Licensing Of Foreign Lenders In Uganda: Much Ado About Nothing

• Published date: 21 June 2023
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Financial Services, Trials & Appeals & Compensation
• Law Firm: ENS
• Author: Ms Rehema Nakirya Ssemyalo and Phillip Karugaba

The Supreme Court of Uganda gave its judgment last week in the much-anticipated appeal by Ham Enterprises against Diamond Trust Bank Uganda and Diamond Trust Bank Kenya. The court held that a lending transaction between a foreign bank and a Ugandan borrower does not constitute "transacting financial institutions business" as defined by the Financial Institutions Act 2004 ("FIA"). This finally clarifies that a foreign lender does not require a licence from the Bank of Uganda ("BoU") under the FIA in order to extend credit to Ugandan borrowers.

Regardless of the finding of the court on the alleged illegality, this does not absolve a borrower from repaying its debts.

Background

In 2020, the High Court shook the Ugandan market when it held that it was illegal for a foreign bank to lend money to a Ugandan borrower without a licence from BoU under FIA. The High Court further held the loan agreement between the foreign bank and the Ugandan borrower unenforceable.

Ham Enterprises (the "borrower") borrowed money from Diamond Trust Bank Uganda ("DTBU") and Diamond Trust Bank Kenya (DTBK). A dispute arose when the borrower defaulted on its loan repayments and the borrower instituted a suit in the High Court against DTBU and DTBK. At trial, the borrower argued that the loan agreements with DTBK were illegal and unenforceable due to DTBK carrying out financial institutions business in Uganda without a licence from BoU. The High Court agreed. The decision of the High Court threw the market into disarray, given the large number of foreign lenders to Ugandan businesses. The High Court allowed the borrower to escape liability on the loan and walk away without repaying the borrowed funds, inflicting financial loss to DTBK's investors.

The decision was appealed to the Court of Appeal and then to the Supreme Court.

The decision

The Supreme Court determined whether DTBK, as a foreign bank, engaged in transacting financial institutions business within Uganda and thereby required a license under the FIA.

The FIA prohibits a person from transacting any deposit-taking or other financial institutions business in Uganda without a valid licence. The court stated that the key criterion to determine if a person is transacting financial institutions business in Uganda is whether that person holds money on deposit from Uganda, from which it extends loans to borrowers.

In this case, the court found that the funds disbursed to the borrower had been transmitted by DTBK and were not...