High Court reaffirms that money lending contracts must comply with the Tier 4 Act; courts will not enforce illegal lending arrangements, even where funds have been advanced.

Waboga David
Jun 27
3 min read

Introduction

In a recent decision, the High Court reiterated the mandatory legal requirements for enforceable money lending contracts under the Tier 4 Microfinance Institutions and Money Lenders Act, Cap 61, and its accompanying Regulations.

The Court found that a loan agreement which lacked the signatures of the lender and a third-party witness and involved the unlawful use of the borrower’s ATM card as collateral was unenforceable.

The decision reaffirmed that courts will not enforce contracts that contravene statutory provisions, even where funds have been advanced.

This aligns with the authority in Wakwale & Anor v. Bumutsukhu Financial Services (U) Ltd (Civil Appeal No. 106 of 2023) [2024] UGHC 897, where the Court held that the absence of a party’s signature or a third-party witness on a loan agreement implies a lack of consensus, rendering the contract invalid.

Similarly, in Wambette v. Bumutsukhu Financial Services (U) Ltd (Civil Appeal No. 32 of 2024) [2025] UGHC 49 (19 February 2025), the Court confirmed that section 84(1) of the Act mandates a money lending contract to be in writing, signed by both the lender and borrower, and witnessed by a third party.

These decisions reinforce the critical reminder to money lenders to strictly comply with regulatory requirements when structuring loan agreements.

Facts

The Plaintiff/Respondent instituted a summary suit (Civil Suit No. 17 of 2021) seeking UGX 6,305,000/= as unpaid principal, interest, general damages, and costs, alleging that the Appellant had defaulted on a loan advanced on 17th September 2019.

According to the Respondent, the Appellant was advanced UGX 2,805,000/= and agreed to repay it in one installment at 10% monthly interest, handing over his Stanbic Bank ATM card as security. Due to default, the Respondent continued to withdraw money from the Appellant’s bank account, allegedly accumulating to UGX 6.3 million.

The Appellant, in defence, claimed that the disputed loan was a top-up to a prior facility and contended that the Respondent had already recovered their dues illegally through unauthorized ATM withdrawals totaling UGX 2,065,000/=, in addition to prior deductions amounting to UGX 3,895,000/=.

The trial court (His Worship Maloba Ivan) ruled in favour of the Respondent, holding that the loan was a new contract, not a top-up, and awarded the Respondent UGX 6,090,000/= plus 10% annual interest, UGX 3 million in general damages, and costs.

⚖️ Findings on Appeal

Defective Contractual Formalities
The High Court found that the loan agreement for UGX 2,550,000/= (dated 17th September 2019) lacked the signatures of both the lender and a third-party witness, contravening Section 84(1) of the Tier 4 Microfinance Institutions and Money Lenders Act.
Unlawful Collateral
The court held that accepting an ATM card as security breached Regulation 18(1)(b) of the Tier 4 Money Lenders Regulations, 2018, rendering the transaction illegal.
Illegality Overrides Pleadings
Citing Makula International v Cardinal Nsubuga [1982] HCB 12, the court reaffirmed that no court shall enforce an illegal contract, regardless of admissions by the parties.
No Legally Binding Loan Contract
Given the formal defects and illegal collateral, the court held that no enforceable contract existed between the parties.
Partial Recovery Ordered
As the Respondent had already withdrawn UGX 2,325,000/= from the Appellant’s account using the ATM card, the court ruled that only UGX 225,000/= remained outstanding from the principal sum and no interest or damages were due.

⚖️ Significance

This decision emphasises the strict adherence to statutory requirements for money lending agreements under Uganda’s Tier 4 regime. It reaffirms that non-compliance renders contracts unenforceable, and courts will not aid a lender who benefits from illegality, even in cases where the borrower received funds.

📝 Practical Takeaway

Lenders must ensure that loan agreements are properly executed and witnessed and avoid unlawful collateral practices. Borrowers, on the other hand, should be aware of their legal rights and the requirements that protect them from predatory lending.

Read the full case below