Financial sector needs some trust to drive its growth

Monday October 12 2020

DTB Centre, Home to DTB Bank, Uganda in Kampala. PHOTO | MORGAN MBABAZI | NMG

By The EastAfrican

The region and the global financial community in general, are still reeling from the aftershocks of two major events that reverberated from an epicentre in Uganda.

Sitting in Kampala, the Commercial Division of the High Court on October 7, reached a $33 million decision against regional lender Diamond Trust Bank. The decision arose from a dispute over a syndicated loan Diamond Trust Kenya extended to Uganda’s Ham Enterprises, owned by businessman Hamis Kiggundu, through its Ugandan affiliate.

At some point, Diamond Trust Uganda declared the loan non-performing triggering a protracted legal battle that culminated in Wednesday’s decision. Hamis contends that the bank had continued to make illegal deductions from his accounts and refused to release his mortgage long after he had discharged his responsibilities as a borrower.

Predictably, the court’s decision was popular among Kampala’s business community who see Uganda’s largely foreign-owned financial sector as predatory. Beyond the direct impacts for DTB, the ramifications for the Ugandan economy are deeper.

Owing to its shallow nature, a predominance of short-term funds and regulatory requirements, there are funding requirements that not a single financial institution in Uganda can handle on its own.

From corporate loans to large public infrastructure projects it has become the norm for local lenders to arrange syndicated loans to meet demand for anything with a funding requirement larger than $50 million. With the uncertainty resulting from the decision, mobilising funding for pending projects in the oil and gas sector will be a tall order.


It also negatively impacts Uganda’s risk profile and money will become a lot more expensive for Uganda as loan sharks fill the void between apprehensive global capital markets and desperate borrowers.

The court was in a difficult position. The case presented a classic conflict between justice and economic sense. If indeed DTB acted improperly, the court had a duty to protect Hamis. The fear of losses to the economy cannot justify even an iota of underserved pain imposed on an individual. Attention should now shift to the appellate courts where this dispute will ultimately be settled.

Still in Kampala, hackers made off with yet unknown sums of money when they broke into the IT core of a financial aggregator that facilitated payments between the two largest telecom companies and a couple of banks. Not unique to Uganda, the event nevertheless raises questions about security consciousness around Uganda’s cyber networks. It took the victim companies more than 48 hours to wake to what was going between their networks.

The fintech industry has played an important role in bringing formal financial services to a lot more people. The participation of indigenous fintech communities in this process is important not only for retention of value but the development of independence in the new knowledge economy.

In that context, the benefits delivered by local fintechs far outweigh the cost of the occasional heist. But such events undermine confidence and are a major setback for a local industry that is still in its infancy. To grow, the industry needs a reasonable degree of trust, and integrity of systems for participants at different levels to feel secure.

An effective system for punishing deviation will be necessary for effective deterrence.