AN EXAMINATION OF THE LEGAL IMPLICATIONS OF MORTGAGES AS COLLATERAL IN NIGERIA

CHAPTER ONE

• GENERAL INTRODUCTION

The 2005 consolidation exercise otherwise known as the recapitalization exercise embarked upon by the Central Bank of Nigeria (CBN), was meant to address the issue of inadequate share capital of banks in Nigeria by the introduction of N25Billion minimum share capital for all Banks in the country in order to make the banks stronger to be able to finance more businesses. The concept of recapitalization refers to the policy that compelled all commercial banks to raise their capital base from N2billion to N25billion by the Central Bank of Nigeria on or before 31st December, 2005¹. The exercise brought about huge resources at the disposal of financial institutions which in turn enabled them to make credit available to a large number of individuals and corporate entities with the intention of making huge profits.

The desire to make huge profits consequently pushed the financial institutions into fierce competition as a result of which some of them started giving out loans without collaterals in a bid to lure customers with the ultimate aim of making huge profits. This culminated in billions of naira loans to the capital market which at the end of the day, got caught up in the financial meltdown (a situation were some financial institutions or assets suddenly lose a large part of their value especially in the stock market crashes). The melt down led to the near collapse of many banks/other financial Institutions as a result of bad debts which arose from credit facilities granted by financial institutions without adequate collateral.

Consequently, some few Nigerian banks mainly due to the general weakness in their Risk Management and Corporate Governance framework, started displaying signs of failure as far as October 2008 due to huge concentrations of their exposure to certain sectors of the economy like the Capital Market and the Oil and Gas Industry. These banks started showing serious liquidity strain and had to be given financial support by the CBN in the form of an “Expanded Discount Window” (EDW)² when the CBN extended credit facilities to these banks on the basis of collateral in the form of Commercial Paper and Bankers Acceptance. This clearly indicated that recapitalization alone, was not the panacea to the problem of the banking industry in Nigeria as all the banks frequenting the EDW, had recapitalized and even raised additional capital thereafter.

                     STATEMENT OF RESEARCH PROBLEM:

The research identified a legal problem that arose after the 2005 Consolidation exercise of the Central Bank of Nigeria when some financial institutions started giving out loans without collaterals or adequate collaterals due to the volume of funds available at their disposal and stiff competition towards making substantial margin of profits as well as a combination of the following factors: