Notes on the law on Banking in Uganda

B ANKING AND NEGOTIABLE INSTRUMENTS

HISTORY AND CONTROL BANKING IN UGANDA

Pre independence banking features
The banking system at pre-independence was foreign owned and
dominated by foreign banks –standard chartered bank, Grindlays bank,
Barclays bank, Bank of Baroda and Bank of India. These banks were
very conservative in their lending policies often giving loans on strict
commercial criteria. The banking system was however discriminatory
against Africans /Ugandan. Africans had not come into the age of
accessibility of acceptable banking security –land titles, life insurance
policies Bills of exchange. The banking system was also discriminatory
because Africans were more engaged in high risk and non-commercial
ventures such as agriculture and animal husbandry on a small scale. In
1950 cognizant of the inadequacy of the foreign owned banks, the
colonial government passed the Uganda credit and savings Bank Act
and this created the first savings and credit Bank. The rationale for the
Bank was to enable facilitation of the loans to Africans to further
agriculture commercial exports, building and cooperative society
purpose.

In 1955 we had the banking Act launched and some of the traits/tenents
/characteristics of the Banking Act included;
-      Banks were required to have paid up capital of 1 million UGX
-      Register with the registrar of companies
-      The banking Act provided for sector regulation
However there was no central bank to regulate, monitor the work of the
other banks. the luck of a CB was in part due to the fact that hitherto
 that the foreign banks that had their own management systems,
supervision rules and prudential regulations.

The independence Era 1960 -1962-1993- A nascent banking sector

The 1950 savings and credit bank did not sufficiently meet the financial
needs of Africans. The foreign banks were however unrelenting in their
approach and continued to provide short term loans for finance of foreign
trade and the provision of working capital to foreign owned companies or
companies owned by African nonresidents. Africans and Africans owned
businesses were largely excluded from borrowing.
The independent government regarded the prevailing circumstances as
development averse and reformed the banking sector through legal and
structured reform in order to fill the financing gaps and influence
allocation of credit directly through administrative controls.

In 1965, the savings and credit Bank was restructured in to the Uganda
commercial Bank, UCB extended banking services to rural areas and
steadily expanded its branch network through out the 1960’s and 70’s.
in 1966 Bank of Uganda was launched as the central Bank. According to
the 1966, Bank of Uganda Act;
-      The central Bank had powers to control credit of commercial Banks
-      The central Bank could control the purpose for which loans were
granted and the class of business.
-      The Act set the maximum time for loan and advances
-      The act also set the time and maximum
-      The central bank also had powers to determine the rates of interest,
commercial banks could not charge interests depending on risks and
neither could they use the interest rates to attract deposits.
-      However the CB was not given power to burry minimum paid up capital
or adjust it.
1969
1969 saw the repealing of the 1955 Banking Act with radical under
hones of post-independence quota and quote modes of doing business.
Some of the tenents of the 1969 Act included;
i) Only companies registered in Uganda were allowed to carry on
banking business
ii) The min-paid up capital was 20 million
iii) Banks were to make mandatory period returns
iv) Capital reserves were built into the Act (security that then Bank
must maintain as they lend out money)
v) The Act prohibited unsecured credit facilities and loans.
However the Act had some limitations.

i) The Act did not address prudential regulation (prudential

regulation is regulation of deposit-taking banks/institutions
and supervision of the conduct of such institutions and sets
down requirements that limit their risk taking)( prudential
regulationis a type of financial regulation that requires financial
firms to control risks and hold adequate capital as defined by
capital requirements, liquidity requirements, by the imposition
of concentration risk (or large exposures)limits and by related
reporting and public disclosure requirements and supervisory
controls and process). The aim of prudential regulation is to
ensure the safety of depositors funds and keep the stability of
the financial institutions.
ii) The Act did not address insider lending (this is a bank makes a
loan to one or more of its officers or directors and in many
jurisdictions it is required that the provisions of these loans
should be the same as or comparable to those of the bank’s
 customers. This ensures fairness and limits the access of the
bank’s funds to insiders.
iii) The Act did not address the quality and experience of bank
managers.
iv) Licensing and revocation of a license was left at the discretion of the
ministers with no guidelines to offer directions for the process.
v)Inspection of banks was not assigned to any particular body the task
was given to the ministers and the CB to carry out non-mandatory
periodic inspections.

1972 Cooperative Bank

1972 the cooperative Bank is set up. The emerging local banks /UCB&
cooperative Bank) were exported to fill the developmental objectives
based of governmental development plans. In the early 1970’s the
government of Uganda, in an attempt) acquired 49% shares in the
foreign banks with exception of standard chattered bank. As a reaction
the foreign owned banks closed down all the up country branches and
left operational branches in Kampala. These gave room for the local
banks to establish themselves in the Mrkt. By 1991 cooperative bank
had 24 branches across the country, UCB had 190 branches and held
50% of the overall total banking deposits.

Note
The expansion of the banking sector was based on a very inadequate
legal framework which would threaten systematic collapse of the banking
sector nearly a decade later. An alternative argument says that the legacy
of Bch colonial rule and the dominancy of foreign owned banks- because
these banks were subsistence and they had their own prudential
management rules challenged the creation of a robust legal framework
for the sector. The flip side however, the government at the time should
have exercised diligence when rolling out local banks.
 Commercial banking environment
The rapid expansion of the cooperative society Bank and UCB – operated
in an environment that was short of experience and professional
personnel. These circumstances coupled with the weak regulatory
framework undermined the banks efficiency and internal controls. The
banks were managed in the absence of prudential lending regulations-
leading UCB to accumulate non performing loans of 75% of it total
portfolio. The 1990’s also stored an increase in the number of players
including Greenland Bank, Teffe Bank, CERUDEB and many others.
However the increase in the number of banking players was increasingly
met by banking challenges including but not ltd to;
i)             Automatic liquidity support for UCB from the central Bank
ii)UCB lacked proper accounting procedures,
ii)           Political influences and patronage –this was supplemented by
corruption practices.
iii)          Lack of regulation
iv)          Since most loans were politically influenced, borrowers repayment
feedback was poor
v)            Absence of supervisor/advisor
vi)          Lack of proper accounting procedures across the sector

Political instability
Weak law regime.

In response to the above, the 1993 financial institutions Act addressed

some of the Banking challenges.
i)It increased paid up capital to 500 m UGX for local banks and for
foreign banks 1 billion UGX, the exception was that, that could be
reviewed by the ministers.
ii) Minimum capital requirement could be adjusted to respond to
inflation.
Iii) There were restrictions to insider lending, large credit exposure,
investment in the non bank business and purchase of real estate.
IV)Bank of Uganda had power to conduct or site and off site supervision.
V)Licensing powers were taken away from the ministers and given to
BOU

Read
Financial institutions Act and note. Depositor protection and monetory
stability
i) Under capitalization
ii)Prohibited transaction
iii)Insides lending
v)Deposit protection fund
vi)Competition
vii) Licensing
vii) Credit reference bureau
ix)Cooperate governance

CONTROL OF THE BANKING SECTOR IN UGANDA

The supervision of banking business in Uganda is a preserve of Bank of
Uganda –central Bank. This mandate is denied from A 151 and A 162 of
the 1995 COU.
A 161. Bank of Uganda shall be the central bank & shall be the only
authority to issue the currently of Uganda A 162(1) says that bank of
Uganda shall;
a) Promote and maintain the stability of the value of the currency of
Uganda
b) Regulate the currency system in the interest of economic progress in
Uganda.
c) Encourage and promote economic development and the efficient
utilization of the resources of Uganda through effective and efficient
operation of a banking ad credit system.
d) To all such things not consistent with this article or may be prescribed
by law.

A162 (2)
In performing its functions the BOU shall conform to this constitution
but shall not be subject to the direction or control of any person or
authority.

S.4 of BOU cap

The funds of the bank shall be to formulate and implement monetary
policy directed to economic objectives and achieving economic stability.
The bank shall;
i) Maintain monetary stability
ii) Maintain and external asset reserve
Iii) Issue currency notes and coins
iv) Be the banker of the government
v) Act as a financial advisor to the government and manage public debt
vi) Advice the government on monetary policy
vi) Be the banker of financial institutions
viii)Be the cleaning house for cheques and other financial instruments
for ..
ix) Supervise, regulate, control and discipline all financial institutions
x) Participate in economic growth and development programes.

Note
Banking business involves the acceptance of deposits of money from the
public, repayable.
On demand
At the expiry of a fixed period
After notice and employment of such deposits by lending or the risk of
the person accepting such deposits.
The business also involves presenting the another bank for payment,
cheques, drafts of orders received from customers in the capacity of the
banker.

The public has interests in the manner in which banking business is

conducted. Good financial systems lead to creation of a strong/rebust
banking sector with a ripple effect on economic and social development.
Since the banking sector plays a crucial role in development it is
important that the sector be controlled and regulated to ensure that it is
properly organized and run on sound commercial principles.

Financial institutions Act FIA (2004)

In order to carry on banking business in ug, the proposed company must
come under the defn of a financial institutions. S 3 of FIA 2004, “a
financial institution is a company licensed to carry on or conduct
financial institutions business in Uganda and include a commercial
bank, a merchant bank, mortgage bank, post office savings fund, credit
institution, a building society, an acceptance house, discount house, a
finance house as any institution which by regulation is classified as a
financial institution by the central bank.
S.4 of FIA, A person shall not transact any deposit taking or financial
institution business in Uganda without a valid license granted under the
FIA Act.
S.7 of FIA – the company that wants to do such business must use the
word “bank’
S10- A Company proposing to copy on financial or banking business in
Uganda shall apply to central Bank for a license under the Act.
Only cos. incorporated under the Co’s Act are eligible to apply for a
banking license.

Qn
a) What documents are a prerequisite when submitting an application for
a license under the FIA
b) Describe the licensing process.

S 26-28 set the capital requirements for carrying out business with the
financial institutions. The minimum capital requirements is 4 B.
minimum paid up capital is no les the 1 bn shillings for non-bank.

S26 (3) The minister may review the requirements by SI with approval of
parliament.
On going capita adequacy requirement S 27(1)
Liquid Assets A liquid Asset is that asset that can be converted into each
quickly with minimal impact to the price received- liquid assets are
generally regarded as cash because their prices are relatively stable when
sold on the open market. S 28(6).

S40 talks about foreign exchange holding, probitions and restrictions

S29-39
S 53(1)-Initial control and vetting of directions
Approval of appointment of an auditor make annual reports is seen in S
03
S79 –supervision and control, inspection by the C.B
S80-81 looks at reporting –this info. That must be submitted by a
financial institutions to the central Bank.
S97-99 and 88 look at liquidation, seizure and reorganization of banks

ELIZABETH KOLOLO V BANK OF UGANDA (2000 KALR 389

SIR -120 talk about amalgamation and transfer of shares
Cleaning house essentially is the transfer of money between banks – the
central bank is mandated to make regulations for the participation in the
cleaning house and for the cleaning of cheques and other instruments. A
bank may only participate in activities of a clearing house on permission
of authorization of the CB and after recommendation by the Uganda
Bankers Association (UBA0

Read about Uganda Banker Ass.

Code of banking practice in ug 2005
Mukubwa 6-48

OTHER LEGAL ATTEMPTS TO DEFINING A BANK

There are different legislation that have attempted to define a bank for
example the Bills of exchange Act cap 68 notes –unless the context
otherwise require bankers include a body of persons whether
incorporated or not who carry on the business banking. Does this def.
hold merit? Especially when considering that an unincorporated entity
can engage in the business of banking.

The evidence (Bankers book Act) provides that a bank or banker means
any person carrying on banking business in Uganda
The stamps Act- Banker means a bank and any person acting as a
banker
The BOU Act- defines the Bank as the bank of Uganda established under
Act.
The FIA defines a bank to mean any co licensed to carry on financial
institutions business as its principle business and includes all branches
and offices of that company in Uganda.
Please also review the capital mkts authority Act as well as the money
lenders Act.
Case law defn of bank
Case law like the statutes have not defined the word bank but have listed
the xtics of the banking business.
In the case of UNITED DOMINIONS TRUST LTD V KIRKWOOD (1966) 2
QB 431 it was noted that there are three characteristics usually found
in bankers today;
i)They accept money from and collect cheques for their customers and
place them to their credit
ii) They honour cheques for orders drawn on them by their customers
when presented for payment and debit their customers accordingly,
iii)They keep current accounts or study of that nature in their books in
which the credit and debits are entered.
No one and no body corporate or otherwise can be a banker who does
not;
a) Take current account
b) Pay cheques drawn on himself
c) Collect cheques for his customers

There are also other characteristics which don’t make a banker …

soundness, stability and Probity.. and in case of doubt one should look
at the reputation of the company amongst intelligent commercial men.
(Lord Denning)
in the same case Lord Diplock added that to constitute the business of
banking the banker must also understake to pay cheques drawn upon
himself (the banker) by his customers in favour of third parties up to the
amount standing to their credit in the current accounts and to collect
cheques for his customers and credit the proceeds to their current
account.

In the case of RE SHIELD’S ESTATE, GORVENOR AND COMPANY OF

THE BANK OF IRELLAND, it was noted that the real business of the
banker is to obtain deposits of money which he may use for his profit by
lending it out again. General common law xtics include
i) Conducting accounts on which they deposit money on customers and
which shows debits and credits.
ii) Lending out money deposited with it for its profit
Iii) Collecting cheques or orders for customers
iv)Payments cheques drawn on the bankers
Customer
The term customers is not easy to define however the major factor of whether or
not a person is a customer will depend on whether or not such a person has/will
have an account with the Bank.
There must be some self of account either a deposit or current account or similar
relationship to make a person a customer of the bank.

N.B
Duration is not of the essence when determining the relationship between a
banker and customer.
REF. GREAT WESTERN RAILWAY CO V LONDON COUNTY BANKING
CO. LTD (1901) AC 414
If a person has no account with the bank and is not about to open on account
with the bank, the fact that the bank renders some casual service to or for him
does not qualify him as a customer. However an agreement to open an account
is sufficient to constitute a person a customer of a bank.

Court held that a person need not have a series of dealings with the bank before
he acquires the status of a customer. He becomes a customer the moment the
bank receives money/cheque and agrees to open an account for him.
A person becomes a customer of a bank when he/she goes to the Bank with
money/cheque and asks to have an account opened in his/her name and the
bank accepts the money /cheque and is prepared to open an account in the
name of that person. After that he/she acquires customer’s status.

NOTE: WOODS Y MARTINS BANK LTD (195() 1 QB 55

NATURE OF THE RELATIONSHIP BETWEEN BANK& CUSTOMER

Read FOLEY V HILL, this case provides the genesis for the principle that the
relationship between banker and customers is that of contract.

Joachimson v swiss bank corp . There is only a contract between banker &
customer& the term of the contract include the following.
a) The bank undertakes to receive money and collect bills for its customer’s
accounts
b) The proceeds received are not to be held in trust for the customer but the bank
borrows the proceeds and undertakes to repay them.
c) The promise to repay is to repay at the branch of the bank where the account is
kept and during working hours.
d) It includes a promise to repay any part of the amount due against any written
order of the customer addressed outstanding in the ordinary course of business
for two or three business days
Q. It is term of the contract that the bank will not cease to do business with a
customer, except upon reasonable notice.
f)The customer undertakes to exercise reasonable care in executing his/her
written orders so as not to mislead the bank or participate forgery.
g)The bank is not liable to payable full amount to the customers balance unless
where this is demanded.

REF SUDAN COMMERCIAL BANK V EL –ASADO

Special types of relationships customer and bankers
Duties owed by the customer to the banker
 1. The customers have to give all necessary information available to his
banker.

The customers must exercise reasonable care to inform the bank of his or her
account has been forged. This means if any forgery arrives, the customer owes a
duty to the bank
This was stated in the LONDON JOINT STOCK BANK V
Reasonable care.
The customer has a duty to the banker to exercise reasonable care in drawing
cheques so as not to perpetuate as the customer and banker are under a
contractual relationship it is obvious that is drawing a cheque, the customer is
bound to take usual and reasonable steps to prevent forgery. If a cheque a
written order in drawn in such a way as to facilitate or enable a third party
increase the amount on the cheque through dishonest means, forgery is in such
circumstances is not a remote but a very natural consequence of negligence the
customer is liable.
The duty of the customer to exercise reasonable care in executing his/her written
order so as not to mislead the bank or to facilitate forgery. The same principle
was laid down in the case of
SOACHIMSON V SWISS BANK CORPORATION (1921) 3 KB 110
This duty had already been recognized in the case of LONDON JOINT STOCK
BANK V MAC MILLAN AND ATHUR 1915 AC 77, where the House of Lords
said that a cheque drawn by a customer is in point of law a mandate to the
banker to pay the amount according to the tenor of the cheque.

It is therefore beyond dispute that the customer is bound to exercise reasonable

care in drawing the cheque and if he/she does in a manner which facilitate
fraud, he/she is guilty of breach of duty as between himself or herself and the
banker, and he then will be responsible to the banker for any loss sustained by
the banker as a natural and direct consequence of his breach of duty.
In MOBIL (U) LTD V UCB 1982 HCB 64, a cheque was drawn
The customer has a duty to the banker for disclose forgeries against the bank in
relation to his account as he discovers them.
In GREEN WOOD V MARTIN BANK LTD (19330 AC 5.
Court held that if the customers known that an entry Maa is his or her passbook
or statements of account is wrong but keeps silent, the customers will be
precluded from asserting the error once the bank has changed its position.
In BROWN V WESTMINSTER BANK 1964/2 LLOYD RPT
Read TAI HIN COTTON MILLS CASE

Does the customer banker relationship give rise to an action in tort?

DUTIES TO TAKE PRECAUTION AN HIS BUSINESS TO PREVENTS FORGED
CHEQUES FROM BEING PRESENTED FOR PAYMENT.
NIGERIA ADVERTISING SERVICE LTD V UNITED BANK OF AFRICA, court
noted that a customer who knows that his or her signature is being forged on
cheques has a duty to his or her bank to inform it of such fact without waiting
until the banks position is altered for the worse and if he/she fails to carry out
this duty , he/she will be estopped from contending against the bank that
payment should have been made on later forged cheques, but if the customer is
merely silent for a period after learning of the forgery of his or her signature
during which time the position of the bank is not altered, his or her conduct
cannot be held to be an admission or adoption of liability or an estoppels.

Ref. BANK OF ZAMBIA V AG OF ZAMBIA

Note. A bank may be entitled to charge a customer for payment made on a
forged cheque if the customer, negligent conduct was the proximate cause of the
loss being such that it induced the bank to pay on the forgery.
A customer must make a written demand for payment in a particular form of
accounts. The written order or cheque had to be addressed to the bank and
branch where he customers account is held. However contemporary banking
presents unique traits. There is no strict adherence to this rule and customers can
in most banks access this money during normal banking his dependent on each
particular bank and working days.

5. The customer must go to or instruct his or her bank when he/she requires
payment
It is not incumbent on the banker to seek out the customers.
This is contrary to the normal lending requirements whereby it’s the debtor who
should seek out his creditor to effect payment.

6. Before making demand for payment, the customer must be sure that his
account has the necessary funds to meet his or her order. Alternatively he/she
can (customer) make prior arrangements for over draft facilities to be available
from his/her banker.

7. A customer must pay reasonable interest and omission and other charges for
banking services.

RIGHTS THAT ACCRUE TO A CUSTOMER BY VIRTUE OF BEING A

CUSTOMER TO THE BANK
i)Right of privacy
ii)Repayment of money
iii)payment of interest by the customers by banker
iv)Keep the customers money in safe custody
v) Repayments of money on demand.
vi)Give a bank statement to a customer
DUTIES OWED BY A BANKER TO A CUSTOMER
According to papets law on banking, the duties owed by the bank to the
customers relate to the carrying out the banker’s payment instructions, dealing
with securities deposited with the bank and the way the bank handles
information concerning the affairs of the customer.

1. NON DISCLOSURE

TOURNIER V NATIONAL PROVINCIAL AND UNION BANK OF

ENGLAND (1924) 1 KB 461
Exception
i) Disclosure under compulsion of law –the guidance (Bankers Book) Act cap 7
ii) Duty to the public to disclose
iii) Interests of the bank require disclosure say during a suit brought by a
customer thus will be justified to disclose the details.
Sunderland v Barclays bank ltd (1938) L DAD 163
iv) When consent is given by the customer to the bank to disclose information
and details.
Rights to a banker
i) It has the right to retain the profits it makes from lending out the customers