THE LEGAL AND INSTITUTIONAL FRAMEWORK GOVERNING THE MANAGEMENT OF COMMERCIAL BANKS I BY KYEYAGO EDWARD REG NO: LLB/ 14296/62/DU SUPERVISOR MR. EMMANUEL FEMI GBENGA AJAYI A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A DEGREE OF BACHELORS OF LAW KAMAPALA INTERNATIONAL UNIVERSITY DECEMBER 2010 DEDICATION To God for richly blessing me. To my loving mother Mrs. Mirembe Aida Kimumwe, my father Mr. Simba Herbert, grand mother Maleka Gladys, and my uncle Dr. Francis Maleka: they have all nurtured and supported me. Lastly, to the memory of my late grandfather, YK Maleka, who inspired me from childhood. DECLARATION OF ORIGINALITY I Kyeyago Edward, hereby declare that the work presented in this dissertation has not been presented in any other University, and where such m aterial is adopted, it has been duly acknowledged. PRESENTER: .... ~ .............. .... ..... KYEYAGO EDWARD (DECEMBER 2010) .... .... ...... ..... !.91£) bl\ MR. EMMANUEL FEMI GBENGA AJAYI ii ACKNOWLEDGMENT I am indeed grateful to the people who played important roles m the accomplishment of this research paper. My sincere gratitude and appreciation goes to my supervisor, MR. EMMANUEL FEMI GBENGA AJAYI for introducing me to this area of research and for the patience he displayed especially when my presentations were off-track. I deeply acknowledge the assistance given to me by Mr. Kintu Patrick of Bank of Africa, the library staff at Makerere University, Law Development Centre and Uganda Bank Institute. !'am also heavily indebted to Nakawala Helen, Kweyamba Ruhemba, Mpaka Amos, my wife Mrs. Kadama Jackline Kyeyago and Maureen Kiyuba who helped me to type this work and friends who supported me immeasurably in this work. However, although the above named people contributed to the accomplishment of this research, none of them should be held responsible for views, opinions and conclusions expressed herein. iii LIST OF ACTS Banking Act, Cap. 88 1969 Bank of Uganda Act, No.5 of 1969 Bank of Uganda Act, Cap. 51 1993 Bankruptcy Act, Cap. 71 Bills of Exchange Act, Cap. 68 Companies Act, Cap. 110 Constitution of Uganda, 1995 Financial Institutions Act, Cap. 54 Land Act, Cap 227 as amended Penal Code Act, Cap. 120 Anticorruption Act 2009 iv LIST OF ABBREVIATIONS B.O.U Bank of Uganda B.O.U. Act Bank of Uganda Act B.E. Act Bills Of Exchange Act F.I.A Financial Institutions Act I.C.B International Credit Bank I.M.F International Monetary Fund U.B.A Uganda Bankers Association U.C.B Uganda Commercial Bank U.B.J Uganda Bankers Institute U.C.C Uniform Commercial Code P.C Penal Code W.B World Bank v ABSTRACT The surprise closure of commercial banks in the last two decades has raised concerns about the state of affairs in the banking sector. There has been so much public outcry as members of the general public lost huge sums of money in the defunct commercial banks. It is for this major reason amongst others, that the researcher seeks to study the legal framework under which Commercial Banks in Uganda operates. This research shall also examine the role of the vanous institutions responsible for the management of commercial banks in Uganda. For a better understanding of the arguments in this paper, the strengths and weaknesses of the legal and institutional frame work will be concurrently analyzed, as well as their links to commercial banks in Uganda. vi TABLE OF CONTENTS DEDICATION ............................................................................................... i DECLARATION OF ORIGINALITY ................................................................ ii ACKNOWLEDGMENT ................................................................................ .iii LIST OF ACTS ............................................................................................ iv LIST OF ABBREVIATIONS ........................................................................... v ABSTRACT ................................................................................................. vi TABLE OF CONTENTS .............................................................................. vii CHAPTER ONE ............................................................................................ 1 1.0 Introduction .......................................................................................... 1 1.1 Statement of the problem ...................................................................... 5 1.2 Methodology .......................................................................................... 6 1.3 Justification for the research ................................................................. 6 1.4 Hypothesis ............................................................................................ 7 1.5 Objectives of the study .......................................................................... 7 1.6 Scope of the study ................................................................................. 8 1. 7 Chapterisation ...................................................................................... 9 1.8 Conclusion .......................................................................................... 10 CHAPTER TWO ......................................................................................... 11 The legal framework governing ................................................................... 11 Commercial banks ..................................................................................... 11 2.0 Introduction: ....................................................................................... 11 2.1 Historical Background of Banking ....................................................... 11 2. 1.1 Pre- Independence ............................................................................ 13 2.1.2 Post Independence ........................................................................... 15 vii 2.2. Evolution of Commercial Bank Laws .................................................. 18 2.3 The Law Relating to Commercial Banks in Uganda ............................. 21 2.3.1. The 1995 Constitution of Uganda .................................................... 22 2.3.2 The Bills of Exchange Act Cap 68 ..................................................... 23 2.3.3 The Financial Institutions Act-1993 ................................................. 26 2.3.4. The Bank of Uganda Act Cap. 51.. ................................................... 30 2.4 Critique of the Legal Framework. ......................................................... 32 2.5 Conclusion .......................................................................................... 36 CHAPTER THREE ..................................................................................... 37 3.0 Introduction ........................................................................................ 37 3.1 The Bank of Uganda ............................................................................ 38 3.2 The Uganda Bankers Institute ............................................................ .47 3.3 The Ministry of Finance ....................................................................... 51 3.4 Comments and Analysis ...................................................................... 53 3.5 Conclusion .......................................................................................... 56 CHAPTER FOUR ....................................................................................... 57 4.0 Conclusions ......................................................................................... 57 4.1 Recommendations ............................................................................... 58 Bibliography .............................................................................................. 68 viii CHAPTER ONE A general introduction to the law and institution governing Commercial banks in Uganda 1.0 Introduction. Owing to the commercial bank scenanos that transpired m Uganda in the last two decades, there is need to critically examine the legal and institutional framework governing the banking sector. In Uganda, commercial banks were established by our colonial masters; the British, and were generally aimed at promoting the colonial economy. These commercial banks were charged with the duty to mobilize all local surpluses not for the near future use by the local population. These surpluses were then repatriated to metropolitan Britain as surplus value gained from the colonies. Accomplished authors like A.W. Fleetwood, laboured to explain the grounds upon which these banks were established in Africa. That first, it was due to the ever-increasing trade in Africa. Secondly, it was due to the growing demands of the expatriate population and colonial government for banking facilities. Thirdly, it was the desire to overcome the cumbersome routine of shipping and carrying large quantities of currency to Britain and its metropole statesl In line with the fact that his argument holds some truth most commercial banks operating in Uganda then were actually expatriate 1 1 A. W Fleetwood: Money and Finance in Africa 6 h Edition Pg.43 1 banks based in Britain and its metropoles. These included the National Bank of India, which Opened branches in Entebbe, Jinja and Kampala as early as 1910. The Standard Bank of South Africa had two branches at the time and Barclays Bank of Britain had one branch with its headquarters in London. All these banks had a common and basic function that included; mobilizing deposits, financing colonial