Project Materials

THE LEGAL PERSPECTIVE TO CAPITAL RECONSTRUCTION OF BANKS IN NIGERIA

ABSTRACT

It is generally accepted that banks are inevitable component of an economic system and

that the capital of a bank is the foundation on which it stands. This foundation has continued to

witness dynamic changes leading to crisis that often threaten to rock the foundation of our

banking system.

At each of the point the crisis the depositors had always turned to the state and

the central Bank of Nigeria (CBN) for help. Unfortunately the two have no coordinated

resolution scheme that would punish those responsible for depositors and other creditor’s woes

and at the same time save money for the state or taxpayer from the cost of resolution of the crisis.

It has therefore become necessary to examine the legal perceptive to rehabilitation of this basic

aspect of our banks and the banking system particularly the challenges faced by the institutions

responsible for bank’s capital reconstruction during and after crisis

The major player in resolution of banking crisis –the CBN has just two major tools for

crisis management namely the power of liquidation and the power of lender of last resort. The

exercise of power of liquidation has a direct negative impact on the depositors’ confidence

especially where depositors have lost money to a failing or failed bank.

The power of lender of last resort guarantees that no depositors lose money to failing or

failed bank but it leaves a lot of legal and moral issues unresolved.

The first issue is that the cost

of repaying the depositor fund is borne by the tax payers’ money instead of the bank

management that are often responsible for mismanagement of the bank’s capital that lead to the

crisis.

Secondly the criminal legal system often does not punish the perpetrators of fraud and

mismanagement leading to either liquidation or spending of tax payers’ money.

The result is that

instead of strengthening the corporate governance culture in the banks in the system, the lender

of last resort tends to encourage carelessness frauds and mismanagement in the banking system.

This therefore calls for extension of the roles of the regulatory institutions in the system

from mere intervention to active participation in fashioning and implementing lasting capital

reconstruction measures in the banks.

The research proceeded on the assumption that banking

crisis will continue to happen, there will continue to be need for resolution scheme that will

reconstruct the bank’s capital and beef up liquidity else panic will ensue in the system which

may lead to total collapse of the banking system.

Therefore there is the need to harmonize the legal procedures and institutions necessary

for capital reconstruction in the country.

CHAPTER ONE

GENERAL INTRODUCTION

1.0 BACKGROUND TO THE PROBLEM

In Medieval Latin, capital appears to have denoted the head of cattle

or other livestock, which have always been important source of wealth

beyond the basic meat, milk, hides, wool and fuel they provide1.

Like the

modern capital livestock has the potential to generate surplus value for

accumulation. This principle of accumulation and preservation of wealth

ran through ages.

This probably was the reason Adam Smith stated that,

“for accumulated asset to become active capital and put to additional

production, it must be fixed and realized in some particular subject after its

labor is past”2.

Capital asset can be rented (for one off production) or

acquired out rightly for joint input in series of production. This nature

enable capital to command two prices i.e. the service price (rent) and or

asset price3.

Hernando, D. S. The Mystery of Capital, Finance and Development, March 2001 Vol. 38 No 1 p.29. also available at http:/www.imf.org/external/pubs/ft/frand/2001/03/Desoto.htm visited on 04/03/2010

2 Ibid

3 Yotopoulos ,J and Jeffery N. B. Economics of Development Empirical Investigation Harper Row publishers New York pp164-165

Today capital includes any asset that can be stored up for later use in

the production of goods and services.

Even some kind of labor has been

classified as a specie of capital hence the use of the term “human capital”

to differentiate human trained skill and entrepreneurship from primitive

labor.

Capital in a classical conception     “ is born when the economic

potential of an asset is represented in writing- in titles as security, a

contract, and other such records and when the most economically and

socially useful qualities about the asset as opposed to the virtually more

striking aspects of the asset is considered”4 .

The dynamic nature of capital

underscores its importance and explains why it will continue to engage the

minds of lawyers and economists.

It is obvious that in any market system, large proportion of wealth is

concentrated in capital in the forms of interests held in share, securities,

futures exchanges and deposit with banks and other financial institutions.

Banks are also known to be the fulcrum upon which the capitalist system

revolves.

It is therefore important for the efficient operation of the market

system that capital of banks and the banking system should be preserved

4 Hernado, D. S. op.cit

and periodically restructured to maintain safety and soundness in banking

system.

Because of this nature of capital, capital accumulation will continue

to be central issue for legal and economic development. In no other system

is the multiplicative power of capital better exemplified than the banking

system.

Banks provide a vital channel through which credit is made

available to the real sector of the economy for production of goods and

services.

Governments also use banks as medium to transmit and stimulate

economic growth through their monetary polices. Government has through

the Central Bank used monetary, regulatory and supervisory policies to

strengthen the banking system.

1.1.     JUSTIFICATION FOR THE RESEARCH

Numerous issues in corporate and banking sector restructuring that

arise consistently during bank crises in Nigeria point to inherent conflict in

banking business as shareholders attempt to achieve higher returns on

their investment at the expense of depositors and other stakeholders in the

banking system.

As a result, all banks however well their risks are managed

have the same inherent flaw in their balance sheets. Their liabilities are

certain and short-term whereas their assets are uncertain in value and

long-term in nature.

This sameness of banks, results in a high tendency for

known problems in one bank to spread rapidly to other banks and to the

whole banking system if the problems are not checked.

Failure to strike a balance between profit motive of stakeholder in

the banking system and protection of the depositors fund has resulted in

failure of some banks in Nigeria. Our judicial and regulatory process

appeared ill equipped to tackle these challenges.

While there are