Foreign loan default jeopardizes Uganda’s profile – BoU

Bank of Uganda research director Adam Mugume said the rising default rate on foreign-originated loans is increasing Uganda’s risk profile.
In notes shared with this publication in response to inquiries about an increase in court cases challenging the legality of foreclosures by foreign lenders and their involvement, Dr Mugume said that because Uganda operates in a global economy, any default in servicing a foreign loan is not detrimental only to the company, but to the entire economy.

“This increases the risk premium for lending to Uganda. Firms’ compliance with contractual obligations goes a long way towards lowering risk premiums and, therefore, lowering the cost of foreign credit,” he said, noting that beyond the impact on foreign lending , the payment default also has an impact on foreign partnerships, foreign direct investments and offshore investments.
Uganda, Dr Mugume said, currently attracts an annual average of $1.2 billion in foreign direct investment, while nearly 800 billion shillings and 2.7 trillion shillings are held in deposits in banks and government securities by foreign investors, respectively.

The revelation comes at a time when a number of companies are challenging the legality of foreign-based lenders, including banks and venture capital funds, some of which after trying to seize properties against which loans in default have been advanced, have been declared non-existent while others have been found not to have the power to execute foreclosures because they are not registered, in accordance with Ugandan laws.

Over the past five years, three high-profile cases, including Ham and others v Diamond Trust Bank, Simbamanyo v Equity Bank, and Simba Properties and others v Vantage Capital, have challenged the legality of foreclosures executed by lenders that are not registered in Uganda.

In Ham v DTB, which has since been appealed, the court found that DTB Kenya did not have the legal status to enforce a foreclosure as it was not registered in Uganda while that in Simbamanyo v Equity Kenya there were several claims many of which have since been overtaken by events with properties on which loans had been advanced already surrendered.

Last month, a miscellaneous petition filed by Vantage Capital barred the South African lender from forcing a takeover of shares in Simba Properties.
Vantage had filed the petitions on the grounds that efforts to enforce the takeover of the shares had been frustrated by the Uganda Registrar Services Board (URSB). In a legal opinion, the court found that the URSB acted illegally in refusing to register the application.

Such cases have drawn mixed reactions, with some experts condemning their findings as making it difficult, and even costly, for Ugandans to access capital from foreign lenders.
Dr. Tumubweine Twinemanzi, Executive Director of Bank of Uganda in charge of supervision, in an interview last week, told the Daily Monitor that it was difficult for the Central Bank to estimate the amount held by companies in the foreign loans, noting that much of the money comes as investment capital.

However, he said, growing corporate exposure has created the need for banks to disclose to the central bank transactions that repay overseas loans.
“You have raised an important question. From June, we may be forced to ask commercial banks to include in their data the amount that goes out [of the country] on loan repayments. Usually most of the borrowing is private capital, which sometimes even local banks don’t know or understand,” he said in response to the amount of foreign loans held by Ugandan companies.

James V. Hayes