by SANUSI LAMIDO SANUSI Executive Director Risk & Management Control First Bank of Nigeria Plc
(*Being a paper presented at the DISTINGUISHED GUEST PROGRAMME organized by Messrs Templars (Barristers & Solicitors) and held at their Conference Room at No. 13A, A. J. Marinho Drive, Victoria Island Annex, Lagos on Tuesday, June 6, 2006)
LEGAL ISSUES IN CREDIT RISK CONTROL AND THE PREVENTION OF BANK FAILURES IN NIGERIA by SANUSI LAMIDO SANUSI Executive Director Risk & Management Control, First Bank of Nigeria Plc Lagos, June 6 2006
I have been invited by Messrs Templars (Barristers & Solicitors), the organizers of this programme, to speak on the topic Legal Issues in Credit Risk Control and the Prevention of Bank Failures in Nigeria as their “Distinguished Guest” for this month. Although the programme organizers indicated that I was free to alter the title or subject matter of the topic to suit my preference, I felt I should honour the organizers by attempting to do justice to their own topic. Since I am a mere Risk Manager, this entry into the terrain of the “learned gentlemen” seems to me extremely brave. I do hope, therefore, that it shall turn out to be a duly calculated and well-managed risk.
Credit Risk Control refers to the process by which all loans, advances, credit facilities or accommodation granted by a bank to a customer are administered to ensure that the facilities run satisfactorily according to the terms governing them and are ultimately repaid on due date. The process involves monitoring, reviewing, upgrading and downgrading as the case may be, the process of dealing with loan delinquency and collectibility and ultimately re-payment.
Basically, the objective of the Credit Risk Control function is to enable a bank keep abreast of all developments impacting loans and advances granted by it with a view to ensuring that the terms governing the loan or credit are adhered to so that there is no default. The idea is to allow the bank to be proactive and take appropriate, and indeed, proactive initiatives to protect its Risk Assets in order to forestall default or mitigate default if it does occur. This function is therefore an important aspect of banking business. A well managed and effective Credit Risk Control process is important to every bank, as large loan losses could lead to non-profitability and the eventual collapse
and liquidation of a bank. A well structured and managed Credit Risk Control function no doubt, helps to keep a bank afloat as well as profitable.
I shall now proceed with a discussion of some of the general legal considerations in Credit Administration before going on to identify the legal issues involved in Credit Risk Control and the prevention of bank failures in Nigeria.
The first consideration deals with the capacity/authority of the borrower. The customer/borrower is expected to be either a natural person or a non-natural person. In the case of a natural person, a bank is expected to deal with adults of sound mind and body, while in the case of non-natural persons, banks are expected to deal with duly incorporated companies, corporations, clubs, associations, firms and government agencies. Indeed, banks are expected to ascertain the legal capacity of the borrower -both natural and non-natural persons -- to enter into contracts before extending credits to them.
The second legal consideration deals with the legality or otherwise of credit transactions. For a contract to be valid it must be legal. If the purpose of the contract is considered illegal in law, then such a contract cannot be valid or enforceable. Illegality of contracts will arise either by express stipulation of the law or by the rules of common law. Illegality by law will arise where a law or government regulation precludes or prohibits certain things or acts. Any contract in pursuance of such a thing or act...