The legal perspective to capital reconstruction of banks in nigeria

Thesis Overview

<p> </p><div><p>It is generally accepted that banks are inevitable component of an economic system and</p><p>that the capital of a bank is the foundation on which it stands. This foundation has continued to</p><p>witness dynamic changes leading to crisis that often threaten to rock the foundation of our</p><p>banking system. At each of the point the crisis the depositors had always turned to the state and</p><p>the central Bank of Nigeria (CBN) for help. Unfortunately the two have no coordinated</p><p>resolution scheme that would punish those responsible for depositors and other creditor’s woes</p><p>and at the same time save money for the state or taxpayer from the cost of resolution of the crisis.</p><p>It has therefore become necessary to examine the legal perceptive to rehabilitation of this basic</p><p>aspect of our banks and the banking system particularly the challenges faced by the institutions</p><p>responsible for bank’s capital reconstruction during and after crisis</p><p>The major player in resolution of banking crisis –the CBN has just two major tools for</p><p>crisis management namely the power of liquidation and the power of lender of last resort. The</p><p>exercise of power of liquidation has a direct negative impact on the depositors’ confidence</p><p>especially where depositors have lost money to a failing or failed bank.</p><p>The power of lender of last resort guarantees that no depositors lose money to failing or</p><p>failed bank but it leaves a lot of legal and moral issues unresolved. The first issue is that the cost</p><p>of repaying the depositor fund is borne by the tax payers’ money instead of the bank</p><p>management that are often responsible for mismanagement of the bank’s capital that lead to the</p><p>crisis.</p><p>Secondly the criminal legal system often does not punish the perpetrators of fraud and</p><p>mismanagement leading to either liquidation or spending of tax payers’ money. The result is that</p></div><div><p>instead of strengthening the corporate governance culture in the banks in the system, the lender</p><p>of last resort tends to encourage carelessness frauds and mismanagement in the banking system.</p><p>This therefore calls for extension of the roles of the regulatory institutions in the system</p><p>from mere intervention to active participation in fashioning and implementing lasting capital</p><p>reconstruction measures in the banks. The research proceeded on the assumption that banking</p><p>crisis will continue to happen, there will continue to be need for resolution scheme that will</p><p>reconstruct the bank’s capital and beef up liquidity else panic will ensue in the system which</p><p>may lead to total collapse of the banking system.</p><p>Therefore there is the need to harmonize the legal procedures and institutions necessary</p><p>for capital reconstruction in the country.</p></div><div><p><strong>CHAPTER</strong>&nbsp;<strong>ONE</strong></p><p><strong>GENERAL INTRODUCTION</strong></p><p><strong>1.0</strong>&nbsp;<strong>BACKGROUND</strong>&nbsp;<strong>TO</strong>&nbsp;<strong>THE</strong>&nbsp;<strong>PROBLEM</strong></p><p>In Medieval Latin, capital appears to have denoted the head of cattle</p><p>or other livestock, which have always been important source of wealth</p><p>beyond the basic meat, milk, hides, wool and fuel they provide1. Like the</p><p>modern capital livestock has the potential to generate surplus value for</p><p>accumulation. This principle of accumulation and preservation of wealth</p><p>ran through ages. This probably was the reason Adam Smith stated that,</p><p>“for accumulated asset to become active capital and put to additional</p><p>production, it must be fixed and realized in some particular subject after its</p><p>labour is past”2. Capital asset can be rented (for one off production) or</p><p>acquired out rightly for joint input in series of production. This nature</p><p>enable capital to command two prices i.e. the service price (rent) and or</p><p>asset price3.</p><p>Hernando, D. S. <em>The Mystery of Capital,</em>&nbsp;<em>Finance</em>&nbsp;and Development, March 2001 Vol. 38 No 1 p.29. also available at http:/<a target="_blank" rel="nofollow" href="http://www.imf.org/external/pubs/ft/frand/2001/03/Desoto.htm">www.imf.org/external/pubs/ft/frand/2001/03/Desoto.htm</a> visited on 04/03/2010</p><p>2 Ibid</p><p>3 Yotopoulos ,J and Jeffery N. B. <em>Economics</em>&nbsp;<em>of</em>&nbsp;<em>Development</em>&nbsp;<em>Empirical</em>&nbsp;<em>Investigation</em>&nbsp;Harper Row publishers New York pp164-165</p></div><div><p>Today capital includes any asset that can be stored up for later use in</p><p>the production of goods and services. Even some kind of labour has been</p><p>classified as a specie of capital hence the use of the term “human capital”</p><p>to differentiate human trained skill and entrepreneurship from primitive</p><p>labour. Capital in a classical conception &nbsp; &nbsp; “ is born when the economic</p><p>potential of an asset is represented in writing- in titles as security, a</p><p>contract, and other such records and when the most economically and</p><p>socially useful qualities about the asset as opposed to the virtually more</p><p>striking aspects of the asset is considered”4 . The dynamic nature of capital</p><p>underscores its importance and explains why it will continue to engage the</p><p>minds of lawyers and economists.</p><p>It is obvious that in any market system, large proportion of wealth is</p><p>concentrated in capital in the forms of interests held in share, securities,</p><p>futures exchanges and deposit with banks and other financial institutions.</p><p>Banks are also known to be the fulcrum upon which the capitalist system</p><p>revolves. It is therefore important for the efficient operation of the market</p><p>system that capital of banks and the banking system should be preserved</p><p>4 Hernado, D. S. op.cit</p></div><div><p>and periodically restructured to maintain safety and soundness in banking</p><p>system.</p><p>Because of this nature of capital, capital accumulation will continue</p><p>to be central issue for legal and economic development. In no other system</p><p>is the multiplicative power of capital better exemplified than the banking</p><p>system. Banks provide a vital channel through which credit is made</p><p>available to the real sector of the economy for production of goods and</p><p>services. Governments also use banks as medium to transmit and stimulate</p><p>economic growth through their monetary polices. Government has through</p><p>the Central Bank used monetary, regulatory and supervisory policies to</p><p>strengthen the banking system.</p><p><strong>1.1.</strong>&nbsp; &nbsp; &nbsp;<strong>JUSTIFICATION FOR THE RESEARCH</strong></p><p>Numerous issues in corporate and banking sector restructuring that</p><p>arise consistently during bank crises in Nigeria point to inherent conflict in</p><p>banking business as shareholders attempt to achieve higher returns on</p><p>their investment at the expense of depositors and other stakeholders in the</p><p>banking system. As a result, all banks however well their risks are managed</p></div><div><p>have the same inherent flaw in their balance sheets. Their liabilities are</p><p>certain and short-term whereas their assets are uncertain in value and</p><p>long-term in nature. This sameness of banks, results in a high tendency for</p><p>known problems in one bank to spread rapidly to other banks and to the</p><p>whole banking system if the problems are not checked.</p><p>Failure to strike a balance between profit motive of stakeholder in</p><p>the banking system and protection of the depositors fund has resulted in</p><p>failure of some banks in Nigeria. Our judicial and regulatory process</p><p>appeared ill equipped to tackle these challenges.</p><p>While there are</p></div> <br><p></p>