‘BOU didn’t have to license DTB Kenya to lend to Ham’

Kampala, Uganda |  THE INDEPENDENT |   The controversy surrounding a commercial court judgement on the case between Diamond Trust Bank and businessman Hamis Kiggundu has taken a new twist after the Bank of Uganda advised that a foreign bank can appoint an agent to carry our business in Uganda, without necessarily applying for a license.

Last week, the commercial court head Justice Henry Peter Adonyo ruled that the credit facilities offered by DTB-Kenya to Kiggundu were illegal since the bank is not licenced by Bank of Uganda to carry out the financial institution business in Uganda. According to Adonyo, “The act of DTB-Kenya in conducting financial business is licenced in Kenya and it therefore illegally offered the facilities in Uganda.    

The decision was based on a  suit filed by Kiggundu, through his companies; Ham Enterprises and Kiggs International against DTB Bank, accusing it of illegally taking out more than 120 billion Shillings from his bank account in Uganda.   Kiggundu says he had been paying the loan which was organized jointly by DTB Uganda and DTB Kenya, for years. But they later discovered that the Kenyan bank had continued deducting money from his accounts, reportedly using DTB Uganda as an agent.    

Following the ruling, the Uganda Bankers Association said that this was going to affect the syndicated loan business in Uganda.  The bankers expressed fear that this ruling could encourage other borrowers in this category to default on payment and use this ruling to get away with it. Currently, the stock of loans syndicated by Ugandan banks with foreign partner banks, amount to 5.7 trillion Shillings.   

Now, the Bank of Uganda says  that the transaction was not carried out under the rules and regulations governing it, and as such, the banks did not require approval from the central bank to collect the money borrowed by Ham Kiggundu. 

“The Bank of Uganda does not regulate the extension of loans or credit or the financing of commercial transactions that are funded using funds obtained from foreign banks that do not take deposits from the public in Uganda,” says the statement signed by Governor Emmanuel Tumusiime-Mutebile.  

DTB Kenya had appointed DTB Uganda which is licenced to carry out business in Uganda to act as their agent, which would make it legal to collect funds for repayment of the loan taken by Ham. But  the judge ruled that the action of appointing DTB Uganda to act as an agent of DTB Kenya should have been legal, if it has been done formally through applying for a Bank of Uganda license for DTB Uganda to be an agent for DTB Kenya. 

Bank of Uganda now says that agent banking that is regulated under the Financial Institutions Act, 2004 is defined under Regulation 4 of the Financial Institutions (Agent Banking) Regulations, 2017 to mean the conduct of financial institution business by a person contracted by a financial institution to deliver such services on its behalf as approved by BoU.   

However, the Central Bank says a foreign bank can choose to contract a person or company as their agent in Uganda using the general contract laws. Under this, they are not required to get approval from the Bank of Uganda.  “Such agencies do not fall within regulated agency under the FIA, 2004 and do not require a BoU license”, it says.   

The statement further says the Central Bank does not regulate extension of credit funded “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.”  This therefore distances the regulator from the transaction as DTB Kenya argued that it extended the loans through its Ugandan sister company, DTB Uganda.   

Foreign banks lending on deposits held in jurisdictions other than Uganda are regulated and supervised by their home authorities.  The statement says a foreign bank doesn’t need to establish a representative office in Uganda to conduct lending or non-deposit-taking activity.   

According to the BOU, therefore, DTB Kenya did not have to have an office in Uganda to conduct lending business or do business that does not involve taking public deposits.   

“Bank of Uganda’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.” These powers do not extend to activities of foreign banks outside Uganda licensed by foreign regulators.

Lawyers at ENSAfrica in a joint opinion say it is common market practise for locally licensed banks to seek the support of their parent companies to undertake large lending. 

The lawyers seem to agree with the regulator that DTB Kenya does not need to have a BoU license to lend anyone on Uganda since it is not lending from deposits taken from the Ugandan public: “The undertaking of financial institutions’ business in Uganda is limited to only those licensed by the BoU under the FIA. 

“It is also the norm for development finance institutions and others to lend to Ugandan borrowers, including the government. Similarly, foreign players are a large part of Uganda’s interbank market.

As part of these transactions, a Ugandan entity may be nominated by the lenders as agent for the lender. In none of these cases does the foreign lender take a licence from the BoU,” says an opinion by lawyers; Philip Karugaba, Racheal Musoke,  Rehema Nakirya Ssemyalo and Anita Kenyangi. 

“In other words, a licence is required only where the lending or extending of credit is from deposits collected from the Ugandan public. It is not tenable to argue that “money held on deposit” can refer to monies held on deposit outside Uganda (in this case, Kenya). 

But lawyer, Fred Muwema says the Bank of Uganda should table its opinions before the court because it has not authority to interpret a judgement.   

DTB has appealed the ruling and secured a stay of the execution of the judgement. The lawyers at ENS say until theHam/DTB decision is set aside, it will be a hard task for every counsel advising foreign lenders.

********

URN