Prime
Banks want deposit on disputed loan cases raised to 50 percent
Financial institutions want the Central Bank to increase deposits on disputed loans, arguing that too much money, which could be used for onward lending, is tied up in lengthy court cases. PHOTO | FILE
What you need to know:
- Therefore, banks have proposed that Bank of Uganda and Ministry of Finance review the Mortgage Regulations with the view of amending the law to increase the deposit to 50 percent.
Commercial banks have said the 30 percent deposited in disputed loan cases is too low compared to the principle.
Therefore, banks have proposed that Bank of Uganda and Ministry of Finance review the Mortgage Regulations with the view of amending the law to increase the deposit to 50 percent.
The increase, they argue, will be sufficient to save resources of supervised financial institutions needed for onward lending to other customers from being tied up in lengthy court cases.
“Increase the deposit from 30 percent to 50 percent for pending disputes [related to loan recovery] in court. Regulation 13(1) of the Mortgage Regulations provides for 30 percent while Regulation 13(5) provides for 50 percent. Both should be at 50 percent,” banks say in a report that is currently under review, noting that the 30 percent deposit is in most cases far less than the principal amount a financial institution has lent, which affects liquidity flow of banks.
Lengthy court cases remain a challenge to financial institutions, many of which have to wait for between five to 10 years before cases, which rotate around loan default, are resolved.
Last year, while launching the International Centre for Arbitration and Mediation 2020-23 strategic plan, Mr Patrick Gimara, the former Uganda Law Society president and a board member of the Centre, indicated that at least more than Shs5 trillion was locked up in commercial disputes with some cases taking as much as 10 years without being resolved.
On average, the Commercial Court receives about 2,000 cases annually with only half of these going up to disposal level per annum.
According to the 2013 annual report, the Commercial Division of the High Court, received 2,417 case of which 1,747 were disposed of.
However, the backlog, during the period grew to 4,165, which represented an average annual growth of 22.6 per cent.
The details above create a difficult financial position for a number of commercial banks, many of which depend on customer deposits and borrowed money for onward lending.
Therefore, banks want the threshold to be increased to 50 per cent given the lengthy trials that lock up resources for a long time.
However, the provision, which currently requires an applicant to deposit 30 percent of the loan amount has previously been challenged.
For instance, in a case in which Simbamanyo Estates challenged the sale of properties mortgaged to Equity Bank for a loan advance of Shs40b , Simbamanyo had challenged the legality of an order to pay 30 percent of the outstanding loan amount.
However, the application was rejected giving Equity Bank an opportunity to proceed with the sale in the event that Simbamanyo failed to deposit 30 percent of the loan amount.
The reforms
The proposal is contained in a raft of suggested reforms that banks, under Uganda Bankers Association (UBA), have drawn and handed over to Bank of Uganda for onward review.
The proposed refroms seek to improve the banking sector by regulating new financial components and repealing obsolete laws that cover, among others, governance, legal, compliance and digital financial services.
