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.[1][2][3] 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.[4] 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.[5] In the year 2010, a total of 103 micro finance banks also went into liquidation while 83 others had their licences revoked in 2014.[6] Also, in 2012, three banks had their licences revoked by the Central Bank of Nigeria.[7] As at date, a total of 48 deposit money banks and 187 microfinance banks are in liquidation.[8]

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[9] 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.[10] 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[11] 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.[12] 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[13]. 

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.

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?

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

4.      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.[14]  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.[15] 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. 

This book is a useful literature in discussing banking crisis. However, the book is concerned with the ways in which the law seeks to protect likely victims of bank failures in England and Wales. It has no direct application to Nigeria which is the main focus of our study.

In the same vein, Nwosu and Shekwogaza,[16] stated that banks play the critical role of financial intermediation in the economy by mobilizing financial resources from surplus economic units for on lending to deficit units. Consequently, any negative occurrence in the banking industry would likely have ripple effects in the economy.[17] The authors reviewed the achievements of the Asset Management Corporation of Nigeria (AMCON), its relationship with other safety net participants, its objects, as well as its contribution in stabilizing the Nigerian

Banking Industry.  However, while the authors‟ work focused on examining inter alia the objects and achievements of AMCON, the present study seeks broader ways of enhancing recovery of debts owed banks.  

Lamenting the impact of non-performing loans on the banking industry, Ogunleye stated that it is a paradox that lending which is the core business of banking has become the bane of many banks. He attributes this paradox to a combination of factors which include non-adherence to canons of good lending, poor documentation, weak collateral protection, poor borrowing culture and difficulty in enforcing creditor rights.[18]  

To reduce incidence of loan defaults therefore, Holden discussed the canons of good lending extensively. These are factors that a bank should examine and find satisfactory before giving out an advance. The principles of good lending according to Holden include capacity and character of the borrower, purpose, profitability, duration and availability of collateral for the advance. Although Holden admitted that the realization of securities is sometimes a lengthy, costly and complicated business, he did not discuss the challenges associated with realization of securities which is one of the major focus of the present study.[19]

According to Smith, banks and other financial institutions provide the tonic for the vigorous commercial activities through lending. The provision of credit facilities is an investment for banking and a method of financial undertaking which propel economic growth.[20] He stated further that the risk of non-repayment of loan is minimized when the debtor provides an alternative means to fall back on in the event of default to repay.22 That by reducing the risk, security reduces the cost of credit by reducing the interest payable. Stressing the need to ensure repayment of loans, the author states that it is necessary for repayment of loans to be assured so that the banks may stay afloat and able to make fresh advances to other customers in need of finances.[21]

One can safely regard mortgages as the most popular and universally recognizable means of securing credit transactions. Relying on Lord Lindley MR,[22] Smith defined mortgage as a legal or equitable conveyance of title as a security for payment of debt or discharge of some other obligations for which it is given, subject to the condition that the title shall be reconveyed if the mortgage debt is liquidated. According to the author, the substance of a mortgage of land (as well as mortgage of other form of property) is a right of property vested in the mortgagee which entitles the later by virtue of this title to have the rents and profits applied to satisfy his debt, and upon default by the mortgagor to liquidate the loan, to enforce the security by sale or foreclosure.[23] 

Smith‟s work is broad in scope; it is not restricted to land mortgages. It goes on to discuss mortgage of personal chattels, ship, shares, life insurance policy etc. The author discusses means of realizing all these securities. Smith‟s work shares some common features with the present work in terms of scope as the present work is also not limited to land mortgages but also discusses other subject-matters of mortgages. However, Smith did not reckon with the practical challenges that impede the exercise of mortgagees‟ rights. The present study recognizes that realization of mortgage securities poses serious challenges to mortgagees and seeks means of ameliorating the challenges. Furthermore, Smith‟s discussion on mortgage of ships was based on the repealed Merchant Shipping Act of 1962. This statute was repealed in 2007. The extant legislation is the Merchant Shipping Act, 2007.[24] The extant Act contains significant improvements. For example minister‟s consent was required to mortgage a ship under the repealed Act. This requirement does not exist under the extant Act. This work therefore discusses mortgage of ships under the current Merchant Shipping Act. The discussion therefore reflects the current position of the law in this regard.   

According to Chianu, individuals and corporate moneylenders desire to recover the money they lend. Consequently, most of them insist on something to assure them that on the borrower‟s default they would not have lost their investment. The author cautioned the courts‟ sympathy for mortgagors and warns that the graciousness of equity to the mortgagor should not be extended too far because mortgagees are in credit business which is at the roots of the economy. As such, any harm done to them under the guise of mistaken kindness to mortgagors can crumble the economy irrecoverably.[25]

Chianu stated further that foresightful lenders prefer real security which elevates the creditor to the status of a secured creditor, giving him something out of which he is entitled to have his debt paid in preference to the unsecured creditor. He identified land as the chief source of security for lending in the banking and informal sector and proceeded to focus his discussion on land mortgages. He considered the laws guiding creation of mortgages in different parts of Nigeria. He examined the provisions of the Land Use Act that have bearing on mortgages. 

Contrary to Smith‟s position,[26] Chianu stated that land in non-urban areas can be mortgaged.[27] We do not agree with Chianu on this issue. In view of the provisions of the Land Use Act,[28] Smith‟s position that land in non-urban areas cannot be mortgaged[29] is the correct position of the law. 

Chianu also examined the validity of sale of mortgaged property by the mortgagor while the mortgage is still subsisting. He concluded that a purchaser from the mortgagor steps into the shoes of the mortgagor with regards to the obligation to repay the mortgage loan. He discussed the mortgagee‟s power of sale and asserted that a mortgagor cannot restrain a mortgagee from selling the mortgaged property even when he (mortgagor) is disputing the amount of the debt. He has to first pay to the mortgagee or into court the amount being claimed by the mortgagee before he can secure an injunction to restrain the mortgagee from selling the mortgaged property.

Chianu went on to analyze the consent provision of the Land Use Act and concluded on that point that loans secured by mortgages that were created without obtaining the Governor‟s consent can still be recovered using legal apparatus. This, according to him, is because the loan transaction is distinct from the mortgage transaction concluded in respect of the loan. He explained that both transactions are governed by different laws. While the loan transaction is in the realm of the law of contract, property law governs the mortgage that serves as an assurance to the lender. This argument is plausible. If for instance a mortgage instrument is invalidated for any reason, the lender should be able to bring an action to enforce the covenant to repay the loan. If the lender obtains judgment, he should be at liberty to execute the judgment against any property of the debtor (mortgaged property inclusive) to recover the judgment debt.

Also Commenting on the Land Use Act‟s requirement of Governor‟s consent to mortgage transaction, Umezulike opined that mortgage transactions should be exempted from the requirement of Governor‟s consent because of the importance of mortgages to the overall economic life of the nation.[30]  We share Umezulike‟s view on this point. Removal of mortgage transactions from the requirement of Governor‟s consent would greatly enhance mortgage transactions.

Still on the requirement of Governor‟s consent to mortgage transactions, Akujobi opined that the Governor can be compelled to give consent to alienation of land. That the discretionary powers of the Governor to grant consent is coupled with a duty on the Governor to exercise his discretion in favour of the citizens, especially where the applicants have satisfied the conditions laid down by the Governor for the grant of his consent.33 He contended that while a Governor may refuse his consent for reasons consistent with the Act, he has no absolute power to refuse an application for consent. That once the application is submitted and the conditions set by the Governor for the grant of consent are satisfied, it is the duty of the Governor to consider the application and grant the request for consent.[31] There is merit in this argument. There should be some measure of checks on the discretion of the Governor to refuse consent to alienation of land.

Oluyede, stated that mortgage under the general law is by no means without complications.[32] He quoted per Lord Macnaghten in Samuel v. Jarrah Timber and Wood Paving

Corp[33] that “no one … by the light of nature ever understood an English mortgage of real estate”.[34] The author identified two types of mortgages under the general law, namely: legal mortgages and equitable mortgages. He discussed requirements of a mortgage to include capacity of parties, state requirements as well as stamping and registration. The author also examined methods of creating legal mortgages in Nigeria. He concluded his discussion on the right of a legal mortgagee to take possession of the legal mortgage by stating that if a mortgagee remained in possession of the mortgaged land for twelve years without acknowledging the mortgagor‟s title or receiving any payment of principal or interest from him, the right to redeem the land is extinguished and the mortgagee will acquire a title to the land according to the different limitation statutes operating in Nigeria. Oluyede‟s work is quite instructive on the traditional principles of mortgages. However, it does not contain recent developments in the law and practice of mortgages having being written two decades ago.  

Cousins cautioned the effort of a mortgagee to recover the mortgage debt by taking possession of the mortgage property. The author stated that the mortgagee‟s security does not depend on being in possession. If he wishes to apply the rents and profits to the satisfaction of the mortgage debt, his remedy is to appoint a receiver. He cannot derive any personal profit from being in possession. Indeed he is accountable to the borrower not only for the profits which he does make but also for those which he reasonably ought to have made.[35] 

Aluko traced the history of mortgage to ancient times when people in need of money used to approach rich people for financial assistance and personal effects or immovable assets were offered as securities for repayment of the money borrowed. He further states that due to the high rates of interests charged by moneylenders, legislation had to be passed by many governments to fix interest rates. The author also examines the implication of alienation of mortgaged property by the mortgagor and concludes that anybody who buys a mortgaged property from the mortgagor when the deed of legal mortgage is still subsisting takes the property subject to the right of the mortgagee. The author distinguished legal mortgage from equitable mortgage. He states that unlike an equitable mortgagee, a legal mortgagee can sell the mortgage property without an order of court.[36]

Okany, discussed the modes of creating mortgages in different parts of Nigeria prior to the enactment of the Land Use Act. The author proceeded to identify the material differences between English mortgages and customary pledges. He stated that unlike that of a customary pledge, the right of the mortgagor to redeem is subject to the mortgagee‟s power to sell the property or to foreclose the mortgage. The author also considers the effect of lapse of time on the mortgagor‟s equitable right to redeem.[37]

Bray traced the development of mortgages at Common Law and Equity. She discussed four ways in which equity has attempted to protect the mortgagor. These include protecting the equitable right to redeem, striking down oppressive interest rates, preventing rates and preventing unfair collateral advantages. She further considered priority of mortgages and concluded that priority of mortgages is governed by two factors, namely, whether the mortgages are legal or equitable and whether the title to the property is registered or unregistered. While this work is very concise and educative on general principles of mortgages, it does not reflect local circumstances peculiar to Nigeria, being a foreign text.[38]

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