Does a foreign lender to a Ugandan business require a licence from the Bank of Uganda

The Ugandan Court of Appeal, (in Diamond Trust Bank (Kenya)/Diamond Trust Bank (Uganda) vs Ham Enterprises Civil Appeal No, 262 of 2020), has set aside a decision that declared loans made by Diamond Trust Bank (Kenya) to Ugandan businesses to be illegal on the grounds that the lender required and had not obtained a licence from the Bank of Uganda under the Financial Institutions Act 2004.

The Appeal Court set aside the judgment and has sent the matter back to the High Court for retrial before another judge.

In its decision, the Court of Appeal disagreed with the trial judge’s conduct of proceedings in striking out the Bank’s defence for illegality followed by an immediate entry of judgment against the Kenyan Bank. The Appeal Court determined that it was wrong for the trial judge to make such a finding without hearing evidence. Ham Enterprises has since issued statements on its dissatisfaction with the result and expressing their intention to appeal to the Supreme Court.

The banking industry (borrowers and lenders alike) were disappointed that the Appeal Court did not answer the big question at the heart of the dispute: does a foreign lender to a Ugandan business require a licence from Bank of Uganda? Only one judge of the panel of three mentioned the issue.

Hon. Justice Buteera DCJ, before taking leave of the case, stated that he wished to clarify a legal issue in the circumstances of the appeal. The learned judge stated that he knew of no law that makes it illegal for a Ugandan citizen or foreign resident in Uganda to borrow or pay back money borrowed from a foreigner or foreigner institution, a bank or any other organisation, unless the transaction involves perpetuation of a criminal offense. The loan agreement tainted with a perpetuation of an offense would not be enforced by a Ugandan court.

There is hotly divided legal opinion as to whether this statement fully addresses the vexed question on the legality of foreign lending. The primary reason for concern is that the statement does not form part of the reasons for the determination of the case. The case was decided on procedural grounds. In addition, the learned judge did not address the specific sections of law that the respondents relied on to win in the High Court.

While this question awaits full judicial consideration and determination, the banking industry should remain fortified by the succinct guidance from the Bank of Uganda who administer the Financial Institutions Act. The Bank of Uganda has advised that they do not regulate extension of loans or credit by foreign banks that do not take deposits from the public in Uganda.

The statement of the Bank of Uganda can be found here.

Phillip Karugaba

Head of ENSafrica Advocates | Uganda

pkarugaba@ENSafrica.com

+256 772 785 332

Rachel Musoke

ENSafrica Advocates | Uganda | Partner

rmusoke@ENSafrica.com

+256 772 778 822

Sheila Pacuto

ENSafrica Advocates | Uganda | Senior Associate

spacuto@ENSafrica.com

+256 784 116 125