A recent decision by the High Court of Uganda in the case of Simbamanyo Estates Ltd v Equity Bank (U) Ltd, Equity Bank Ltd, and Bank One Ltd has provided significant clarity on the regulatory landscape for cross-border syndicated lending in Uganda. This judgment, which closely follows the Supreme Court's guidance in Ham Enterprises Ltd v Diamond Trust Bank (U) Ltd, offers much-needed certainty for both local and international financial institutions engaging in syndicated and foreign lending to Ugandan entities.
Background
The dispute arose from a series of loan facilities advanced to Simbamanyo Estates Ltd between 2012 and 2017 by a consortium of banks, including both local and foreign institutions. Simbamanyo challenged the legality and enforceability of these loans, alleging fraud, misrepresentation, illegality, and impropriety in the mortgage process and the validity of the loan agreements and securities. The key legal questions were whether Ugandan entities are prohibited from borrowing from foreign lenders under the Financial Institutions Act, (Cap 57) and whether such foreign lenders require licensing or approval from the Bank of Uganda.
Key legal findings: Legality of foreign lending
The High Court, relying on the Supreme Court's reasoning in Ham v DTB, held that the Financial Institutions Act does not prohibit Ugandan entities from borrowing from foreign lenders, nor does it prohibit foreign entities from lending to Ugandans. The Act's regulatory requirements apply specifically to "financial institutions" as defined, namely, companies licensed to conduct financial institution business in Uganda, particularly where lending is from money deposited with the financial institution by its customers." Foreign institutions that lend to Ugandans do not fall within this definition and are not regulated by the Bank of Uganda for such lending activities. The Bank of Uganda's own guidance confirms that foreign banks are not required to establish a representative office in Uganda to conduct non-deposit taking lending activities.
Syndicated lending and agency arrangements
The Court recognised that syndicated lending, where multiple banks, both local and foreign, participate in a single loan, is a lawful and established commercial practice. The appointment of a local bank as agent or security trustee for foreign lenders in such arrangements is lawful and not subject to the Financial Institutions (Agent Banking) Regulations, 2017. The agency relationship in syndicated lending is a matter of contract between financial institutions, not a regulatory licensing issue.
The Regulations are designed for retail agent banking, enabling financial institutions to extend services to the public through human agents in areas lacking bank branches. In contrast, agency arrangements in syndicated lending are inter-bank relationships, not relationships between a bank and a human agent serving the public. There is no statutory or regulatory requirement for such inter-bank agency arrangements to be licensed or approved under the Agent Banking Regulations.
Impact and conclusion
The High Court's judgment, in line with the Supreme Court's decision in Ham v DTB, provides robust affirmation that the Financial Institutions Act does not prohibit foreign lending to Ugandan entities, nor does it require foreign lenders to be licensed by the Bank of Uganda unless they are taking deposits in Uganda. Syndicated lending and agency arrangements between local and foreign banks are lawful and not subject to the Agent Banking Regulations. The regulatory framework is designed to protect the integrity of the Ugandan financial system, not to restrict legitimate international financial transactions or cross-border lending.
These decisions offer certainty for international and syndicated lending in Uganda, thereby facilitating cross-border finance and supporting international trade and investment by eliminating unnecessary regulatory obstacles. Financial institutions engaging in large-scale, cross-border syndicated loans can proceed with confidence that such arrangements are lawful.
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