Commercial Banks In Panic Mode After Court Ruled Out Syndicate Loaning In Tycoon Ham Fraud Case Ruling

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Commercial Banks In Panic Mode After Court Ruled Out Syndicate Loaning In Tycoon Ham Fraud Case Ruling
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Commercial banks in Uganda and other financial institutions are in Panic mode following the October 7th, ruling by the High Court Commercial Division judge justice Henry Peter Adonyo  in a case which involved city tycoon Hamis Kiggundu and Diamond Trust Bank(DTB), which caused outlawed syndicate lending.

The panic among financial institutions comes after High Court justice Henry Peter Adonyo ruled that DTB Kenya (DTBK) acted illegally in lending money to Ham Enterprises and the ruling has caused major implications on syndicate lending in Uganda’s staggering economy

Adonyo’s ruling forced Uganda Banker’s Association to come out in a joint statement that was released on Thursday showing their dissatisfaction with the ruling.

“Uganda Bankers Association has learnt of the judgement delivered yesterday 7th October 2020 in the High Court of Uganda (Commercial Division) arising from H.C.C.S No 43 of 2020 involving one of our members, Diamond Trust Bank (U) Ltd and related parties.

”Although the Association is yet to receive a copy of the detailed judgement, the ramifications of the judgement have sent shockwaves across the entire industry and related stakeholders premised on the following five preliminary areas of assessment;
a) As a result of the judgement & its implications, the syndicated portfolio currently at risk seated with commercial banks is over U.Shs 5.7 trillion(1.53 billion USD) of running facilities across various sectors including real estate, road construction, energy covering hydro-electric power, oil & gas and manufacturing among others. The above figure does not include pipeline transactions that were still being processed and have all been halted since judgement came out yesterday.
b) The above figures exclude syndicated lending to the government of Uganda who is the largest beneficiary of syndicated lending for various development programmes in the country.
c) The wide-sweeping nature & sheer weight of shockwaves the judgement has sent to our international partner agencies and lenders and the implications for the country as an investment destination.
d) The message this judgement is sending to other borrowers with foul intention who can now anchor their default on this judgement that declared syndication illegal.
e) The overall impact of this judgement on the economy.
The Chief Executives of all the 35 member institutions of Uganda Bankers Association that includes all the Tier I Commercial Banks, the Development Banks and Tier II & III (Micro Finance & Deposit-taking Institutions) supervised by Bank of Uganda have this morning resolved as follows;
1. To join Diamond Trust Bank (Uganda) Limited in its appeal at the higher court to determine the case on its merits.
2. To join Diamond Trust Bank (Uganda Limited) to file for a stay of execution of the orders of the Hon Justice as ruled yesterday.
3. To call upon the Central Bank of Uganda to pronounce itself on this matter.
4. To call upon the Executive Arm of Uganda Government through the Minister for Finance, Planning & Economic development and the Attorney General to pronounce itself on this matter, more so because they are the accountable officers for syndicated facilities contracted by Government including where foreign counterparts are involved and re-assure the financial sector, the international lending partners and the entire country of the commitment to continue honoring all debt obligations in line with agreed protocols.
5. To call upon our esteemed good borrowers & all customers to remain calm as appropriate action is undertaken to address the challenges arising from this specific judgement.
6. To call upon all our friends and stakeholders including Uganda Insurers Association, PSFU, UMA, KACITA, ULS, Members of Parliament, Civil Society, Uganda Investment Authority, Capital Markets Authority, Financial Intelligence Authority, Uganda Revenue Authority, Professional Bodies among others as well as the Judiciary itself to join us in addressing the implications of this reckless judgement and assist in avoiding the adverse effects this judgement could lead the country & economy into.’

The  ruling was as result of a lengthy suit in which Ham Enterprises sued Diamond Trust Bank Uganda and DTB Kenya for pilfering money from his accounts because of a Shs 39.7Bn loan which the businessman acquired to facilitate his businesses and serviced the loan, but the banks’ officials went ahead and illegally deducted billions of shillings from his account over a period of 10 years.

Tycoon Ham had acquired the money in four tranches: $6.2m, $3.2m, $458,604 and Sh2.8b from both DTB Uganda and DTB Kenya between February 2011 and September 2016.

In 2018, the loans were consolidated and were to run for five years, ending August 23, 2023, until Ham discovered that the Banks’ officials had been conducting illegal transactions on his accounts and decided to close them.

In his ruling, Justice Adonyo stated that DTB Kenya did not  have the license from Bank of Uganda as provided for under the Financial Institutions Act 2004 to transact syndicate lending with DTB Uganda, hence their actions were illegal, null and unenforceable by law.

Through his lawyer, Fred Muwema, Ham argued that DTBK was carrying out illegal banking business in Uganda by lending money to the first Plaintiff, Ham Enterprises, an accusation DTB was found guilty of.

The tycoon also stated that Diamond Trust Bank Uganda was “facilitating and abetting the illegal conduct” of Financial Banking Business for DTB Kenya in Uganda contrary to the Financial Institutions Act and well-knowing that it was and still is illegal.

In his verdict, Justice Adonyo also faulted DTB Kenya for appointing its counterpart in Uganda to collect the loan facility from Ham Enterprises without fulfilling the set legal requirements that would have facilitated the same due process to be undertaken, describing the appointment of agents as “illegal, unethical and breach of trust.”

He also stated that; “The Act contravened Financial Institutions Regulation number 5 and the first respondent (DTB Uganda) is culpable of breaking the law and is penalized for taking part in an unauthorized transaction.”

 

The Commercial Court’s ruling said that syndicated loans are illegal has since created a lot  of uncertainty around the financial future of several commercial banks that have been practicing syndicate lending for survival.

It is also reported  that Cairo Bank Uganda’s top executives called a crisis meeting on Wednesday evening to discuss the ramifications of the Ham Vs DTB ruling and the impact it poses on their loan portfolio.

It should be noted that Uganda banks’ syndicated loans amount to over Shs 3Tn but if written off, the financial sector could collapse, which would inevitably sink the economy.

Shortly after the ruling, Cairo Bank management said in a note to its stakeholders that, “The judgement has huge implications for the banking industry , for syndication, for Uganda as investment destination and capital flows.”

The note reads in part thus: “The Executive Directors had called to request us to URGENTLY assist with info before 5 pm. Info requested is value of syndicated loan portfolio at risk because of this judgement. This includes inter-company or group, or other independent non-resident syndicate partner funding. It includes both direct loan facilities as well as off balance sheet G LC lines, Guarantees etc.”

“The implications of the ruling on the banking industry would be massive, since there are at least 7 foreign banks in Uganda with huge market share that do syndication with parent balance sheets quite frequently.” a  source revealed

On whether syndicate lending is regulated by the Banking Act, the expert noted that it is common practice in the banking sector and governed by a syndication agreement between the local bank and the foreign parental arm.

A syndicated loaning, also known as a syndicated bank facility, is financing offered by a group of lenders—referred to as a syndicate—who work together to provide funds for a single borrower. The borrower can be a corporation, a large project, or a sovereign government. The loan can involve a fixed amount of funds, a credit line, or a combination of the two.

Syndicated loans arise when a project requires too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class.

Syndicating the loan allows lenders to spread risk and take part in financial opportunities that may be too large for their individual capital base.

 

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