Two weeks ago the commercial court made a controversial ruling in a case between Kampala businessman Ham Kiggundu and Diamond Trust Bank (DTB).
The highlight was the court ruling that a DTB loan to the businessmen that was executed by the parent Kenya bank was illegal as DTB-Kenya was not registered to do business in Uganda.
The court went on to reverse the payments the bank had made to itself from Kiggundu’s accounts when they claimed he defaulted on the loan.
Interestingly Kiggundu claimed he had repaid the loan. Anybody who has ever taken out a loan with a bank knows its unlikely, next to impossible, that you can repay their loan and the system does not register the payments. So who is fooling who?
It is
a detail that was lost in the larger picture of what the ruling meant for the industry and economy.
Kiggundu has been telling anyone who can listen how this is a conspiracy against the local businessman by foreign banks and will have dire repercussions for our economy.
It reminded me of the bank closures at the turn of the century, which mostly put paid to locally owned banks.
In all cases the banks had sunk under the weight of growing bad loans, to businessmen who didn’t think they needed to repay their loans. In addition a lot of red ink in the bank books were due to loans to related parties – directors and affiliated companies, that had gone bad.
In one case, the bank even illegally sold shares to the public and lost all the new owners money.
In those cases too the local bankers claimed it was a ploy by the foreign interests to stifle the growth of the local banking industry and the local business community by extension.
They say nationalism is the last resort of the scoundrel.
"Whenever people start making none business arguments to justify their incompetence or theft – the best way to rob a bank is to own one, they say, a red flag is raised in my mind....
Banks aggregate savers’ deposits and lend these funds to borrowers.
Following the closures in the late 1990s and early 2000s the laws were amended to increase the minimum capital from less than a billion shillings to now sh25billion or less than $10m.
This was in light of the growth in credit, the higher the capital the more the bank can lend without putting savers deposits at risk.
Also the banking regulations are such that no bank cannot commit more than 25 percent of its loan book to one borrower.
In the context of the Kigundu case where his needs were for $11m ( sh40b) you can see how few of our banks – foreign owned or otherwise, could handle him.
In addition no one single individual can own more than 25 percent of the bank, a safeguard against insider lending and other malpractices.
"The net effect of this ofcourse is that locally owned banks have fallen by the wayside – Ugandan businessmen seem incapable of coming together to meet these requirements....
The argument has been made that the requirements for locally owned banks should be eased, but that will only mean they wouldn’t be able to lend to the Kigundu’s of this world anyway.
There are structural issues in the financial sector, not least of all that it is dominated by commercial banks, who by their nature are not suited to lending to start ups, small business, agriculture and to long term projects.
Banks need to be better capitalised too. The sh25b minimum capital requirement may have been adequate 10 years ago but is now woefully inadequate.
The Kigundu case inadvertently is saying that in order not to borrow from abroad our banks have to better capitalised, further knocking out the locally owned bank.
And what is it about foreign owned versus locally owned banked?
"Are we saying that local banks don’t deserve to make profit or is it that with local banks we will be abled invoke non-business criteria – family and tribal ties, old boys network to get cheaper credit which we will dodge and duck not to repay?
See how that worked for Uganda Commercial Bank (UCB), Cooperative Bank and Greenland Bank to name the obvious ones.
The legal minds have been deciphering the case and Diamond Trust Bank will appeal the ruling.
That being said the case has raised interesting issues that will be handled in subsequent bank reforms – upping the capitalisation of banks, deepening the financial sector beyond commercial banking among others.
On our side of the counter let us also work towards developing a culture of loan repayment. When you borrow not only from the bank reorient your mind to pay back the loan. We will save a lot of drama that way.
Oh! I see another conspiracy. When you default on a loan these days the Credit Reference Bureau blacklists you making it difficult to borrow again or if you do, it would have to be at a higher rate.
