The Legal Perspective to Capital Reconstruction of Banks in Nigeria

ABSTRACT

It is generally accepted that banks are an inevitable component of an economic system and that a bank’s capital is the foundation on which it stands. This foundation has continued to witness dynamic changes leading to crises that often threaten to rock the foundation of our banking system. At each of the points of 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 creditors’ 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 the rehabilitation of this basic aspect of our banks and the banking system, particularly the challenges faced by the institutions responsible for bank capital reconstruction during and after the crisis.

The major player in the resolution of the banking crisis. The CBN has two major crisis management tools: the power of liquidation and the power of lender of last resort. The exercise of the 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 a failing or failed bank but leaves many legal and moral issues unresolved. The first issue is that the cost of repaying the depositor fund is borne by the taxpayers’ money instead of the bank management, that are often responsible for the 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 taxpayers’ 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, fraud and mismanagement in the banking system.

This, therefore, calls for an 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 the banking crisis will continue to happen and there will continue to be needed for a resolution scheme that will reconstruct the bank’s capital and beef up liquidity; else, panic will ensue in the system, which may lead to the total collapse of the banking system.

Therefore there is a need to harmonize the legal procedures and institutions necessary for capital reconstruction in the country.

References

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