ISLAMIC UNIVERSITY IN UGANDA

KIBULI CAMPUS
FACULTY OF LAW
COURSE OUTLINE
LAW OF BANKING AND NEGOTIABLE INSTRUMENTS

ACADEMIC YEAR: 2017/2018

SEMESTER: 1
LLB: III
LECTURER: MR………………………………… LL M, LLB
(MAK),
DIP.LP. (LDC), PODITRA.-ADVOCATE.

OBJECTIVES
This course aims at giving students a clear understanding of the legal framework within
which the banks are allowed to operate in Uganda. The course will explain the services
which banks offer, the nature of banker- customer relationship and the obligations it
imposes on either party. The remedies for breach of respective duties will be examined.
The nature, importance and uses of negotiable instruments (bills of exchange and cheques
will) also be discussed to acquaint students with the law relating to credit creation which
is essential for modern economic activities, and a civilized living and to increase their
suitability for a career in legal profession, banking sector, or private entrepreneurship.
The course will further expose students to the law relating to securities for bank
advances. Aspects about modern developments in banking sector like Islamic Banking, e
banking, Anti-Money laundering etcetera will also be considered in the due course.

CONDUCT OF THE COURSE

The course will be conducted through lectures, discussions, moots, presentations, etcetera.
Attending all lectures is a must. Students are advised to consult the reference books and statutes
indicated below. Other relevant reading materials are set out in the reading list or will be availed\
to students in due course. Students are advised to access the relevant Web-sites on banking and
related topics for current legal issues like Ulii.org., Uganda law library online etc. This course
outline is a guide and directional, not exhaustive of the research work expected from students.

ASSESSMENT
The examination will consist of course work of 30% and final written examination of 70%.
 TOPIC 1 & II
Institutional Framework of Conducting Banking Business in Uganda
======================================================
1. Introductory Background
Uganda’s banking law is modeled on the British English law and systems. This is
premised on our historical colonial background.

The pre-independence commercial banking sector was dominated by five foreign owned banks.
These banks were very conservative in their lending policies, usually giving loans on strict
commercial criteria. As a result, they tended to lend to larger companies and to finance trade all
of which were owned and controlled by foreigners. They discriminated against Africans because
the majority could not meet strict commercial criteria as they did not have acceptable securities
such as land titles.

The colonial government reacted to the perceived inadequacies of foreign owned banks by
enacting, in early 1950s, the Uganda Credit and Savings Bank Act which created the Uganda
Credit and Savings Bank. This was the first public sector bank in Uganda to facilitate loans to
Africans in furtherance of agriculture, commercial, buildings and co- operative society purposes
in Uganda.

2. Independence Era 1962-1993

Dissatisfaction with foreign controlled banks continued after independence. The
independent government regarded this as irrational and unjust and a constraint on its
development objectives.

The primary objective of the reforms of the banking sector in 1960s and 1970s was therefore to
fill the financing gaps, and influence the allocation of credit directly through administrative
controls.

In 1965 the Uganda Credit and Savings Bank was transformed into Uganda Commercial Bank
(UCB) which is now Stanbic Bank. Other commercial banks included local operations of Bank
of Baroda, Barclays Bank, Bank of India, Grindlays Bank and Standard Chartered Bank.

The Bank of Uganda was set up on 15th August 1966 the day the Uganda Currency was first
issued. Prior to 1966, Uganda was using the East African Currency. Co-operative Bank was set
up in 1972. It was owned by Co-operative societies. These banks were expected to fulfill
development objectives based on government development plans.

In early 1970s the government acquired 49% shares in the foreign owned banks, except Standard
Chartered Bank. The foreign owned banks reacted by closing down in couple of cases and
closing their branches in the rest of the country except for those in Kampala. The vacuum left
was filled by U.C.B and the Co-operative bank which embarked on expansion programmes. By
1991 the Co-operative bank had 24 branches and U.C.B had 190 branches and the latter held
about 50% of all bank deposits.
3. Commercial Banking Environment
The rapid expansion of U.C.B. and the Co-operative Bank in the 1970s and 1980s was carried
out when there were shortage of professional and skilled personnel. This
development coupled with weak regulatory framework undermined managerial efficiency and
internal controls even further. Both banks were imprudently managed leading the U.C.B to
accumulate Non-Performing Assets (NPAs) of around 75% of its total loans’ portfolio by 1990s.

This situation was brought about by a number of factors. There was automatic liquidity support
for U.C.B. from the Bank of Uganda, the bank did not have proper accounting procedures and
there was political influence on lending policies of the U.C.B. and corruption. Because the loans
were politically influenced, the borrower’s repayment discipline was very low. Political
instability, protracted economic crisis, loan disruptions and a weak legal regime made the
lending very difficult.

All these factors influenced the way new private sector banks such as Greenland Bank, Teffe
Bank, ICB, CERUDEB etc. were operated. This situation persisted until 1993 when the Financial
Intuitions Act, No. 4 of 1993 Cap 54 and the new Bank of Uganda Act No. 5 of 1993 were
enacted. The Central Bank was given wide powers to carry out both on-site and off-site
supervision with a range of options to take against violations.

he licensing of Banks was taken away from the Minister and given to the Central Bank with
clear guidelines regarding screening of directors, shareholders, competence and integrity of
management and approval of auditors appointed by the Banks. The Central Bank used its powers
under the statute to intervene in Nile Bank and Sembule Bank and to close down Teffe Bank
(1994), International Credit Bank (1999), Co-operative Bank (1999) and Greenland Bank (1999)
all of which were insolvent by intervention time. A judicial Commission of inquiry was set up to
find out the immediate causes and failure of the last three banks but the report has not been made
public as yet. What is noteworthy, however, is that when these banks were closed, the
government directed that all depositors should be paid whether they were protected or not at
the expense of the tax payers.

Uganda Commercial Bank was initially privatized through a sale of its majority shares to a
purported company from Malaysia. However, it later came to light that the actual buyer was a
partnership between Greenland Bank (which itself was insolvent) and some politically
connected individuals. A second privatization sale was conducted, with the Standard Bank
emerging as the winner.

The privatized Uganda Commercial Bank was merged with the former Grindlays Bank which
Standard Bank already owned and renamed Stanbic Bank. The combined new bank is now
known as Stanbic Bank (Uganda) Limited. As of now, Stanbic Bank (Uganda) Limited is the
dominant commercial bank in Uganda. Nile Bank Limited, an indigenous institution, was
acquired by the British conglomerate, Barclays Bank in January 2007 and merged with its
existing Ugandan operations to form the current Barclays Bank (Uganda).
A moratorium on new commercial bank licenses was declared in 2004, with the passage of the
Financial Institutions Act, 2004 in Parliament, which established new banking institution
classification guidelines.

The financial sector is categorized in a tiered framework where institutions are classified.
Currently there are four tier classes of financial institutions as outlined below;

Tier I –Commercial Banks

This class includes commercial banks which are authorized to hold cheques, savings and time
deposit accounts for individuals and institutions in local as well as International currencies.
Commercial banks are also authorized to buy and sell foreign exchange, issue letters of credit
and make loans to depositors and non-depositors.

Licensed commercial banks in Uganda include the following (as of August 2017);

1. ABC Bank
2. Barclays Bank
3. Bank of Africa
4. Bank of Baroda
5. Bank of India (Uganda)
6. Cairo International Bank
7. Commercial Bank of Africa (Uganda) Ltd
8. Centenary Bank
9. Citibank Uganda Limited
10. DFCU Bank
11. Diamond Trust Bank
12. Ecobank Uganda
13. Equity Bank
14. Exim Bank (Uganda) Ltd
15. Finance Trust Bank
16. Guaranty Trust Bank (Uganda) Ltd
17. Housing Finance Bank
18. Kenya Commercial Bank
19. NC Bank Uganda
20. Orient Bank
21. Stanbic Bank
22. Standard Chartered Bank
23. Tropical Bank
24. United Bank for Africa

Tier II –Credit Institutions

This class includes Credit and Finance companies. They are not authorized to establish checking
accounts or trade in foreign currency and therefore are not members of the Clearing house. They
are authorized to take in customer deposits and to establish savings accounts. They are also
authorized to make collateralized and non-collateralized loans to savings and non-savings
customers. These include (as of August 2017);
 1. Mercantile Credit Bank
2. Opportunity Uganda Limited
3. Post Bank Uganda
4. Top Finance Bank Uganda Ltd

Tier III –Microfinance Deposit Taking Institutions (MDIs)

This class includes microfinance institutions which are allowed to take in deposits from
customers in the form of savings accounts. Members of this class of institutions are also known
as Microfinance Deposit-taking Institutions or MDIs and regulated under the Micro finance
deposit taking institutions Act, 2003. MDIs are not authorized to offer accounts or to trade in
foreign currency. They include (as of August 2017);

1. FINCA Uganda Limited

2. Pride Microfinance Limited
3. UGAFODE Microfinance Limited
4. EFC Uganda Ltd
5. Yako Microfinance Ltd

Tier IV –Non Deposit taking institutions

These institutions are not regulated by the Bank of Uganda. They are regulated under the Tier 4
Institutions and Money lenders Act, 2016. The Act establishes the Uganda Microfinance
Regulatory Authority, provides for the licensing and management and control of money lending
business, establishes the SACCO Stabilization Fund, establishes the SACCO Savings
Protection Scheme etc. They are not authorized to take in deposits from the public. In 2008, it
was estimated that there were over 1,000 such institutions in the country.

D. The Financial Institutions Act, 2004

Enactment of the Financial Institutions Act, 2004 stemmed from the banks failures between 1994
and 1999 and the need to strengthen the regulation of banks.

A Judicial Commission of inquiry into closure of banks was constituted under Legal Notice
No.4/1999 of 29th October, 1999 and Sworn on 7th February, 2000.

The terms of reference of the commission among others were to;

a) Examine the primary causes of the failure and subsequent closure of International Credit
Bank (ICB), the Greenland Bank Ltd (GBL), and the Cooperative Bank Ltd.
b) Make recommendations to strengthen the prudential regulation and supervision of banks
and strengthen the Bank of Uganda’s intervention policy towards failed banks in order to
protect depositors and public funds.

The recommendation of the commission were incorporated in the Financial Institutions Act,
2004.