Need for Resuscitation of Failed Banks Tribunal
By Ayodele Aminu
Generally, the business of banking involves financial intermediation - mobilizing resources from the surplus units and channeling it to the deficit units. By so doing, banks are faced with risks that such funds would not return back from the outlets they are channeled to.
Cash is the safest (most liquid) but least profitable of the bank assets, while loans are the riskiest and the least liquid, but the most profitable of a bank's asset. This explains why bank management is naturally motivated by profit objectives to lend (and often compelled by competitive pressures to lend to the marginal fields). But when such loans become bad it inescapably exposes the depositors to risk for which the market provides no mitigant.
Bad loans like the Acquired Immune Deficiency Syndrome (AIDS) don_t kill immediately. What kills a bank is technically not bad loans but illiquidity -i.e., the failure of (bad) loans to produce or to fruitify cash over time. Just like a person inflicted with AIDS virus can continue to look good for a long time, there is permissible time lapse between the accumulation of bad debts by the bank and the ultimate insolvency or failure.
The problem of non-performing loans and advances has therefore been and is still one of the greatest challenges facing the banking industry and eating the main fabric of the economy. The Nigeria Deposit Insurance Corporation (NDIC) annual report for 2003, for instance, noted that the volume of non-performing loans in the banking industry rose from N47 billion in 1994 to N199.62 billion in 2002 and increased further to N260.17 billion in 2003.
Speaking on "Implications of The Scrapping of The Failed Banks tribunal on NDIC's Role as Bank Liquidator" Head, Legal Department/Board Secretary, NDIC, Mr.Alheri Bulus Nyako disclosed that the problem of bad loans has been further compounded by the fact that most of them were products of insider abuse or otherwise granted under fraudulent circumstances.
Nyako, who made this known in Enugu at a workshop organized by the Corporation for business editors and Finance Correspondents Association of Nigeria (FICAN) last Friday, said the development was evidenced by poor documentation and collaterisation.
He maintained that the scrapping of the Failed Bank Tribunals in 1999 has a negative consequence in the achievement of justice in the trial of failed banks.
Specifically, he revealed that the Nigerian judicial system is characterized by endless adjournments, undue reliance on technicalities, frivolus interlocutory injunctions and other cases of outright abuse of court processes.
The NDIC Head of Legal Department described the period between 1994 and 1999 when the Failed Banks Tribunal were in force trying various offences as a glorious year for the effective discharge of NDIC's function as a liquidator of failed banks.
He said nowadays, the Nigerian police, lawyers and judges have conspired to encourage bank directors, bankers and bank customers to circumvent the rules and avoid justice.
Nyako pointed out that "by May 1999, when the transition to democratic rule was imminent, a total of 2,464 cases were pending before the Failed Banks Tribunal comprising 2,332 civil and 132 criminal cases. A total of 716 cases were disposed off comprising 672 civil and 44 criminal cases.
"More than half of the cases pending before the failed bank tribunals by the time it was dissolved were in respect of closed banks, Nyako said.
Besides, he disclosed that a total sum of N4.3 billion were recovered through the machinery of the Failed Banks Tribunal out of which the sum of N3.55 billion was in respect of banks in liquidation.
"Total debt recoveries to date for the banks in liquidation amounted to about N5 billion, indicating that just about N1.5 billion had been recovered since the scrapping of Failed Banks Tribunal in 1999. Meanwhile, the Corporation has so far refunded N5.8 billion to depositors of 35 closed banks. More significantly, 100 per cent of depositors funds had been paid in respect of 10 closed banks," Nyako stated.
The satisfactory performance recorded by the Corporation in settling the claims, he stressed, would have been possible if the Failed Banks Tribunal did not play their roles.
Besides, he emphasized that the machinery of the Failed Bank Tribunal sent clear signal that it would no longer be business as usual for debtors who borrow from banks with no intention of repayment, as well as bank directors who hitherto were diverting depositors funds through insider lending and other malpractices.
"With regard to criminal prosecution, the Tribunals played a critical role particularly in getting the accused persons refund the various sums involved in the offences committed. Consequently, the Tribunals made a lot of recoveries.
"In fact, the fear of criminal prosecution alone compelled bank directors and customers to repay huge sums being the amounts involved in the offences committed so as to avoid the consequences and stigma of criminal prosecution/conviction.
"Thus, the machinery of criminal prosecution resulted in substantial recovery for the closed/distressed banks as the Act encouraged such refunds for the mitigation of sentence," he said.
He lamented that since 1999, no single case has been concluded by the Federal High Courts where the cases were transferred following the advent of democracy.
Noting that Decree 62 merely scrapped the Failed Banks Tribunal administering the Failed Banks Act, he emphasized that the Act itself has not been repealed and is therefore very much in operation.
"What happened was that the jurisdiction over the Failed Banks Act was transferred to the Federal High Court? Accordingly, Section 2(1) of Decree 62 provides that the Federal High Court shall have jurisdiction to try the offences created under the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, while subsection 2 provides that "a tribunal established by the Failed Banks Act is hereby dissolved.
"A further amendment under Decree 62, stipulated that the words "the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Tribunal" be substituted with words " in the Federal High Court," he explained.
Given this scenario, he said that the Act has remained alive, except that it is the Federal High Court that is administering it and not the Tribunal.
He listed some of the implications of scrapping the Tribunals to include slow dispensation of justice occasioned by logistic problems and other administrative bottlenecks, division of judges attention between failed banks cases and other numerous litigations pending in court as well as frivolous interlocutory applications by debtors who are unwilling to pay their debts.
"The manipulation of the Court Procedures and rules as well as undue reliance on technicalities to prolong and frustrate debt recovery proceedings which is now prevalent at the Federal High Court was not possible with the Failed Bank Tribunal because the procedures were streamlined while the technicalities were ignored. Furthermore, interlocutory appeals were not allowed, while substantive appeals to the Special Appeals Tribunal must be within 30 days and the decision of the Appeal would be final," he observed.
Nyako however noted that one of the greatest setbacks, which arose from the scrapping of the Failed Bank Tribunal, which the Corporation had to contend with, was the judgement of the Court of appeal in case of Okem Enterprises Ltd and the Corporation (Liquidator of Allied of Nigeria).
"In this case, the Corporation filed an action at the Tribunal for the recovery of about N300 million owed to Allied Bank (in Liquidation) by Okem Enterprises Ltd. (over N600 million owned by the debtor and other related companies).
"The matter had to commence de novo at the Federal High Court following the scrapping of the Tribunals. Okem Enterprises however, filed a preliminary objection challenging the jurisdiction of the Federal High Court to handle debt recovery matters being disputes between a bank and its customer within the meaning of Section 251(1)(d) of the 1999 Constitution," he said.
The Court of Appeal in judgement delivered in February 2003, he noted, held that the Federal High Court lacked the jurisdiction to entertain failed banks matters and that such matters should be handled by state High Courts.
"Not satisfied with the judgement, the Corporation appealed to the Supreme Court. However, while the appeal was pending, proceedings in failed bank matters were stalled as no new cases could be filed while a number of those already pending were being struck out in reliance of the Appeal Court decision.
"However, in a considered judgement delivered by the Supreme Court on April 26, 2004, it quashed the Court of Appeal decision and held that the Federal High Court had concurrent jurisdiction with the High Court of a State on failed banks matters by the Federal High Court had resumed," he stated.
He therefore submitted that unless the National Assembly passes the Banks and Other Institutions amendment Act, which would establish special courts for the trial of failed banks, the Corporation and the banks would continue to face difficulties in recovery of debts.
The Managing Director of Omega Bank Plc, Rev. Segun Agbetuyi who spoke at the 2003 First Quarter Lecture/Luncheon of the Lagos Chamber of Commerce and Industry (LCCI), expressed similar view.
Agbetuyi who delivered a paper on "Banking: The Heightened Risk Carve", called on the federal government to establish special courts to handle litigation on bad debts expeditiously.
While imploring the board and management of banks to strive to bridge the skill gap in credit knowledge in the industry, he urged the NDIC to purchase banks' debts at a negotiated discount.
"The NDIC should consider incorporating a company whose primary objective will be to buy at a negotiated discount the bad debts of banks and take over the underlying collaterals for a more orderly disposal", he advised.
Citing examples of other developed countries where Central Banks negotiate with banks to ensure their survival rather than have their licenses revoked, the Omega Bank boss maintained that the NDIC is technically better structured to fund this important intervention activity from the billions of naira premiums annually paid by insured banks.
"By restoring banks to good health through the discounted purchase of their qualifying bad debts portfolio, NDIC can modify its role from being the undertaker that pays frugal dividends to poor banks depositors long after buying their dead banks.
"Also, this way rather than sterilizing away substantial premium moneys collected from banks, these funds can be activated to actively resolve bad loan problems and to promote health in the banking sector generally", Agbetuyi emphasized.
He added that since the NDIC is a government organ, the companies and properties it takes over, "can be sold to the serious-minded businessmen to regenerate economic activity to or at worst recommended for donation to social courses to alleviate poverty in the society".
While maintaining that a major contributing factor to the heightened risk of banking business in Nigeria is the highly corruptible Nigerian judicial system, he urged the relevant committees of the senate to review any laws that may encourage a fraudulent debtor to evade justice.
"Concomitantly, perhaps the judicial commission ought to review and enforce the professional code of conduct of judges and other administrators of justice as a key step in building and sustaining a corrupt-free judicial process", he advised.
Noting that debtors often manipulate the media, he urged media houses to always cross-check such cases with the concerned banks and avoid sensationalism if they have to invite a report an the matter.
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