By Brian Kalule,Dominic Indokhomi,William Kasozi Tuesday, October 20, 2020

On 7 October 2020, the High Court of Uganda issued a ruling (Decision) in M.A No. 64 of 2020; Ham Enterprises Uganda and Others v Diamond Trust Bank (U) Ltd and Diamond Trust Bank (K) Limited, which severely affects banking law and business in the country.


Ham Enterprises Ltd, Kiggs International Ltd and Hamis Kiggundu (jointly the Borrowers), Ugandan enterprises and a Ugandan individual, borrowed money from Diamond Trust Bank Kenya Ltd (DTB Kenya).

The lending happened in Kenya and the facility agreement was subject to Kenya law. For purposes of collection, Diamond Trust Bank Uganda Ltd (DTB Uganda) was appointed as Facility Agent with mandate to debit the Borrowers' accounts in DTB Uganda. The lending was secured by mortgages over various properties belonging to the Borrowers in Uganda with DTB Uganda as the Security Trustee.

Over time, the Borrowers defaulted on their obligations and DTB Kenya issued Notices of Default as a precursor to enforcement of the securities. At this point, the Borrowers  filed a suit in the High Court in Uganda contending, among others, that the lending by DTB Kenya was illegal because DTB Kenya conducted financial institutions business in Uganda without a licence issued by the Bank of Uganda (BOU) and, alternatively, DTB Kenya  engaged in agent banking business in Uganda without the approval of BOU as is required by the Financial Institutions Act 2004 as amended (FIA).

The Borrowers also consequently sought orders to release the charges on the mortgaged properties. In their joint defence, DTB Kenya and DTB Uganda admitted that DTB Kenya was not licensed in Uganda but contended that the facility extended to the Borrowers did not amount to conducting financial institutions business in Uganda and that DTB Uganda’s role was not one of agent banking, within the meaning of the FIA.

With that ‘admission’ the Borrowers filed an application to strike out DTB Kenya’s and DTB Uganda’s written statement of defence for being a ‘perpetration’ of illegalities. It is from this application that the Decision arose.

The Decision

The judge made the following findings:

  • DTB Kenya issued credit facilities in Kenya to Ugandan entities without the approval of BOU. DTB Kenya and DTB Uganda committed illegalities when money facilities were availed by DTB Kenya to the Borrowers without prior authorisation of BOU even if such funds were availed outside Uganda.
  • Section 117 of the Financial Institutions Act, 2004 requires a foreign bank to seek the authorisation of BOU before it can engage in activities such as lending and extending credit facilities.
  • It was illegal for any person to lend any money held on deposit whether within Uganda or outside Uganda without a licence.
  • DTB Uganda illegally acted as agent of DTB Kenya and conducted financial institutions business on behalf of DTB Kenya without a licence issued by BOU as required under the FIA and the Financial Institutions (Agent Banking) Regulations 2017 (Agent Banking Regulations).
  • DTB Kenya acted illegally when it failed to obtain BOU’s authorisation before establishing a representative office in Uganda.

The judge also made obiter remarks to the effect that syndicated financial institutions business by DTB Uganda and DTB Kenya was designed to avoid the seeking of a licence from the relevant authority, which is clearly illegal.

He also issued directives to the BOU, as implementing authority of the FIA, to take such measures to protect the Ugandan economy from what he called  ‘illegal haemorrhages’ and ‘uncontrolled flow of financial resources’ and also safeguard what he termed Uganda’s ‘nascent banking business industry’.

As a result, the judge determined that the joint written statement of defence filed by DTB Kenya and DTB Uganda was a perpetuation of illegalities and he therefore ordered for the defence to be struck off.

As a consequence, judgment was entered for the Borrowers wherein the judge declared that the credit facilities between the Borrowers and DTB Kenya have been settled at law. He further ordered DTB Kenya and DTB Uganda jointly to pay UGX 34 295 951 553/= and USD 23 467 670.61 to the Borrowers as money unlawfully taken from the Borrowers’ accounts. Also that the loan facilities were void ab initio and unenforceable. Lastly the judge made orders releasing the mortgaged properties.

The merits of the Decision

We believe the judge made the following errors of law:

  • It was an error to arrogate to BOU powers to approve a lending that occurred out of jurisdiction merely because the Borrowers were Ugandans. The FIA does not grant BOU such powers and the FIA does not have extra-territorial application. By comparison, the Data Protection and Privacy Act, 2019, expressly provides that it applies as long as the data subjects are Uganda citizens irrespective of where the data collection happens. The FIA has no equivalent provisions.
  • It was an error to describe the DTB Kenya lending as doing financial institutions business in Uganda. The 2016 Amendment to the FIA defines financial institutions business to include ‘lending or extending money held on deposit or any part of that money’. The FIA is a territorial law, which means that such deposits have to be taken in Uganda to constitute financial institutions business in Uganda. This definition could not apply to DTB Kenya, which took no deposits in Uganda and therefore did not lend or extend credit money held on deposit.
  • It was an error to characterise contractual agency by a facility agent as agency banking. The appointment of DTB Uganda as collection agent under the facility in question was contractual agency.  The 2016 Amendment to the FIA defines ‘agent banking’ as the conduct by a person of financial institutions business on behalf of a financial institution. In the Financial Institutions (Agency Banking) Regulations 2017, only Financial institutions which are licensed to conduct Financial Institutions business in Uganda, may apply to the Bank of Uganda for approval to conduct Agency Banking in terms of the provisions of the regulations. It follows that DTB Kenya  could not be said to require authorisation to appoint DTB Uganda as its agent. We believe the judge confused facility agent, a purely administrative role, with agent banking.
  • It was an error to rely on Section 117 of the FIA and in effect, without taking any evidence, find that DTB Kenya had opened a representative office in Uganda without the authority of the BOU. The reliance on Section 117 is not justified as DTB Kenya opened no such office. At the very least, such a finding could not be made on the back of the ‘admissions’ set out in DTB Kenya’s and DTB Uganda’s joint written statement of defence. On the contrary, DTB Uganda is its own independent entity with its own financial institutions licence and was not purporting to act as a representative office of DTB Kenya.
  • It was procedurally improper to enter summary judgement on the contested amounts and in circumstances where fraud was alleged. It is elementary law that fraud has to be proven strictly. Thus, even if DTB Kenya’s and DTB Uganda’s joint written statement of defence had been struck out, the onus remained on the plaintiff to prove the alleged fraud and also prove the amounts involved. The judge ought to have set down the matter for formal proof.
  • Related to the above, under Uganda law, any benefit obtained under a void agreement has to be restored. It means therefore that the Borrowers had to refund any benefit (the principal) it received from DTB Kenya under the alleged illegal transactions. It is not clear to us why no such orders were made, in effect punishing DTB Kenya for the alleged illegality but rewarding the Borrowers for the same.
  • It is also not clear to us why no objection was taken on the jurisdiction of the High Court of Uganda to hear a claim arising out of an agreement subject to the laws of Kenya and the High Court of Kenya.

The effect of the Decision

At face value, the Decision means that the legality of any lending to Uganda or Uganda domiciled entities without BOU approval can be challenged. From the Decision, anything done in Uganda by a foreign bank which constitutes ‘financial institutions business’ without the approval and or authorisation of BOU would be illegal.

In the context of this case, any money lent in Uganda by a foreign bank, whether bilateral or syndicated, would be illegal and therefore void.

Under Uganda law, a party who benefits from a void transaction has an obligation to restore that benefit. Therefore, any credit extended under an illegal agreement must be refunded (excluding interest).

Because the Decision is a judgement in personam, which binds only the parties to the case, it is not binding on other transactions or lendings. Any other person who wishes to rely on the Decision must file a separate claim in Court and use the Decision as authority.

The Decision, being a High Court decision, is binding only on courts lower than the High Court and does not bind another High Court judge or any of the superior courts who can depart from it. It can only be persuasive.

Therefore, parties to other similar transactions who do not wish challenge the legality of such transactions are at liberty to perform them in accordance with their terms.

Appeal and stay of execution

An interim stay of execution of the Decision has since been obtained by DTB Kenya and DTB Uganda. This effectively restrains the implementation of the Decision until the appeal against the Decision is determined or until such further orders of the Court.

The intended appeal has a high likelihood of success as a result of the errors in the Decision identified above.

Moreover, the BOU has issued a statement to the effect that it does not regulate credit extended using deposits not taken in Uganda; it does not regulate credit extended out of Uganda by foreign banks; it is not necessary to establish a representative office in Uganda to be able to lend in Uganda by foreign banks; and that it has no mandate over contractual agency which is not agent banking. This further undermines the correctness of the Decision.

We understand that an intending appellant has filed a Notice of Appeal and also requested a typed record of proceedings.

Once the court provides the record of proceedings, the appellant will have 60 days to file its appeal in the Court of Appeal. The time from filing the appeal and hearing of the appeal to judgement cannot be determined, but in our experience it can take up to three years.

A party dissatisfied with a decision of the Court of Appeal can further appeal to the Supreme Court. This secondary appeal process is identical to that of the court of appeal. Given that the Decision was a form of summary judgement, it is likely that the superior courts will direct that the matter be tried on the merits and therefore remit the file back to the High Court.

Can a similar position be validly upheld in Kenya?

We do not believe that a position similar to the Decision can be validly upheld in Kenya. Kenyan law regulates financial businesses that have an element of ‘deposit taking business’ and requires such businesses to be licensed by the Central Bank of Kenya (CBK).

Deposit-taking business entails (a) accepting money on deposit and (b) lending money at the risk of the person lending the money or (c) financing the activities of one business from such funds. The law does not have extra-territorial application and only applies to financial businesses carried on in Kenya.

In view of the above, lending in itself constitutes a financial business that does not require licensing in Kenya. Therefore, foreign and local lenders who do not engage in deposit taking business in Kenya are not required to be licensed by the CBK.

The Central Bank of Kenya (Amendment) Bill, 2020 (CBK Bill) proposes the regulation of financial services, which include credit services, by the CBK. If the CBK Bill is enacted into law in its current form, lending activities would be subject to regulation by the CBK.


Since the Decision has been appealed and a stay of execution obtained, we recommend that business continue as usual in respect to credit facilities extended by non-Ugandan entities.

Those that were extended prior to this judgement should be operated as usual. Those in the pipeline should be conducted in accordance with the law before the Decision, since the correctness of the Decision or otherwise will not be conclusively determined soon.

In the unlikely event that the Decision is upheld by the superior courts, the impact will not be immediate since the Decision is a judgement in personam. Counter-parties to such transactions will have to file their own independent claims.

Moreover, it will be possible to obtain any relevant authorisations retrospectively. In such cases, we recommend that authorisations from BOU be sought through the collective lobbying efforts of the Uganda Bankers’ Association as this is an industry issue.