Abstract
Evidences contained in this paper show that there is a serious dearth of long-term corporate finances in Nigeria. The paper draws out clearly the fact that there are many deficiencies in the legal instruments governing bankruptcy practices in the country, and that it is these deficiencies which joined to erode confidence in the financial system. Its conclusion, among others, is that the near lack of long-term investment capital in Nigeria may therefore be owing to the gaps in the bankruptcy and collateral laws, and that even the recent banking consolidation was formulated and implemented without any attempt to equally close these gaps. The paper suggests that the present banking industry in the country would only succeed in playing an efficient intermediation role in the economy if the bankruptcy regulation were reformed as well in order to make adequate provisions for corporate liquidation, workout and reorganisation, as part of its debt resolution options; in addition, it is necessary to incorporate provisions that ensure the equitable allocation of risks in cases of liquidation and the protection of the value of an insolvent in cases of liquidation or reorganisation. These, the paper recognises, are the ingredients of efficiency bankruptcy regulations in countries with exemplary debt markets.
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The Nigerian financial system, for instance, is just emerging from what has been adjudged as the largest industry convergence in the history of banking in Africa (Ezeoha, p. 172).11 The exercise witnessed the forced reduction in the number of conventional banks in the country from 89 as at July 2004 to 25 as at present. According to official sources, the key goal of the consolidation was to solve the lingering cases of distress and failure and reposition the financial system to serve as catalyst for national development.
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Bankruptcy laws apply in general proportion to all corporate firms. However, in the case of financial institutions (and banks in particular), other regulatory frameworks are used to facilitate the resolution of distress or bankruptcy cases. A good example is the existence of deposit insurance and bail-out schemes in most countries.
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The Federal high court is vested with jurisdiction in bankruptcy and insolvency proceedings, by virtue of the provisions of basic bankruptcy related laws in Nigeria – such as Section 407 of the Companies and Allied Matters Act, Section 142 of the Bankruptcy Act, as well as Section 251(e) of the Constitution of the Federal Republic of Nigeria.
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In the historic 2004 address that heralded the much celebrated Nigerian banking consolidation, the governor of the Central Bank of Nigeria used the concept of ‘the cultural environment and the mindset whereby many people prefer to own 100 per cent of barely nothing rather than 1 per cent of something’ to explain the inherent difficulty in relinquishing control among Nigerian corporate owners (Soludo, 2004).32
The difficulty of enforcing commercial contracts in Nigeria is measured by the number of procedures counted from the moment the plaintiff files a lawsuit until actual payment, the associated time, and the cost as a percentage of debt value. On average, it requires 23 procedures, 730 days and 37.2 per cent of debt. The cost of bankruptcy in Nigeria is 18 per cent of estate value, the recovery rate for creditors is $0.33 per USD and the time in years to complete a foreclosure/bankruptcy procedure is 1.5 years (http://www.yearofmicrocredit.org/docs/countryprofiles/Nigeria.doc, Accessed 19 February 2008).
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Quoted in Uche, p. 437.43
Or in general, Collier (1998) advises that the economic solutions to the problems of the judiciary in Africa are to change the incentives facing both clerks and judges; include an element of piece-rate into the wage structure, so that delay becomes costly; and raise clerks’ wages by increasing court charges.
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In most cases, the NDIC and the Central Bank of Nigeria have had to face stiff legal tussles in their bid to close a ‘distressed’ bank. In the last concluded banking consolidation in the country, at least 5 out of the 13 banks that were unable to meet up with the 25 billion (Nigerian) Naira capitalisation till date have some running legal cases against the regulatory agencies. Another good instance of this is the case of Savanah Bank Plc, which the agencies are yet to be liquidated because of the contention by the former that it was not in distress as at the time its license was revoked in 2002. All these have led to serious public impression that such revocation was an instrument of the ruling government to silence oppositions.
Regulatory provision that mandated banks to specify the maturity structure of their lending operations was abolished in 1996. Henceforth, banks regained the freedom to structure their loans and advances according to their individual preferences. This development may have no doubt consolidated the traditional financing patterns of banks – where because of the dominance of short-term deposit structure (and of course the absence of incentives to lend to most domestic economic sectors), banks tend to focus more on short-term lending.
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Free Cash flow or over-investment hypothesis is used to illustrate an agency problem where managers deliberately commit funds on projects with negative NPVs (Berkovitch and Kim, p. 766, footnote 5).58
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The present practice where settlement of debts under the bankruptcy practice is prioritised to first take care of all the costs arising from the bankruptcy proceedings and administration does not seem to help matters. Section 35(1) specifically provides that ‘the assets remaining after payment of the actual expenses incurred in realising any of the assets of the debtor shall, subject to any order of the court, first be liable to the following payments, which shall be made in the following order of priority, namely – (a) the actual expenses incurred by the Official Receiver in protecting or attempting to protect the property or assets of the debtor or any part thereof and any expenses or outlay incurred by him or by his authority in carrying on the business of the debtor; (b) the fees, percentages and charges payable to, or costs, charges and expenses incurred or authorised by, the Official Receiver, whether acting as Official Receiver or trustee; (c) the remuneration of the special manager, if any; and (d) the taxed costs of the petitioner, so far as the same may not have been disallowed by the court.’36
Acknowledgements
We are grateful to Professors Francis Okafor and Chibuke Uche and to the doctoral students’ participants at the 2007 Financial Management Association Doctoral Student Seminar in Spain for their useful comments. Part of the main idea of this paper is drafted from Abel Ezeoha's PhD thesis report at the University of Nigeria.
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1holds a PhD in Banking & Finance from the University of Nigeria. He is a lecturer in the Department of Banking & Finance, Ebonyi State University, and a research fellow at the African Institute for Applied Economics (AIAE).
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Ezeoha, A., Anyigor, C. Bankruptcy practice in the absence of long-term corporate financing: The Nigerian case. J Bank Regul 10, 249–264 (2009). https://doi.org/10.1057/jbr.2008.24
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DOI: https://doi.org/10.1057/jbr.2008.24