Introduction

A bank failure occurs when a bank cannot meet its financial obligations to creditors and depositors. This can result from two main issues: insolvency or illiquidity. Insolvency happens when a bank’s liabilities exceed its assets, meaning it doesn’t have enough resources to pay its debts. Illiquidity, on the other hand, occurs when a bank, despite being solvent, lacks sufficient liquid assets like cash to meet the immediate withdrawal demands of its depositors. This can trigger a bank run, where depositors rush to withdraw their funds, exacerbating the bank’s liquidity crisis.

Several factors contribute to a bank’s failure. Poor risk management practices, such as making high-risk loans or failing to diversify investments, can expose a bank to significant financial vulnerabilities. Economic downturns can lead to a surge in loan defaults and decreased profitability. Fraudulent activities or mismanagement by bank executives can erode a bank’s capital base. Non-compliance with regulatory requirements can result in hefty fines, further weakening the bank’s financial standing.

Circumstances for License Revocation by the CBN

The Central Bank of Nigeria (CBN) has the authority to revoke a bank’s license under Section 12(1) of the Banks and Other Financial Institutions Act (BOFIA 2020). The circumstances include:

1. The bank ceases to conduct its licensed banking business for six continuous months.
2. The bank undergoes liquidation, winding up, or dissolution proceedings.
3. The bank fails to meet the conditions of its license or violates BOFIA, the CBN Act, or related regulations.
4. The bank’s assets are insufficient to cover its liabilities.
5. The bank conducts business in an unsound manner or engages in unsafe practices.
6. The bank’s actions pose a threat to the financial system’s stability.
7. The bank fails to adhere to regulatory obligations.
8. The bank’s capital adequacy ratio falls below the minimum requirement.
9. The bank fails to commence operations within 12 months of licensing.
10. The bank fails to maintain the minimum paid-up share capital requirement.
11. The bank fails to maintain capital funds unimpaired by losses as specified by the CBN.

Using Heritage Bank as a case study, the recent revocation of Heritage Bank’s license on June 3, 2024, by the CBN, cited breaches of Section 12(1) of BOFIA 2020 and the bank’s inability to improve its financial performance, suggesting issues related to items 4 and 6.

Implications of License Revocation

For depositors, the revocation of a bank’s license can have significant implications. Depositors may lose access to their accounts, and banking services like ATM access and online banking may be disrupted. Specifically, in Nigeria, the following steps occur:

1. NDIC Appointment: The CBN appoints the Nigeria Deposit Insurance Corporation (NDIC) as the liquidator. The NDIC insures deposits and acts as a receiver and liquidator of failed banks.
2. Claims Submission: The NDIC invites depositors to submit their claims for reimbursement through advertisements.
3. Payments to Depositors: The NDIC pays depositors within 30 days of appointment, guaranteeing up to ₦500,000 for non-microfinance banks and ₦200,000 for microfinance banks. However, it announced a payment of up to ₦5 million per depositor for Heritage Bank.
4. Liquidation Dividend: Depositors with funds exceeding the insured limits receive liquidation dividends upon realization of the bank’s assets.

Impact on Shareholders and Directors

In the event of a bank’s license revocation, the NDIC can enforce personal liability on significant shareholders and directors if their actions contributed to the bank’s failure. This includes liability for monetary damages resulting from the misuse or improper investment of the bank’s assets. Shareholders and directors may be liable even if their actions occurred before the bank was declared failing.

A bank can challenge the revocation of its license by filing an action with the Federal High Court within 30 days. However, the court cannot restore the license but may award monetary compensation not exceeding the bank’s paid-up capital at the time of revocation.

Actions Against Debtors

As a liquidator, the NDIC can take several actions against debtors of a failed bank to recover debts, including:

1. Set-off: Using the debtor’s deposits to repay the loan.
2. GSI Scheme: Accessing the debtor’s accounts in other banks to settle the loan.
3. Receiver Appointment: Managing and selling the debtor’s assets to recover the debt.
4. Account Freezing: Freezing the debtor’s account to prevent access until the debt is recovered.
5. Bankruptcy Proceedings: Initiating bankruptcy proceedings if the debtor fails to settle the debt within 90 days.
6. Winding Up: Applying to the court for winding up a corporate debtor.
7. Public Disclosure: Publishing the names of debtors to pressure repayment.

Conclusion

The revocation of Heritage Bank’s license impacts various stakeholders, including depositors, employees, shareholders, and directors. The liquidation and deposit insurance payouts will unfold in the coming months. This incident will likely prompt increased regulatory scrutiny and a reassessment of risk management practices within the banking sector. The NDIC’s role in managing the liquidation process underscores the importance of robust regulation and proactive measures to safeguard depositors’ interests and maintain trust in the banking system.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.