GENERAL INTRODUCTION

1.0. Background of the Research

Crisis in the Nigerian banking industry has become a common phenomenon. It predates the country‟s independence. Nigeria began experiencing crisis in its banking industry in late 1940s and early 1950s during which period 25 banks failed. The country again witnessed another phase of bank failures between 1994 and 2006, during which a total of 49 banks failed. In 1998 alone, 26 banks failed.2

Similarly, in the year 2009, Nigeria again had another taste of banking crisis in which 8 banks were affected. The timely intervention of the Central Bank of Nigeria was able to salvage the condition of the affected banks and saved them from collapsing. The intervention involved the injection of N620 billion into the affected banks and the sack of management staff of some of the banks. In the year 2010, a total of 103 micro finance banks also went into liquidation while 83 others had their licences revoked in 2014. Also, in 2012, three banks had their licences revoked by the Central Bank of Nigeria. As at date, a total of 48 deposit money banks and 187 microfinance banks are in liquidation.

These bank failures come with grave consequences on depositors, employees, creditors, shareholders and the economy. The former Governor of the Central Bank of Nigeria Sanusi

Lamido Sanusi described the effect of bank failure on depositors in the following words:

Thousands of poor people, who have kept their life savings in the bank, lose it. Children‟s school fees, savings for retirement, medical bills, gone into thin air … How many people have died of heart attacks due to this tragedy? How many honest businessmen have been rendered bankrupt? How many people have committed suicide? How many have died because they were unable to pay medical bills as their monies were trapped in these institutions? How many children have dropped out of school? … We do not know? …

What we do know is that we have today, among those parading themselves as role models in society, people who profited from failed banks. Owners and managers who go on to become governors and senators. Bad debtors who are multi- billionaires, having taken the money belonging to those poor dead souls and not paid back.9

The last sentence of this quotation is the central issue around which this research revolves – instances where banks lend monies and are unable to recover them. This has contributed to the collapse of many banks and other financial institutions.

Lending is essential for the growth of any economy. In fact, it is essential for the continued existence of banks. This is because, given the nature of banking business, loans and advances constitute the bulk of their assets. Paradoxically, when loans are not repaid they become lethal to the banks instead of asset. Similarly, when loans are irregularly granted and their recoveries are impeded, they affect a bank‟s liquidity and throw the bank into distress. For instance, a total sum of N178,918,430,000.00 was owed 45 banks in liquidation as at the date of their closure. Hallmark bank alone was owed N29,716,740,000.00. As stated earlier, these loans affect the banks‟ liquidity and cause crisis in the banking industry.

It is therefore our belief that an indebth understanding and effective application of prudent mortgage principles by parties to loan transactions can mitigate the crises in the banking industry; a scourge which has remained a recurrent night mare in Nigeria.

1.2. Statement of the Problem

One factor that has contributed to the collapse of banks in Nigeria is illiquidity, occasioned by the inability of banks to recover loans and advances they granted. Quite a sizeable number of these loans were secured with mortgages. In spite of the fact that these loans were secured, the banks were unable to recover them owing to various issues ranging from stiff resistance from the mortgagors to attempts to realize the mortgage security, location of mortgaged properties in rural areas, slow judicial processes, inability to locate mortgaged properties etc.

Ordinarily, a mortgage security is meant to serve as an assurance to a lender that if the borrower fails to repay his debt, the lender would have some collateral to fall back on and recover his money. Regrettably however, this has not been the case in Nigeria as banks have had their monies tied down in the hands of borrowers and are unable to recover such monies. In the year 2010, we had a total of 174 accounts with outstanding balances of N100 million and above being debts owed to banks in liquidation in Nigeria. There were other 205 accounts with balances between N50 million and N100 million also being debts owed banks in liquidation. These translate to billions of Naira. In the same year 2010, a total sum of N178,918,430,000.00 was owed 45 banks in liquidation as at 31st December 2010. Only N21,765,220 000 had been recovered as at that date .

It is worthy of note that 32 of these 45 banks were closed between the year 1994 and 1998 while the remaining 12 were closed between the year 2000 and 2006. The point being made is that these debts were not recovered during the subsistence of these banks and have still not been recovered after over a decade since the banks went aground.

Also worrisome is the fact that most of these loans were secured. Yet their recoveries have become a nightmare to the liquidators. It is common to find a bank having serious liquidity problems because a lot of its money is trapped in non-performing loans. It is this state of affairs that has pre-occupied the mind of the writer.

This work is a search to unravel the factors that have impeded the realization of the objective of a mortgage – a buffer against the inability of a debtor to repay his debt; an assurance to a lender of the recovery of his money.

1.3. Objectives of the Study

The objectives of this study are to:

1. Identify and proffer solutions to the problems associated with recovery of mortgage debts in Nigeria with a view to enhancing debt recovery by banks to boost their liquidity and stem crisis in the banking industry.

2. Show that the current judicial process has not aided recovery of mortgage debts.

3. Establish that the provision of the Land Use Act which requires Governor‟s consent to mortgage transactions is not healthy for credit transactions.

4. Examine the impact of non-performing loans on the banking industry and the economy.

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1.4. Research Questions

This study seeks to provide answers inter alia to the under-listed questions:

1. Whether there are challenges confronting banks in their efforts to recover mortgage debts and how the challenges (if any) can be addressed?

2. Whether there is a correlation between the incessant crises in the Nigerian Banking

Industry and application of prudent mortgage principles?

1. Whether the Nigerian judicial process has facilitated recovery of debts owed banks?

2. Whether the Land Use Act‟s requirement of Governor‟s consent to mortgage transactions has been healthy for the banking industry?

1.5. Significance of the Study

This work is significant because it addresses a real issue in our society. It seeks to stem bank failures occasioned by inability to recover loans granted to borrowers. The study sets out to ensure that banks and other financial institutions avoid the pitfall of giving out loans without ensuring that necessary mechanisms are put in place to ensure repayment of such loans.

The study considers recent developments in the law of mortgages in Nigeria. It is a useful material for banks and other financial institutions engaged in the business of lending. It is also a useful literature for bodies engaged in debt recovery activities like Asset Management Corporation of Nigeria (AMCON), Nigeria Deposit Insurance Corporation, legal practitioners and other debt recovery agents.

This work is also useful to members of the Bench and the academia as it touches on issues that come before the courts on regular basis and affect our daily lives.

1.6. Literature Review

Campbell and Cartwright considered the problem of banking crisis and stated that bank failures can have serious effects beyond the confines of the troubled bank. They agreed with Davies that bank failures have a far greater potential to create collateral damage and produce victims who may have had no dealings with the failed institution in question. The authors stated that unlike the failure of a manufacturing business which may be beneficial to its competitors, the failure of a bank could directly affect other banks as a result of interconnecting financial transactions among banks. It could also lead to loss of confidence not only in the troubled bank but also in other banks which could result in bank runs. The authors noted further that banks are at the centre of the international payment system which makes the efficient working of the payment system of great importance to governments.16 The authors also discussed the history and causes of bank failures in Europe, Australia, Asia and America. They equally discussed the regulation of banks in England as well as the role of the Bank of England in a banking crisis.