Address by Louis Kasekende (PhD), deputy governor, Bank of Uganda
At the Banking and Law Symposium organised by the Uganda Bankers Association (UBA) Golden Tulip Hotel, Kampala, March 23, 2018
The Principal Judge, Hon. Justice Dr. Yorokamu Bamwine, the Judge Court of Appeal, Hon. Justice Geoffrey Kiryabwire, the Honorable Judges of the High Court of Uganda here present, the Executive Director Financial Intelligence Authority, the Executive Director Uganda Bankers Association & Bank CEOs present, the President Uganda Law Society & Members of the Law Fraternity, members of the Judiciary, representatives of Development Agencies, ladies and gentlemen,
On behalf of the Governor, I would like to commend the Uganda Bankers’ Association (UBA), the Uganda Law Society and the courts of judicature for organising this very useful symposium, at which we have already heard many valuable insights into the challenges facing the implementation of commercial law in this country and proposals for addressing these challenges. I would also like to thank the UBA for inviting the Governor to address this symposium.
The Bank of Uganda has long had an excellent working relationship with the UBA which has generated a great many mutually beneficial initiatives over the years. More recently, the engagements between the Bank of Uganda and the Uganda Bankers Association have focused on the need to undertake decisive measures in reducing interest rates, which admittedly, remain high in real terms.
The establishment of the Credit Reference Bureau (CRB) that enables banks better access to reliable information about the creditworthiness of borrowers; increased leveraging of technology, greater transparency by banks with respect to their charges and interest rates; issuance of consumer protection guidelines; licensing of more institutions to generate competition coupled with financial inclusion strategies; are all intended to bring about a substantial reduction in the cost of credit and related increase in access to financial services in general.
One other key initiative, for which UBA must be commended, is the establishment of the Asset Reconstruction Company, to help with the management of non-performing assets and associated costs in the industry.
However, we recognise that sustainable reduction in interest rates can only be a result of resolving the bulk of causes of high operating costs that banks face, some of which emanate from outside the banking industry. We therefore applaud the government’s strategic undertakings in improving infrastructure and the efforts in improving the efficiency of the commercial justice system, which is the main focus of my address today.
The law plays a crucial role in a modern, market oriented economy. In such an economy economic agents – firms, employees, customers, etc – freely enter into commercial transactions with one another. Economic self-interest provides the motive for each of these economic agents to engage in commercial transactions; for example, a firm aims to maximise its profits. With some exceptions, which economists call externalities and which justify government intervention, the pursuit of economic self-interest by all economic agents in a market economy generates outcomes which maximise the economic benefits for the society as a whole.
The market, however, cannot operate efficiently in a vacuum. It requires an institutional framework which facilitates economic agents to enter into commercial transactions in a cost effective manner, so that all parties to transactions honour their obligations to other parties.
Without such a framework, agents may incur excessive costs in undertaking transactions in the market with the result that the transactions do not take place, and economic activity is, therefore, reduced. Given that a market economy has its foundation in private property, the institutional framework required for the efficient operation of a market economy must ensure stable, secure private property rights. Since the emergence of capitalism in the 18th century, scholars, including Adam Smith, Max Weber, Ronald Coase and more recently, Daron Acemoglu, have emphasised the centrality of property rights to the functioning of a market economy.
A crucial component of the institutional framework required for a market economy is the system of commercial law. Commercial law is of particular importance for the financial sector because of the nature of many financial transactions.
To a much greater extent than is the case for other sectors of the economy, financial transactions involve claims which are settled in the future. If I deposit money in a bank, I have a financial claim on the bank which will fall due at some future date. My confidence that the bank will honour its obligation to repay my deposit depends on this claim being legally enforceable, although that may not be the only prerequisite for my confidence.
The same principles apply when a bank lends money to a borrower. Unless the bank can legally enforce its claim for repayment of the loan, it would have no grounds for confidence that the loan will be repaid. In such circumstances, the transactions costs of lending become prohibitive for the bank, with the consequence that lending, and thus economy activity, will be curtailed.
In general, I think it is reasonable to conclude that Uganda has a solid corpus of commercial law on its statute books, which embodies similar principles to those found in the commercial laws of other market economies. In recent years Uganda has revamped many important pieces of legislation pertinent to commercial activity, including the Companies Act, the Contracts Act and the Financial Institutions Act. These acts are all in tandem with modern legal practice around the world.
The deficiencies of the commercial law in Uganda are to be found in its implementation and enforcement. The commercial courts are overwhelmed by a vast backlog of cases.
Last year, the Case Backlog Reduction Committee, chaired by Hon. Justice Richard Buteera, revealed that there was a backlog, defined as a case which has not been resolved for a minimum of two years, of around 3,000 cases in the commercial courts. It is estimated that, on average, commercial litigation requires a minimum of four years to be completed. Delays of this magnitude are extremely costly for financial institutions. Not only are loanable funds, which could be re-intermediated to other borrowers, tied up because commercial claims remain unresolved, but the costs incurred by financial institutions because of the delays in resolving commercial claims reduce the viability of their lending, which in turn raises the cost of credit or induces banks to curtail the volume of their lending.
It must be emphasised that the reasons for these huge delays in resolving court cases do not lie only in weaknesses within the judicial system itself. Claimants often clog up the judicial system with frivolous cases designed only to delay the enforcement of legitimate claims and then seek any opportunity to delay the disposal of these cases by the courts.
Under the leadership of the Chief Justice, Hon. Bart Katureebe, the judiciary is making strenuous efforts to reduce the case backlog, in all areas of the judicial system, through the Case Backlog Reduction Strategy. The strategy includes filling vacant posts in the judiciary structure, improving the performance of judicial officers, better management of the court system, strengthening the inspectorate of courts and instigating a policy of zero tolerance of corruption.
I want to applaud these efforts which the judiciary is making to improve the efficiency of the justice system, which will be of great benefit to all Ugandans.
Unavoidably, however, efforts to strengthen the court system are constrained by shortages of human resources and finance, as is the case in all branches of public service. This is why the initiative to set up an alternative Dispute Resolution Framework is so important and pertinent for expediting access to justice.
The Alternative Dispute Resolution Framework for the banking and financial sector, which will be run under the auspices of the Uganda Law Society Arbitration Centre, will help to expedite justice with respect to commercial law in Uganda through two channels. First it will offer an opportunity for litigants to settle commercial disputes without going through the commercial courts, and thereby much more quickly and almost certainly at much lower costs.
Of course, the Alternative Dispute Resolution Framework will only be of value for those claimants who genuinely want to settle their cases quickly and are prepared to abide by the judgment of the dispute arbitrators.
However, to the extent that claimants are willing to withdraw cases from the commercial courts and instead refer them to the Alternative Dispute Resolution Framework, the case load of the commercial courts will be reduced.
This will enable the commercial courts to more rapidly clear the backlog of cases and expedite the administration of justice in the commercial courts.
I want to commend the Uganda Law Society and its partners for their initiative to set up the Alternative Dispute Resolution Framework. I am confident that, once the framework is operational, it will make a substantial contribution to improving access to commercial justice in a timely manner. In turn this will benefit the banking and financial system, reducing the costs which financial institutions incur because of the long delays incurred in resolving commercial litigation. A reduction of costs will, in turn, make financial intermediation more commercially viable and thereby lead, over time, to an expansion of lending to the private sector.
Thank you for listening.