CBN wields big stick to take Heritage out of banking sector

• Experts’ divergent views on apex bank’s action

Onome Amuge

Heritage Bank’s financial woes finally reached a tipping point last week, as the Central Bank of Nigeria (CBN) revoked the bank’s operating licence, bringing its operations to a definitive end.

The CBN, in its announcement of Heritage Bank’s licence withdrawal, cited financial instability and repeated non-compliance with regulatory requirements as the reasons for its decision. Citing Section 12 of the Banks and Other Financial Institutions Act (BOFIA) 2020, CBN emphasised its critical role in safeguarding the soundness and stability of Nigeria’s financial system.

According to the CBN, Heritage Bank had breached the provisions of Section 12(1) of BOFIA 2020, necessitating regulatory intervention in the form of the revocation of its operating licence. The apex bank further stated that despite its best efforts, Heritage Bank had failed to heed the authority’s supervisory measures and continued to suffer from poor financial health and its inability to turn the tide left the apex bank with no choice but to invoke its regulatory powers to protect the financial system and safeguard depositors’ interests.

In a last-ditch effort to protect the interests of depositors and creditors, the Nigeria Deposit Insurance Corporation (NDIC) was directed to scrutinise the bank’s books in a frantic effort to sort out the outstanding funds owed to depositors and creditors. 

Addressing the liquidation process of Heritage Bank, Bello Hassan, managing Director of the NDIC, revealed that the NDIC was working assiduously to reimburse the bank’s depositors within a period of one week.

Hassan disclosed that the failed bank’s deposit base was valued at N650 billion while its outstanding loans totalled more than N700 billion. He, however, assured that the NDIC would conclude repayment of the outstanding loan balance  within a period of six months.

The NDIC revealed that Heritage Bank had a total of 2.3 million depositors, with an overwhelming majority (99%) holding balances of less than N5 million. According to the NDIC MD, all depositors with insured deposits of up to N5 million were being verified for the disbursement of their insured benefits, while depositors with insured deposits exceeding N5 million would be paid out of the proceeds from the sale of the bank’s assets.

A banking tale of triumph and financial tragedy

Heritage Bank was originally founded in March 2012 as a regional bank in Nigeria, following its acquisition of the licence and structure of the erstwhile Societe Generale Bank of Nigeria.

After successfully winning the bid for the defunct Enterprise Bank in October 2014, Heritage Bank underwent a significant transformation from a regional to a national bank.

Being among the deposit money banks having commercial banking licences with national authorisation, the bank was able to extend its services across the country and as at 2024, had about 116 branches across the country.

Despite Heritage Bank’s initial success in the Nigerian banking landscape, concerns surrounding its financial soundness were pervasive in the industry. As early as 2019, a report by Proshare, a research and media organisation, revealed deep-seated apprehensions about Heritage Bank’s financial wellbeing. The unpublished ‘Confidential Report on Heritage Banking Company Limited’ exposed many of the underlying issues that would ultimately lead to the bank’s collapse.

The report revealed multiple areas of concern that called into question the bank’s corporate governance, operational stability, and long-term viability. Of particular note was the report’s finding that the bank’s acquisition of Enterprise Bank was a misstep that exacerbated its pre-existing problems. Among its findings, the report identified the bank’s non-performing loans as being among the worst in the industry.

Furthermore, the bank’s financial statement showed that it sustained significant losses in half year 2018, posting an operating loss before tax of N38.5 billion, and a loss of N4.4 billion in unaudited figures for December 2018. In addition to the losses the bank’s financial woes were further compounded by depleted equity capital, which was severely eroded by mounting losses. This  situation raised questions about the bank’s adherence to sound corporate governance practices, as allegations surfaced of insider loans that were poorly performing and largely unresolved.

The fragility of Heritage Bank’s financial stability became even more apparent in April  2024, when the bank’s customers expressed frustration over their inability to withdraw funds from their accounts.  

Experts views on its licence revocation

Reacting to the revocation of Heritage Bank’s licence, Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria, described Heritage Bank’s fall as an expected outcome.

“The revocation of the banking licence of Heritage Bank by @cenbank is the chronicle of a death foretold. In other words, it’s not surprising,” he stated in his handle on the  X platform.

Moghalu underscored the importance of safeguarding depositors’ funds and maintaining public confidence in the banking system. The renowned economist stressed that despite the essential nature of banks as heavily regulated businesses, poorly managed ones cannot expect to remain solvent indefinitely. He further emphasised that CBN’s decision was based on the imperative to protect depositors’ funds and maintain the stability of the Nigerian banking sector.

According to Moghalu, the establishment of the Asset Management Corporation of Nigeria (AMCON) was primarily driven by the need to ensure stability within the Nigerian financial system, and to prevent bank failures that could destabilise the entire sector.

“What we did in 2010 when we created @AmconNg was to ensure SYSTEMIC financial stability. We made sure no bank failed then to ensure systemic stability because of the unique situation of the global financial crisis. But over the long term, I never subscribed to a view that no bank, no matter how badly run, should ever fail. That would be a wrong approach to financial regulation,” he explained.

On the other hand, Orji Udemezue, chief executive officer, Flame Academy & Consulting Limited, expressed deep concern and disappointment over the revocation of Heritage Bank Plc’s banking licence by the Central Bank of Nigeria.

Udemezue, in a note to Business a.m., cited the CBN’s previous pledge not to allow any bank to collapse after the Global Financial Crisis of 2008-2009, which he believed had been betrayed by Governor Cardoso’s actions.

“What has happened to the Financial Industry Resolution Funds enshrined in the 2020 amended BOFIA?

“What has happened to the risk-based supervision approach entrenched in the Central Bank in the past decade and more?

“Why couldn’t the Central [Bank of Nigeria] take over the bank as a bridge bank, pending whenever an investor can be found? Or has this been on, behind the table?” He questioned.

Udemezue warned that the revocation of Heritage Bank’s licence could have severe implications for the future of the sector and the broader Nigerian economy.

The banking and finance expert added that the decision could erode investor confidence in the banking industry, particularly given that many banks, both large and small, would soon need to raise capital. He observed that the current economic climate, with Nigeria already experiencing a prolonged period of stagnation, was an inopportune time for such disruptive news to be announced.

Udemezue also voiced his concerns about the role of the Nigeria Deposit Insurance Corporation (NDIC) in managing the affairs of Heritage Bank.

He expressed a lack of trust in the NDIC’s ability to manage the assets of Heritage Bank, stating that as usual, NDIC will sit on people’s deposits for decades.

According to Udemezue, “NDIC has (also) never recovered defunct banks’ risk assets to ensure further payments to deposits beyond the hungry insured amounts.”

While conceding that the CBN’s revocation of Heritage Bank’s licence was in line with its core mandate of maintaining financial stability, Wisdom Selekekeme Krokeyi, a senior lecturer at the Department of Economics, Niger Delta University, expressed his belief that the apex bank could have intervened earlier to avert the bank’s demise and safeguard depositors’ funds.

“Although CBN’s responsibility involves ensuring financial system stability, which also includes taking necessary action against struggling banks to sustain such banks, like in the case of Heritage Bank, CBN ordinarily would have, if all things being equal, ensured that the bank is sustained by deploying some measures,” he stated.

With an eye towards alternative approaches to addressing Heritage Bank’s financial difficulties, Krokeyi argued that the recapitalisation option was a potential life raft for the ailing bank. In Krokeyi’s opinion, the CBN should have thoroughly explored this avenue, which would have granted Heritage Bank the opportunity to raise additional capital and shore up its financial position, in effect averting the need for licence revocation and the potentially destabilising fallout.

Another viable option highlighted by the economic analyst is a merger with a more robust financial institution, an avenue that would have allowed the bank to maintain its presence in the Nigerian banking sector while benefiting from the financial strength and stability of its stronger partner. In his view, this solution would have avoided the complete revocation of Heritage Bank’s licence, preserving its existence and protecting depositors’ funds in the process.

Furthermore, Krokeyi underscored the paramount importance of a more vigilant and stringent approach to banking supervision, urging the CBN to assume a more assertive and hands-on role in monitoring the actions and decisions of bank management.

Recognising the potential for poor managerial judgement and oversight as a result of financial crises, Krokeyi urged the CBN to adopt a proactive and preventative stance, leveraging its regulatory authority to detect and address risk factors that could compromise the health of Nigeria’s banking sector.