Danger lurking in cross-border banking


Real estate developer Acorn Properties has been barred from selling a property in Nairobi to recover a debt of Sh134 million. FILE PHOTO | SHUTTERSTOCK

In November 2020, I wrote an article about judicial overreach in global financing emanating from a case in the Ugandan High Court. 

A Ugandan businessman borrowed a series of loans running in the tens of millions of US dollars from a Ugandan subsidiary of a Kenyan bank, part of the borrowing of which was lent by the Kenyan parent bank.

It is fairly common throughout the world for local subsidiaries of banks to draw on the strength of the parent bank’s balance sheet simply because of the capital lending limitations of the subsidiary in its jurisdiction. 

The local subsidiary bank then becomes a collection agent for the principal and interest payments and remits the same to the parent bank.

As happens with paper billionaires who are long on the Range Rover purchases and short on the cash flow mechanics, the Ugandan businessman fell into deep trouble and couldn’t service his loans.

He and his lawyers sued the banks claiming that attempts at collecting the loan repayments were tainted with fraud and, wait for it, that the Kenyan parent of the bank was not licensed to conduct the business of a financial institution in Uganda by the regulator Bank of Uganda.

Hence the loan from the Kenyan parent was illegal from the onset. 

Please note that when the funds were being spent, there was no issue of their legality, but when it came time to repay, the businessman clutched his pearls, his sensibilities deeply offended and said that the funds were lent to him illegally.

Anyway, a Ugandan High Court stupefyingly agreed with his position and the judge ruled that indeed the Kenyan parent bank did not have the legal licence to conduct business in Uganda.

Consequently, the loan was invalidly issued and further he ruled that the Kenyan bank did not have authority from the regulator to appoint its Ugandan subsidiary as a collecting agent.

Even further, the judge then ordered that all the properties that had been mortgaged as securities by the businessman be released back to him forthwith and that all the monies that the bank had recovered from the borrower in the course of trying to enforce payment be reimbursed.

The Kenyan banking parent and its Ugandan subsidiary rushed to the Ugandan Court of Appeal and the judgment was overturned. 

However, the Ugandan businessman, fuelled by the moral umbrage of a man deeply wronged went to the Supreme Court to seek judicial relief, which the court gave its ruling last Tuesday.

With the intuition of Koitalel arap Samoei, the great Nandi Orkoiyot who prophesied the coming of a hissing black iron snake that would change the destiny of the blissfully uncolonised natives of Nandi, the Ugandan businessman petitioned the Supreme Court to stop giving its judgment a week before it was slated to rule.

But an oncoming train cannot be stopped and the Supreme Court went ahead to rule that in the first instance, the High Court judge should have given an opportunity to the two banks to be heard on the issue of illegality of the loans, rather than summarily dismiss the issue and give judgment in favour of the businessman.

Thus the judge erred in law in finding the credit transactions illegal. 

Secondly, there is no law that forbids foreign financial institutions from providing credit facilities to any financial institution or person in Uganda.

This point here is critical because when the High Court judge ruled that a foreign institution could not lend to a Ugandan entity, he was essentially saying that even commercial borrowings by the Ugandan government or credit facilities from international banks to local Ugandan banks used to lend to Ugandan nationals were illegal.

All because one paper billionaire woke up and smelt the roses on this absolute travesty of an alleged cross-border financial injustice.

The danger posed by this erroneous and highly miseducated ruling of the High Court judge was that it would isolate Uganda in totality from the global financial credit system. 

International lenders to local financial institutions could call a “force majeure” eventuality and demand their loans back as it was now illegal to receive such funds in Uganda.

Finally, the Supreme Court also agreed with the Court of Appeal that the High Court judgment requiring the banks to reimburse the businessman for the loan repayments made and for the release of the mortgage securities were without legal basis and should be tossed into the fire of jurisprudential nonsense.

We wait with bated breath as to what the businessman will do next, as I have no doubt that with this level of creativity, the courts have not yet checkmated this debt-dodging grand chess master.
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