EFFECTS OF LAND JUSTICE SYSTEM TO THE BANKING INDUSTRY

Below are key practical highlights of how the land justice system affects the banking industry.

a) Issues of spousal consent

Some Banks take the effort to obtain spousal consent from borrowers before they take on an individual’s land as security as a legal requirement. The borrowers declare and confirm that the person giving consent is their spouse. The aspect of obtaining consent from a spouse is a challenge. There are no parameters of which spouse should consent, for instance under customary marriage and Muslim marriages that allow polygamous marriages. The bigger challenge however is that at the time of realizing the security, another lady files a suit claiming to be the spouse of the borrower and that no consent was obtained from her. The Bank’s efforts of realizing the security are derailed and since suits take long to be concluded, the Bank’s money is tied down. To what extent should the Bank inquire? Sometimes borrowers have deponed affidavits stating that they are not married and no need for spousal consent. But in future, an alleged spouse comes up to claim she did not consent to the mortgage and therefore the mortgage is void. Most times the borrower is working in cohorts with the wife to frustrate the bank’s recovery process. The spirit of the law is clear, once it is established that spousal consent was not obtained, the mortgage transaction is void. Should the borrower be allowed to benefit from his dishonesty? Sometimes it is true that the borrower was indeed married but he lied; should the bank be the one to pay the price?

Another issue is that Judges should be encouraged to be proactive and interpret the law on spousal consent purposively. The law requires that consent be obtained before the transaction is concluded and if it is not obtained, the transaction is void. What if after the transaction the spouse who transacted without the other’s consent convinces his/her spouse to approve and consent. Shouldn’t that later consent validate the transaction? The whole purpose of the law on spousal consent is that family property should be protected and a spouse who is not a registered proprietor should not be surprised or ambushed by eviction orders when the land has been sold, mortgaged or leased without their consent. So once the spouse is aware of the transaction even if it is after it was concluded and he/she approves it that should suffice as consent/ratification. The transaction should therefore be voidable but not void abnitio. Spousal consent should be limited to matrimonial property. This lacuna seems to be the spirit of the Mortgage Bill, however it has its challenges for the bankers. I will revert to it later. b) Delay of Land Justice

Even when people rush to court seeking justice, the matters take too long to be concluded. Banks are also affected in the process. For instance if an alleged spouse halts the Bank’s recovery process by instituting a suit against sell of mortgaged property, when the case takes long to be concluded, even if the Bank were successful at the end, justice will not be served. The Bank’s money will have been tied down for a very long time without any returns being made on it. The quicker the cases are concluded, the better for the parties. It enables them determine their positions and decide on other strategies. Further, with the laxity in issuing of interim orders without proper evaluation of the merits of the application, this renders the land justice not palatable to the banking industry. The continuous extension of the interim orders without fixing of the main applications works only to promote the delaying tactics of the debtors. Sometimes the main applications are never fixed because the Applicants never intended to proceed with them in the first place. Once they obtain interim orders and renewals, they relax since the property cannot be sold when there is a pending order. Debtors are abusing the court process and using court as their avenue to delay financial institutions from recovering their monies. Courts should task Applicants to be vigilant and pursue their matters and in the event that no follow up is being made by the Applicants, the Applications should be dismissed.

c) Extra Legal Factors The President’s directives against evictions are hugely affecting the Bank’s recovery process. The Bank may sell mortgaged property but to grant vacant possession to the purchaser is difficult because evictions have been stopped and therefore the police who should assist in evictions have desisted from it. The recent bailiffs’ sit down strike, demotion of policemen that wanted to execute a warrant, decried killing of the landlord by tenants/bibanja holders is a manifestation of the glaring need to protect and preserve the rule of law and allowing the due process of the law to its conclusion. Of course the mortgage industry is hugely affected knowing that land is still a crucial collateral security for lending. d) Nature of the Land tenure System The Nature of the land tenure system itself is a challenge to the Mortgage industry. Sometimes there are competing claimants over land that may last generations. The land Act provides that customary tenure rights may be registered and certificate of ownership issued. However, provisions of certificate of ownership are yet to be operationalized eleven years after the Land Act was enacted. By implication, that very certificate is convertible for a freehold title also shows that it is inferior to a land title and may be treated with contempt by lending institutions. It is hoped that the certificate will allow people at local level to borrow against it from micro credit schemes and other financial institutions, pledge it or even sell their land against it. However it is in dispute whether the customs of the community will allow for the land to be mortgaged or even sold. It is in doubt that customary owners will be able to enjoy these privileges; there will be very few customary land tenure systems that will permit these privileges. It remains to be seen that customary land will meet the challenges of the land market and not be found wanting in many respects. Would a bank accept a certificate of occupancy from a customary tenant as a security well aware that it could be premised on a freehold or mailo tenure? What are its implications when it comes to the recovery process? However, this does not only affect the banking industry, failure to title some land interests sterilizes the owners’ value of the existing properties, which could easily be turned into collateral to secure access to capital – providing more insecurity for land owners. Lenders are reluctant to accept it because most of the land is communally owned and does not have well-defined Certificate of titles, which are required by lenders as security for mortgage loans. As stated earlier, land remains a crucial security in Uganda, but because of such a challenge bankers resort to lending against other risk and insecure securities.

e) Lack of integrity of the land registry

The country has witnessed massive land frauds that remain uninvestigated later on prosecuted. Intended borrowers forge Certificates of title sometimes in cohorts with the land registry official. When the bank goes to verify with the registry what the intended borrower has presented as title, its genuineness is certified until the time of default and the recovery process. It is when the bank is informed that it cannot recover on a forgery. Meanwhile it was on the strength of the Security that the bank considered disbursing a certain amount of monies. It’s a huge challenge if the banking industry cannot rely on the integrity of the land registration system. It should be beyond reproach and forgery. The registry should be able to detect any forgery upon inspection of the register. The dilemma is worsened with the introduction of Search Statements that contain exclusion clauses. This was not the intention of the torren system of the land registration. Probably computerization of the system could alleviate the dilemma

f) Commentary on The Land (Amendment) Bill, 2007

The government proposed an amendment to the Land Act, Cap 227. The government has stated that the object of the bill is to enhance the security of occupancy of the lawful and bonafide occupants on the registered land. That whereas section 31 of the Land Act provides for the enjoyment of security of occupancy, there has been widespread arbitrary “evictions of these categories of tenants in utter disregard of their interest in the land”. Government has proposed that a lawful or bonafide occupant cannot be evicted from registered land except upon a court order and only for non payment of the annual nominal ground rent. And the rent is payable within one year after the minister has approved the rent payable. There are no provisions for appeal against the minister’s decision. Eviction order under the proposed can only be executed after six months. These proposed amendments may not arguer well for the country’s banking system. Many land owners, in one way or another have used their land titles to borrow money from financial institutions. So if ownership of land is ‘diluted’ in a way by creating two titles on the same piece of land (registered owner and a bonafide or lawful occupant), the borrowers will simply abandon their mortgaged land titles with the financial institutions well knowing that the bank or any financial institution will have an uphill task trying to take over the land in question. It may also in turn result in potential borrowers who were hoping to use their land as collateral being turned away by banks. There is a need to scrutinize these proposed amendment in light of what effect they have in the business sector.

g) Commentary on the Mortgage Bill.

Whereas S.115 of the Mortgage Act Cap 230 currently empowers only the proprietor of land or a donee of his power of attorney to mortgage land under the Act, the Mortgage Bill capacitates any holder of land under any land tenure to secure a loan repayment or fulfillment of a condition by a mortgage. This implies that beyond the legal owner of land, any interest bearers therein can competently mortgage the land. Furthermore, the Bill will make land under customary tenure mortgage-able, subject to the customary law applicable. However, in the even to default, the Bank as mortgagee shall not have a customary remedy of possessing the land, unless it first engages a mediator in the security realization and then obtains a court order authorizing the remedy. This remedy may be countered by the mortgagor’s application to court for a reopening of the mortgage on grounds which are highly mawkish and subjective to the area’s customary law. I any case, the customary tenant can only be evicted after six months of passing the eviction order( That is if the Land Amendment Bill 2007 is passed into law).

h) Matrimonial home vs family property

Unlike under the Land Amendment Act, 2004 where a spouse’s security of occupancy is over family land generally, the Mortgage Bill precisely guarantees a spouse security for his/her matrimonial home. The Bill clearly draws parameters of a matrimonial home, to which the requirement of spousal consent will be limited. The Bank will therefore be at liberty to dispense from the need for spousal consent over any security furnished by a married borrower, save where it is matrimonial property. Such consent must be informed and genuine consent, given in writing and in the presence of an independent person, as defined therein. That notwithstanding, the Bill does not shield the Bank from crafty polygamous borrowers who may instead use the consent of a spouse, for whom the security is not their matrimonial home. Under the bill the bankers are under a duty to investigate further the status of the individual borrowers and verify whether they are married or not. To make sure that the parties have obtained independent advise on the loan and mortgage transactions.

Future

There is fragility in the land justice system; heavily interference by politics, sluggishness in the court supervised mortgage recoveries, and the pro-peasant- agrarian land law regime that affects land as a market commodity due to the complexities in the land tenure system. Fraud and forgeries are worsening the situation. It is imperative that the bankers look for some alternative means of securing their lending business or carefully look out for their interests before taking on a mortgage. Of course not withstanding competition from small moneylenders who take heavy risks.

After the inception of the crisis in the mortgage industry financial regulators in the developed economies now talk of a return to "old-fashioned banking", where banks grant loans only to clients they know and from resources already available. It is starting to happen. A move towards trade finance and warehouse receipt system is a welcome development. Evaluation of the creditworthiness of the intended borrower is imperative. what are the financial and industry risk involved in that transaction. Does the intended borrower has a history of steady cash flow? What about previous loan repayment behavior? Monitoring and evaluation of the borrower’s business. The emergence of Credit Reference Bureau is key to the banking industry and should be embraced. The banks have only themselves to blame as they are reluctant to do business with each other. Banks do not want to lend money to each other because they are hoarding funds for themselves and worried that their rivals may not be able to pay them back. That attitude should stop. Otherwise, the banking industry should lobby for the reform of the land policy that enhances the symbiotic relationship between property owners who want to use their property as collateral to finance their business from banks and the bankers who would like to secure the lending with land since it is still an important commodity in Africa.