What is the feasibility of using arbitration as a dispute resolution mechanism in the Tanzanian banking and financial services sector? The Arbitration Act, 2020 is the principal legislation governing arbitration in Tanzania. Outside the banking sector, arbitration is gaining some traction as a valuable dispute resolution mechanism embraced by businesses in the real economy.
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. The new Arbitration Act 2020 was enacted to keep pace with key changes and developments in the business environment. Perhaps, this development will give rise to 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.
Even though there is a long-held reluctance in the banking and financial services sector in Tanzania 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, following the recent enactment of a modern law on arbitration.
Statutory arbitration may also be introduced by an appropriate provision in the Banking and Financial Institution Act. In this 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.
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This blog post is intended as a general overview and discussion of the topics and issues dealt with. The information is not intended to be, and should not be used, as a substitute for seeking legal advice or other professional advice in relation to any particular situation.
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