The banking industry is built on trust and stability, with financial institutions serving as the backbone of modern economics. However, when a bank’s licence is revoked, the implications can be far-reaching and devastating. This rare but significant event can have a profound impact on the bank’s customers, employees, and the broader financial landscape. The revocation of a banking license is a drastic measure typically taken by the Central Bank of Nigeria (CBN) when a bank fails to meet the required standards of operation, like maintaining adequate capital reserves, adhering to anti-money laundering regulations, or engaging in unethical practices. When a bank’s licence is revoked, it is effectively shut down, and its ability to conduct financial business is curtailed. On the 3rd day of June 2024, the CBN issued a press release revoking the banking licence of Heritage Bank Plc. This article examines the intricacies of what happens when a bank licence is revoked, exploring the immediate and long-term effects on shareholders, the role of CBN, and the measures in place to protect customers and maintain financial stability.
HOW ARE BANKS REGULATED IN NIGERIA?
The regulatory framework of the banking sector in Nigeria is governed primarily by the Central Bank of Nigeria (CBN) Act of 2007. The CBN is the main regulatory authority responsible for overseeing and supervising banks and other financial institutions in the country. The CBN Act of 2007 empowers the CBN to issue licences to banks, regulate their operations, and ensure the stability of the financial system. CBN is also empowered to revoke licences of erring banks in Nigeria (See Section 5 of the Banks and Other Financial Institutions Act, 2020).
In addition to the CBN, the Nigeria Deposit Insurance Corporation (NDIC) plays a crucial role in the regulatory framework by insuring depositors’ funds in banks and promoting public confidence in the banking system. The NDIC provides a safety net for depositors in case of bank failures and helps maintain financial stability.
The Securities and Exchange Commission (SEC) regulates the activities of capital market operators in Nigeria, including investment banks and brokerage firms. The SEC’s oversight contributes to the integrity and transparency of the capital markets.
Furthermore, the Financial Reporting Council of Nigeria (FRCN) sets accounting and auditing standards for banks and financial institutions to promote transparency, accountability, and good governance in the sector. Regulatory activities within the framework include licensing and supervision of banks, setting capital adequacy requirements, monitoring risk management practices, enforcing compliance with regulations, and promoting sound corporate governance practices. The collaborative efforts of these regulatory bodies help maintain the stability, integrity, and soundness of the banking sector in Nigeria, safeguarding the interests of depositors and contributing to the overall health of the financial system.
GROUNDS FOR REVOCATION OF BANK’S LICENCE
Bank licence revocation can occur due to various reasons, including non-compliance with regulatory requirements, financial distress, and operational misconduct. These issues can jeopardize the stability and integrity of the banking system.
Section 12 of The Banks and Other Financial Institutions Act (BOFIA) states the conditions upon which the CBN can revoke a bank license in Nigeria. are as follows:
1. Where the bank ceases to carry on the type of banking business for which the licence is issued for a continuous period of six months.
2. Where the bank goes into liquidation or is wound up
3. Where the bank fails to comply with the condition the licence was granted.
4. Where the bank is unable to meet its liabilities because of insufficient funds.
5. Where the bank conducts its business in an unsound manner or its directors engage in unsafe practices
6. Where the bank engages in any activities that are a threat to financial stabilities
7. Where the bank fails to commence business within 12 months preceding the grant of the licence, etc.
In the event of a breach of any of the above conditions, the license of the said financial institution is revoked by CBN. A breach of any of the above conditions is sufficient grounds to revoke the bank’s license.
WHAT HAPPENS WHEN A BANK’S LICENCE IS REVOKED IN NIGERIA
When a bank’s licence is revoked, several consequences follow. The primary aim of the revocation is to protect customers and prevent the spread of financial instabilities. Upon the revocation, The Nigeria Deposit Insurance Corporation will be appointed as the liquidator to manage the bank’s assets and pay customers, creditors, and others. When NDIC is appointed, the bank’s operations come to a halt, leading to disruptions in banking services. Accessing funds may be delayed, causing inconvenience and uncertainty. The revocation also brings about job losses for bank employees and potential financial losses for shareholders. The withdrawal of a bank’s licence can shake public confidence in the banking system, leading to fear and possible bank ruins in other financial institutions. The closure of a bank could disrupt economic activities in the affected region, leading to difficulties for individuals and businesses who had accounts or loans with the bank. There could be legal battles and disputes between the bank, regulatory authorities, depositors, and other stakeholders, potentially leading to lengthy Court proceedings and uncertainties. Following a bank’s license withdrawal, regulatory bodies such as the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) may increase their oversight and regulations on the banking sector, potentially impacting other financial institutions and may have to step in to compensate depositors up to the maximum insured amount, putting strain on the deposit insurance fund.
WHAT HAPPENS TO THE DIRECTORS, SHAREHOLDERS, AND CREDITORS WHEN A BANK’S LICENCE IS WITHDRAWN
The BOFIA outlines a framework for the protection of shareholders when a bank’s licence is revoked. Some of the remedies shareholders are entitled to when the bank’s licence is withdrawn in Nigeria are to wit:
a. Shareholders must be informed when a bank’s licence is withdrawn. According to section 12 of the BOFIA, the affected bank has the right to appeal the decision of the withdrawal of the licence. In this case, shareholders can be part of the action through the bank’s governance mechanisms, typically by engaging with the bank’s board of directors to challenge the withdrawal if they believe it unjustified.
b. Upon the withdrawal of the bank’s license, the right of the shareholders are subordinate to those of the customers and creditors. This is to state that when the depositors have been reimbursed, the remaining assets of the bank will be shared according to the shareholdings of the shareholders.
c. Creditors are also entitled to reimbursements, but this is however subject to that of the depositors. Here, the order of reimbursement is dependent on whether it is a floating or secured charge. The NDIC being the liquidator of the bank reimburses creditors after clearing the liquidation expenses and the depositors are completely paid off.
d. Aggrieved parties may proceed to Federal High Court for redress, but the Court cannot order for reissuance of the licence to the bank, rather the Court will award damages of monetary compensation not more than the value of the paid-up capital of the bank at the time of the revocation of the said licence. What this means is that the Court can grant the bank any other relief but not one pertaining to the restoration of the bank to commence operation in financial business again. It may continue with other businesses that it is incorporated for.
WHAT HAPPENS TO A DEPOSITOR’S MONEY WHEN A BANK’S LICENCE IS WITHDRAWN?
In the event a bank’s licence is withdrawn, the depositors or customers need not panic. This is because it is mandatory for all banking institutions to insure their total liabilities with the Nigeria Deposit Insurance Corporation with zero premium from the depositors. The essence of this is to cushion the loss of the depositor’s fund in the event of the bank’s license being withdrawn or where the bank suffers any other disability and is wound up.
The NDIC in its press release issued on the 2nd day of May 2024 increased the deposit insurance cover to five million naira (N5, 000,000) for Deposit Money Banks and Mobile Money Operators while for Microfinance Banks, Payment Service banks and Primary Mortgage Banks have been increased to two million naira (N2,000,000). This means that in the event a bank’s licence is withdrawn, the depositors with up to the above-mentioned money depending on the type of financial institution he or she is operating, as stated above too, are entitled to a certain percentage of total deposits as reimbursement by the NDIC.
Where the money of any depositor is more than the above-listed deposit insurance cover, depending on the bank, a depositor is entitled to receive a liquidation dividend after the sale of the assets of the bank and debtors redeem their debts to the bank. Bank depositors are the first to be paid after clearing the liquidation expenses and this is overseen by the NDIC who is appointed as liquidator.
CONCLUSION
The recent revocation of Heritage bank’s licence by the Central Bank of Nigeria highlights the critical role of regulatory bodies in maintaining financial stability and protecting depositors’ funds. The actions taken by the CBN demonstrate a commitment to enforcing regulations and safeguarding the integrity of the banking sector in Nigeria. The involvement of the Nigeria Deposit Insurance Corporation (NDIC) further ensures that affected depositors are protected and their funds are reimbursed up to the maximum insured amount. And where any depositor has a fund more than the maximum insured amount, he will also be reimbursed from the assets of the bank upon the successful liquidation of the bank by NDIC, that is, the person is entitled to liquidation dividend.
It is imperative for both banks and regulatory authorities to uphold transparency, accountability, and sound financial practices to prevent future instances of licence revocation. Deposit insurance schemes play a crucial role in promoting depositor confidence and supporting financial stability. As the banking landscape continues to evolve, it is vital for all stakeholders to prioritize the interests of depositors and maintain a robust regulatory framework to prevent systemic risks and protect the overall health of the financial system.
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