A new breed of legal support

Arbitration: A new way in bank loan recovery?—29

2019-03-18 10:57:28

By Paul Kibuuka @tzpaulkibuuka

We are coming to the end of our 30-part article series on secured transactions, corporate recovery and insolvency and banking litigation in Tanzania. In this twenty-ninth part of the series, we look at the feasibility of using arbitration as a dispute resolution mechanism in the Tanzanian banking and financial services sector.

The Arbitration Act, Cap 15 (Revised Edition 2002) is the principal legislation governing arbitration in Tanzania, but to-date it closely follows its 1931 predecessor that was amended in 1971. Despite this, outside the banking sector, arbitration has gained some traction as a valuable dispute resolution mechanism embraced by businesses in the real economy in Tanzania.

Presently, there is a general positive approach towards the incorporation of an arbitration agreement into a contract. The number of arbitration cases involving Tanzanian parties conducted domestically in Tanzania on an ad hoc or institutional basis seems to exhibit an upward trend in light of the recent stance by the government of Tanzania on international arbitration.

Although businesses in the real economy are acknowledging the benefits of arbitration over litigation in the courts of Tanzania, the banking and financial services sector has not been receptive to arbitration in general. The use of arbitration to resolve banking and finance disputes involving business customers is just not a talking point for banks’ in-house legal counsels and legal services departments.

Because banks occupy a unique role of providing financial services (including lending money) to the general public, and because they remain in the crosshairs of Tanzanian regulators, disputes are inescapable, especially from the perspective of the bank lender-customer relationship.

Almost always, these disputes concern term loans, overdrafts, revolving lines of credit, guarantee and other facility payment and related issues as a result of a bank seeking recovery or a customer contesting the exact amount of indebtedness or the customer alleging that the bank acted in a certain manner which caused loss.

In the context of non-performing loans (NPLs) portfolios, there is no denying that some Tanzanian banks and financial institutions are ensnared in an endless stream of legal debacles with customers. But the protracted nature of litigation as a dispute resolution mechanism is a significant stumbling block to bank loan recovery in Tanzania.

It is therefore astonishing to many in the business community why the banking and financial services sector has met arbitration with apathy, if not distrust.

Frequently arbitration is more time saving than litigation but then again it may be as or more expensive than litigation. As earlier noted, the Arbitration Act, Cap 15 (the Act) still closely follows its 1931 predecessor that was amended in 1971; so, this Act has failed to keep pace with key changes and developments in the business environment.

Perhaps, it is because of these downsides that there has not been a positive rethink in respect of the adoption of arbitration as a mechanism for resolving banking and financial disputes involving business customers.

Nevertheless, in project financing and other financing agreements, parties at times accept to use arbitration instead of litigation before the courts. One reason for embracing arbitration is the challenge of litigation dragging on through the courts as one party or both keep unleashing new stumbling blocks.

For a detailed discussion of the pros and cons of arbitration in Tanzania, readers are called to revisit the 3-part Arbitration article series published in this paper and co-written with Mr. Frederick Werema, a retired Judge and former Attorney General of Tanzania who is currently serving as the managing partner of FMD Legal Consultants & Advocates.

Even though there is a long-held reluctance in the Tanzanian banking and financial services sector to entering into arbitration as a mechanism for resolving disputes in the sector, it is important to note that a change of heart could take place with regard to acceptance and use of arbitration to resolve banking and financial disputes if the Arbitration Act is modernized.

Statutory arbitration may also be introduced by an appropriate provision in the banking legislation.

In that way, arbitration could be the new way forward in bank loan recovery in Tanzania which would provide a speedy and effective alternative to litigation and reduce court intervention.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. This article was published in The Citizen on Saturday, 16 March 2019

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