The harm that the HAM vs DTB Court ruling might have on the economy was certainly one of the major discussions of the past week. While the Court ruling did not disclose much of the subject matter besides the legality of the transaction, there is no doubt that HAM and his group obtained a loan from DTB Kenya.
Therefore, the first implication on the economy is linked to the possibility that HAM experienced difficulties in repaying the loan, which triggered potential foreclosure on the collateral and the initial Court case. This suggests underlying vulnerabilities in the economy, including the nature of business and business persons, that may not support large investment projects. Depending on when the financial difficulties begun, the challenges to servicing the loan could have been amplified by the Covid-19 pandemic.
Second, the nature of business management has implications on the degree of trust that financial institutions can attach to some Ugandan business persons as well as protection from the legal and enforcement frameworks. Regardless of the legal facts, the financiers, bankers and others, are bound to make conclusions, which would be leaning on risk aversion. The fear of risk would be reflected in restraint of credit through rationing (refusing to lend to some persons/businesses) or high interest rates. Either way, the economy would suffer from insufficient credit that would halt critical investments.
Regulating Agent banking
Third, the requirement that Bank of Uganda (BoU) should license Agents of banks is akin to focusing on the letter rather that the spirit of the law. The intention of Agency banking was to take financial services closer to the low-income populations, whose transactions involve small amounts of money and hence cannot support a fully-fledged bank branch made of brick and mortar. The law was intended to authorise banks to identify, engage, supervise and monitor various types of business units (pharmacies and retail shops, among others) that could act as their agents in delivering a specified set of financial services. In order to allow for many agents to promote financial inclusion of the low income person, it was agreed that the BoU will not license the Agents as the banks would take full responsibility. The law did not anticipate that commercial banks (foreign or local) would act as Agents of each other as that would be a Principal-to-Principal, not Principal-to-Agent, relationship. Thus, the interpretation of the law by the letter rather than the spirit will significantly undermine financial inclusion, savings, deposit mobilisation, credit, economic growth and jobs.
Fourth, the ruling has implications on foreign-sourced funding through individual or syndicated loans by local Ugandan businesses, foreign direct investments (FDI) in the real sector or purchase of government bonds. It is common practice for an entity to obtain a loan from outside Uganda and transfer resources to a local bank to facilitate its business operations. Under the requirement of ‘Know your Customer’ (KYC) and legal provisions enforced by the Financial Intelligence Authority, both the borrower and local bank are supposed to disclose all details about the money transfer. These include the purpose and attendant conditions that may include transfer of loan repayments, or profits in the case of FDI, back to the source bank abroad.
The high frequency and large number of transactions between local and foreign banks would necessitate a general characterisation as regular bank services offered to customers that would require no additional authorisation from the Central Bank besides the said disclosure. The matter of taxation of proceeds from such transactions, though critical, is secondary to the financial transaction and should be addressed by the relevant authorities. A demand for specific regulation of each of such transactions is bound to increase the transaction costs, and reduce the volume and value of resources being transferred to Uganda for investment, trade and job creation.
Exchange rate, inflation
Finally, limitations on the inflow of foreign resources to Uganda, some of which come into the country as off-shore investments into government papers, purchase of shares in listed companies or support to insurance and trade by the private sector has implications on the exchange rate and inflation. A reduction in the dollar inflows will trigger depreciation pressures (loss of the value of the shilling) that can easily be passed on as an increase in prices given the higher cost of the dollar. Furthermore, the negative impact on revenues from government papers (especially bonds) would undermine security, service delivery and repayment of previous debt as part of it is repaid through new borrowing.
In conclusion, what may be a Court ruling between two business partners can trigger a chain of events that qualify as a typical case of the grass suffering when two elephants fight. The direct and indirect effects can arise from the real and perceived risks to doing business in Uganda. While the country awaits the outcome of the appeal process, the current ripples will continue to carry conversations on how best to enact, interpret and reform laws to create an environment that is supportive of all business actors to the benefit of the citizens.
The author is an Economist and lecturer at Makerere University.