Defaulting on foreign loans risking Uganda’s profile - BoU   

There is an increase in the number of cases challenging foreign lenders. PHOTO | FILE

What you need to know:

  • In the last five years, three high profile cases, including Ham versus DTB, Simbamanyo versus Equity and Simba Properties versus Vantage Capital have challenged the legality of foreclosures by lenders that are not registered in Uganda. 

Bank of Uganda Director for Research Adam Mugume has said the increasing rate of default on foreign sourced loans increases Uganda’s risk profile. 
In notes shared with this publication in response to inquires on an increase in court cases challenging the legality of foreclosures by foreign lenders and their implication, Dr Mugume said because Uganda operates in a global economy, any default in terms of servicing a foreign loan is not only harmful to the business but to the entire economy. 

“It raises risk premium to lending to Uganda. Fulfilling contractual obligations by businesses goes a long way in reducing risk premiums and, therefore, reduces the cost of credit from abroad,” he said, noting that beyond impacting foreign lending, default also impacts foreigners partnerships,  foreign direct investment and offshore investments. 
Uganda, Dr Mugume said, currently attracts an annual average of $1.2b in foreign direct investment while close to Shs800b and Shs2.7 trillion is held as deposits in banks and government securities by offshore investors, respectively.
 
The revelation comes at a time when a number of businesses are challenging the legality of foreign-based lenders, including banks and venture capital funds, some of which, after trying to foreclose on properties against which defaulted loans were advanced, have been declared none-existent while others have been found not to have powers to execute foreclosures because they are not registered, according to Ugandan laws. 

In the last five years, three high profile cases, including Ham and others versus Diamond Trust Bank, Simbamanyo versus Equity Bank and Simba Properties and others versus Vantage Capital, have challenged the legality of foreclosures enforced by lenders that are not registered in Uganda. 

In the case of Ham versus DTB, which has since been appealed, court found that DTB Kenya had no legal standing to enforce a foreclosure since it was not a registered in Uganda while in Simbamanyo versus Equity Kenya, there have been several application many of which have since been overtaken by events with properties against which loans had been advanced already disposed of. 

Last month, a miscellaneous application filed by Vantage Capital barred the South African lender from enforcing a share takeover in Simba Properties. 
Vantage had lodged the applications on claims that efforts to enforce the share takeover had been frustrated by Uganda Registration Services Bureau (URSB). In a legal opinion, court found URSB had acted illegally in refusing to register the application.  

Such cases have created mixed reactions with some experts condemning their outcomes given that they are making it difficult or even expensive for Ugandans to access capital from foreign lenders. 
Dr Tumubweine Twinemanzi, the Bank of Uganda executive director in charge of supervision, in an interview last week, told Daily Monitor that it was difficult for the Central Bank to estimate how much is held by businesses in foreign loans, noting that much of the money comes in as private equity. 

However, he said, the rising business exposure had created the need for banks to reveal to the Central Bank transactions that are repaying loans abroad.
“You have raised an important question. Beginning June, we could be forced to request commercial banks to include in their data how much is going out [of the country] on loan repayments. Generally, most borrowing is private equity, which sometimes even local banks don’t get to know or understand,” he said in response to how much Ugandan businesses are holding in foreign loans. 

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