaged in financial institution business without due authorization and permission from the Bank of Uganda (“BoU”).

The trial court ruled that the Financial Institutions Act (“FIA”) applies to foreign banks and it was illegal for money held on deposit, whether in Uganda or outside, to be lent without the approval of the BoU.

The trial court further ruled that the FIA required the local licensing of foreign banks doing business in Uganda. In consequence of its findings, the court declared the lending transactions by DTBK to Ham Enterprises to be illegal and void ab initio for violation of the FIA. The Borrower’s debt was declared settled by law. An immediate release of all the mortgaged property and a full refund of all monies allegedly debited from the borrower’s account by DTB Uganda was also declared.

On 14^th October 2020, the Bank of Uganda (BoU) issued a statement on the financial institutions business regulated by the Bank of Uganda clarifying that BoU does not regulate the extension of loans/credit or the financing of commercial transactions that are funded, to wit;

1. Using funds owned privately by individuals, corporates, private equity funds local or foreign;
2. Using funds of members of small member-based collective savings or lending organizations that do not advertise themselves as safe-keepers of money or solicit for funds from the public in Uganda;
3. Using funds obtained from foreign banks that do not take deposits from the public in Uganda;
4. Using funds of International, Regional or Local Development Finance Institutions whether such funds are advanced and administered directly by those institutions or through financial institutions in Uganda.
5. Using funds of Development Institutions, be they multilateral or bilateral, whether such funds are advanced and administered directly by these institutions or through financial institutions in Uganda. and that;
6. BoU’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.

The decision of the trial court was appealed against by DTBK and DTB Uganda on eleven grounds (Civil Appeal No. 242 of 2020) and a ruling delivered on 5^th May 2021. However, for purposes of this article, we shall focus on the impact of the court of appeal decision on cross border financial services.

Court’s persuasive guidance on cross-border financial services

Persuasive guidance can be sought from Justice Richard Buteera’s obiter dictum. According to the learned justice, there is no law that makes it illegal for a Ugandan citizen or foreigner resident in Uganda to borrow or pay back money borrowed from a foreigner or foreign institution or bank unless if the transaction involves the perpetuation of a criminal offence.

Inferred from the above, the key determinant on the enforceability of a loan agreement with a foreigner or foreign entity whether entered into in Uganda or outside Uganda is the terms of the agreement, the governing law of the agreement etc.

We note however that the Court of Appeal ordered that the matter be remitted back to the High Court, Commercial Division to be tried on its merits and this time around it shall be before another judge.  This, therefore, means that the position could change after trial of the matter or even following the disposal of the subsequent appeal by Ham Enterprises to the Supreme Court.

Relevance of this decision to cross border financial services

The trial court decision raised concernsto a wide section of international lenders/investors who, following the said ruling had considered lending to Uganda or Ugandan entities very risky.

Apart from setting aside the decision of the High Court, the Court Appeal did not delve into the issues raised in relation to the legality of foreigners lending to Ugandans in view of the cited provisions of the FIA.

Accordingly, at present, cross-border financial services will continue to be regulated by the BoU guidelines on the subject as of 14^th October 2020. The obiter dictum of Hon. Justice Richard Buteera will also be considered for persuasion on the current regulatory regime on cross border financial services.

What we have at the moment could be construed as an interim position pending the final determination of the case to its conclusion.

This information was provided by Byenkya, Kihika & Co. Advocates. The contents of this article are intended to be of general use only and should not be relied upon without seeking specific advice on any matter that one might have. 

For more information please email the author, at info@byenkyakihika.co.ug or blaisie@byenkyakihika.co.ug