Banks paying price for trillions locked up in commercial court  

It has been difficult to ignore the noise coming from the banking sector and by extension, the Judiciary.  

What has largely been a shadowy court that is less known to the public, seems to have all of a sudden invited a lot of attention due to some hair raising decisions taken inside the Nakasero-based court. 

Beyond the decisions, is the amount of money that is locked up in the Commercial Division of the High Court with some cases taking years before they are heard or disposed of. 

It is shocking. Isn’t it? That a case can be locked up in court for more than 15 years. Well, this seems not to be unique to the Commercial Court, it is a challenge to the entire court system and a serious danger to the larger economy. 

Why should a case that involves huge sums of money, sometimes borrowed through banks, take a decade to be deposed of? 
Well, this might be a subject for another day, but sifting through records at one of the realms of justice - the Commercial Court - one cannot ignore the growing crisis that rotates around cases filed for or against commercial banks. 
Therefore, today we shall focus our attention on this area, looking at the amounts involved and the laissez-faire attitude with which cases are handled. 

The dilemma
The principle of the judicial system dictates that once a dispute has been taken to court, there shall be no action until it is disposed of. 

Essentially, this ties the hands of any party involved but of course relieves another while hurting the other. 

It is understandable that most of the cases that involve banks are filed to challenge a fore closure after a dispute that often rotates around a borrower who has failed to meet their end of the bargain to repay a loan.  

Therefore, as a result, billions of shillings, much of which is borrowed money, especially, from banks is tied up in the legal system. 

A 2020 report by Francis Gimara, the former president of Uganda Law Society, indicates that more than Shs5 trillion is locked up in commercial disputes with some cases taking as long as 15 years before they are disposed of.  

The report notes that on average, the Commercial Court receives about 2,000 cases annually, with only half of these going up to disposal. 

According to the 2013 annual report, the Commercial Court Division, received 2,417 of which 1,747 were disposed of. 
The bulk of these originate from or are against banks involving borrowed money and other advances. 
 
Indeed, cases that involve banks have attracted the most noise, perhaps because they involve a lot of money or are filed for or against high profile individuals. 
Take for instance the DTB versus Ham case. Whereas it has only been at the Commercial Court for about three years. But it might take some good years before it is disposed of. 

In an attempt to recover close to Shs41b from Ham, Hamis Kiggundu, a Kampala businessman, dragged DTB to the Commercial Court over a technicality and alleged siphoning of his accounts.  

Indeed, the trial Judge - Justice Peter Adonyo - granted Kiggundu’s prayer and awarded him several compensations, among which include a refund of Shs120b, which had allegedly been siphoned out of his accounts by DTB, and a return of his titles that had ben deposited in the bank in return for a loan facility. 

The ruling in itself was hair raising. But it had effectively banned syndicated financing, a key facility in banking and financial markets. 
However, on appeal, the ruling has been set aside by the Court of Appeal that ordered for a retrial of the case given that the trial judge had ignored evidence on file. 

In the ruling, justices Richard Buteera, Kenneth Kakuru and Christopher Madrama noted that Justice Adonyo had erred in law when he faulted the lending arrangement and allowed Ham to recover Shs34b and $23.2m (about Shs84b) from DTB Uganda and its parent company in Kenya – DTB Kenya. 

“The judgment of the trial judge is set aside,” Deputy Chief Justice Buteera ruled, remitting the case back to the Commercial Division of the High Court to be heard by another judge. 

However, Ham, acting through Fred Muwema, his lawyer, has already filed an appeal before the Supreme Court and has vowed, if it means it is where he will get justice, he will go to up the East African Court of Justice. 

“The Court of Appeal did not just refuse to pronounce itself on the illegalities committed by DTB, in an act derogating its appellate mandate. We have instructions to file an appeal in the Supreme Court. But we shall also be filing suits in courts in Kenya and in the East African Court of Justice,” Muwema said just hours after the Court of Appeal ruling.  This is not the only case that Ham, under Kiggundu, is involved in. There are several of them.

So, close to or more than Shs300b is tied up around one individual, who might be using the law as a delaying tactic, as he deploys the money under dispute to further his business interest.

Wilbrod Owor, is the executive director at Uganda Bankers Association (UBA). He believes the ruling of the Court of Appeal was a relief to the banking sector and provides an opportunity for the court system to set the record straight. 

“We are optimistic,” he says and notes the ruling will, for now, encourage flow of financing and investment while rebuilding confidence in the commercial bank system and money markets. 

Muwema, is also representing Stirling Construction, Stirling Civil Engineering and Stirling Civil Engineering Kenya in which, in 2015, he filed a case against Standard Chartered Bank and Spencon Services at the Commercial Court. 

The case, in which Standard Chartered Bank is accused of unlawful detention of property titles that were used to guarantee financial facilities, has remained unresolved for now close to six years yet it involves huge sums of money.

Alternative dispute resolution  
It is such frustrations that make Owor believe that there should be alternative dispute resolution channels. 

The banking sector, he says, has been engaging with the Judiciary and the Commercial Court as well as alternative dispute resolution systems to find better ways of resolving what is slowly turning into a crisis. 

“The more money is tied up in bad loans or court, the more it erodes capital and reduces lending appetite. So it discourages lending,” he says. 

In fact, he says, Covid-19 has worsened things and hopes there will be alternatives to the court systems to settle disputes that might come along with a weakened economy. 
According to UBA, the level of non-performing loans had by June 2020 increased by Shs123b. 

Impact on lending  
The impact of prolonged court cases is far reaching and touches risk aversion, an area that in most cases, changes the way banks lend out money. 

During an engagement early this year, Anne Juuko, the Stanbic Bank chief executive officer, said the structural challenges such as prolonged legal relief are a contributor to high interest rates given that banks incorporate such risk into lending rates. 
Majority of banks lend to customers at a rate of or above 20 per cent even as there have been several efforts by the Central Bank to bring down interest rates. 

Therefore, there is need for a solution is worked upon to reduce time of case disposal. 
It is also important that there is an alternative system in which cases of commercial nature are evenly and quickly disposed of. 

According to the monetary policy report by Bank of Uganda, in the quarter to February, loan applications fell significantly to Shs3.8 trillion from Shs4.5 trillion, which could be a signal of a drop in demand for credit.  

Number of cases filed 
According to the 2013 annual report, the Commercial Court Division, received 2,417, of which 1,747 were disposed of. 
The bulk of these originate from banks either as plaintiffs or defendants.
The Francis Gimara 2020 report notes that on average, the Commercial Court receives a total of 2,000 cases annually with only half of these going up to disposal per annum.                                                                               

How case backlog impacts commercial bank lending                            

Out of the Shs3.8 trillion applications, only Shs2.5 trillion worth of loans were approved falling from Shs2.6 trillion, mainly due to an increase in risk aversion.

Mr Owor says the outstretched delay of court resolutions on the banking system has a bearing on lending appetite as banks hold back lending to some customers, who they believe has an associated risk. 

Such instances, also drain banks of lending capital, thus holding onto the little that they have to prime customers. 
 The growing case backlog can partly be blamed on the lack of  adequate human resource, which has been a perennial problem in the Judiciary.

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