Aarndale Solicitors | Criteria for Revocation of Banking License by the Central Bank Of Nigeria (CBN) %

Background

In the complex financial landscape of Nigeria, the Central Bank of Nigeria (CBN) plays a critical role in ensuring the stability and integrity of the banking sector. The CBN’s authority to revoke banking licenses is one of its most significant powers, aimed at maintaining a secure financial system. Recently, this power was exercised in the shutdown of Heritage Bank, highlighting the stringent criteria and the critical regulatory environment governing Nigerian banks.

Regulatory Framework and Criteria for License Revocation

The revocation of a banking license by the CBN is governed by various regulatory frameworks, primarily the Banks and Other Financial Institutions Act (BOFIA) 2020. The act provides comprehensive guidelines on the conditions under which a banking license may be revoked. Here are the key criteria:

Insolvency or Financial Distress: One of the primary reasons for the revocation of a banking license is the insolvency of the institution. Where a bank is unable to meet its obligations as they become due, or its liabilities exceed its assets, the Central Bank Of Nigeria (CBN) is authorized to intervene.

Section 12(b) of the Banks and Other Financial Institutions Act (BOFIA) 2020 provides that the Governor may, with the approval of the Board and by notice published in the Federal Government Gazette, or print and electronic media, revoke any license granted under the Act if a bank goes into liquidation or is wound up or otherwise dissolved.[1]

Capital Adequacy Issues: Banks are required to maintain a minimum capital adequacy ratio. Failure to meet these requirements consistently can lead to license revocation.

Section 9(1) of the Act provides that the Bank shall determine the minimum paid-up capital requirement of each category of banks licensed under the Act which shall be complied with by each bank within the time prescribed by the Bank.[2]

Section 9(2) provides that failure to comply with the provisions of subsection (1) within such period as may be determined by the Bank, is a ground for the revocation of any license issued under this Act repealed by it.[3]

Section 12(h) provides that the Governor may revoke any license granted under this Act if a bank is in the opinion of the Bank critically undercapitalized with a capital adequacy ratio below the prudential minimum or such other ratio as the Bank may prescribe.[4]

Section 13(1) provides that A bank shall maintain, at all times, capital funds unimpaired by losses, in such ratio to all or any asset or to all or any liability or to both such assets and liabilities of the bank and all its offices in and outside Nigeria as may be specified.[5]

Corporate Governance Failures: The CBN emphasizes strong corporate governance. Persistent governance issues, such as failure to constitute a board of directors or executive mismanagement, can lead to regulatory action.

Non-compliance with Regulatory Directives: Continuous non-compliance with CBN’s directives, guidelines, and circulars can trigger license revocation. The CBN is authorized to impose fines and other penalties on banks that fail to adhere to regulatory requirements.

Section 12(g) of BOFIA provides that the Governor may revoke any license granted under this Act if a bank fails to comply with any obligation imposed upon it by or under this Act, or the Central Bank of Nigeria Act or any other rule, regulation, guideline or directive.[6]

Fraud and Malpractice: Involvement in fraudulent activities or malpractice is a serious breach that can lead to immediate license revocation.

Section 12(e) of BOFIA provides that that the Governor may revoke any license granted under this Act if a bank conducts its business in an unsound manner or its directors engage in unsafe practices.[7]

Public Interest

Banks and Other Financial Institutions Act (BOFIA) 2020 empowers the CBN to take actions, including revocation of licenses, in cases where a bank’s operations are deemed detrimental to public confidence in the financial system.

Section 12(f) of BOFIA provides that the Governor may revoke any license granted under this Act if a bank is involved in a situation, circumstance, action or inaction which constitutes a threat to financial stability.[8]

Section 12 (2) provides that where the license of a bank has been revoked under the Act and the Governor is satisfied that it is in the public interest to do so, the Governor may, subject to the approval of the Board and without waiting for any period prescribed for doing anything under the Act or any law to lapse, appoint the Nigeria Deposit Insurance Corporation as a liquidator of the affected bank and the corporation shall have the powers conferred on a liquidator by or under the Companies and Allied Matters Act and shall be deemed to have been appointed a liquidator by the Federal High court for the purpose of this Act.[9]

The Case of Heritage Bank Plc.

On June 3^rd, 2024, the Central Bank of Nigeria (CBN) revoked the banking license of Heritage Bank Plc, citing a breach of Section 12 (1) of the Banks and Other Financial Institutions Act (BOFIA) 2020.[10] The CBN indicated that its decision to revoke the license was due to the bank’s persistent inability to enhance its financial performance.[11]

The regulator stated that Heritage Bank, which held a national license, failed to demonstrate any reasonable prospects of recovery, necessitating the revocation of its license as the next necessary step.[12]

It is important to note that this is not the first time the bank has encountered regulatory challenges. Heritage Bank, originally founded in the 1970s as Societe Generale, was closed by the CBN in 2006 due to its failure to meet the new capital requirements of N25 billion ($155 million). The bank subsequently challenged the closure in court and was successful. Consequently, the CBN reissued the license as a regional bank in December 2012.[13]

According to the CBN, the Nigeria Deposit Insurance Corporation (NDIC) has been appointed as the liquidator of the bank in line with Section 12 (3) of the Banks and Other Financial Act (BOFIA) of 2020.[14]

Financial Health: Heritage Bank struggled with liquidity and capital adequacy issues, contravening Section 12 of BOFIA, 2020. The inability to meet customer withdrawal demands and significant decline in its financial health were red flags that prompted CBN’s intervention.[15]
Governance Challenges: The bank faced numerous internal governance issues, including ineffective management and board oversight. These challenges hindered its ability to implement corrective measures and restore stability.[16]
Regulatory Non-compliance: Heritage Bank had multiple instances of non-compliance with CBN directives. This included failure to submit accurate financial reports and non-adherence to capital requirements, further straining its relationship with the regulator.[17]
Public Confidence: The deteriorating situation at Heritage Bank led to a loss of public confidence. Customers and investors alike were wary of the bank’s ability to continue operations, creating a ripple effect that threatened the broader financial system.[18]

Implication of Revocation of Banking license on customers

Revocation of a banking license by the Central Bank of Nigeria (CBN) can greatly affect customers:

Access to Funds:
Temporary restrictions on account access.
Deposit insurance covers some funds, but uncertainties remain for amounts exceeding the limit.

Service Disruption:
Bank branches, ATMs, and online banking services may be limited or suspended.

Loan and Credit Facilities:
Uncertainties in loan repayment terms.
Disruptions in access to credit lines.

Investment Accounts:
Risk of losing invested capital.
Need to transfer investments to another institution.

Legal Rights and Recourse:
Filing claims with the NDIC for insured deposits.
Option for legal action if rights are violated.

Impact on Financial Confidence:
Erosion of trust in the banking system.
Apprehensions about system stability among depositors.

Regulatory Oversight:
NDIC manages resolution process, including insured deposit payouts and asset liquidation.
Effective communication from regulatory authorities is crucial for reassuring customers.

Conclusion

The revocation of Heritage Bank’s license by the CBN emphasizes the importance of regulatory compliance, sound financial management, and corporate governance in the banking sector. The criteria for revocation are stringent, reflecting the CBN’s commitment to safeguarding the stability and integrity of Nigeria’s financial system. Heritage Bank’s case serves as a stark reminder to other financial institutions of the critical need to adhere to regulatory standards and maintain public trust.

As the Central Bank of Nigeria (CBN) maintains vigilance over the banking sector, the closure of Heritage Bank serves as a valuable lesson shaping forthcoming policies and enforcement measures. This commitment aims to fortify the Nigerian banking system, ensuring its resilience, reliability, and capacity to foster economic growth and development.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

[1] Section 12(b) BANKS AND OTHER FINANCIAL INSTITUTION ACT, 2020

[2] Section 9(1) BOFIA, 2020

[3] Section 9(2)

[4] Section 12(h) BANKS AND OTHER FINANCIAL INSTITUTION ACT, 2020

[5] Section 13(1) BOFIA,2020

[6] Section 12(g)

[7] Section 12(e)

[8] Section 12(f)

[9] Section 12(2) BANKS AND OTHER FINANCIAL INSTITUTION ACT, 2020

[10] CBN CIRCULAR https://www.cbn.gov.ng/Out/2024/CCD/CBN%20Press%20Release%20Heritage%20030624.pdf Accessed 5/06/2024.

[11] Bunmi Aduloju (5^th June, 2024) “Heritage Bank’s licence revoked — what happens to depositors, shareholders?” THE CABLE https://www.thecable.ng/explainer-heritage-banks-licence-revoked-what-happens-to-depositors-shareholders/ Accessed 05/6/2024

[12] Ibid