Badly timed bank liquidation in a time of recapitalisation  

Barely seven months after the Central Bank of Nigeria (CBN) governor, Olayemi Cardoso, gave a blanket clean bill of health to Nigerian banks in his keynote speech at the Chartered Institute of Bankers of Nigeria (CIBN) dinner, the apex bank has just revoked the operational licence of one of the deposit money banks (DMBs). Cardoso in his address at the event on November 24, 2023, said: “…Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress…”

Also, in a circular on March 28, 2024, where the apex bank conveyed the ongoing upward review of banks’ minimum capital, the CBN said “the prevailing macroeconomic challenges and headwinds occasioned by external and domestic shocks have underscored the need for banks to raise and maintain adequate capital to enhance their resilience, solvency and capacity to continue to support the growth of the Nigerian economy.” The CBN gave all the existing banks up until April 30, 2024 as the deadline when they must have submitted their detailed plans for meeting the new minimum capital.

With this backdrop, the recapitalisation journey has hardly entered its third month, when the apex bank opted to wield the lethal stick of withdrawing the operating licence of one of the banks (Heritage Bank), and handing over the bank to the Nigeria Deposit Insurance Corporation (NDIC) for liquidation. To say that the move by the apex bank, about 20 years after the  notable failed bank saga in the country, was a shocker to stakeholder and the general public, is an understatement. It was during the 2005/6 bank recapitalisation drive that a number of banks failed/got liquidated.

In announcing and justifying the revocation of the operating licence of Heritage Bank, the CBN in a statement on June 3, 2024 said the revocation was necessary due to the bank’s violation of Section 12 (1) of the Banks and Other Financial Institutions Act (BOFIA), 2020. The statement highlighted that the bank’s board and management failed to improve its financial performance, “posing threat to financial stability.” The CBN emphasised that the revocation of Heritage Bank’s licence is intended “to strengthen public confidence in the banking system and ensure the soundness of the financial system is not compromised.” 

While this justification for the liquidation, to the CBN, is politic and sensible, the timing and mode of sending the bank to the undertaker creates so much doubt about the remaining banks and their activities. The measure poses some danger to the ongoing recapitalisation efforts of the banks. In truth, to fully allay the fears and doubts of investors (local and foreign) at this point in time would require the apex bank giving detailed stress test results of each of the banks. Otherwise, who knows the ‘whited sepulchre’ that some of the existing banks could be, unless the CBN shows the contrary?

Banking business is a core part of the banking system; and as such, any one ailing part affects the whole (though in varying degrees). This is why the devastation and calamity unleashed by the 2005/06 recapitalisation via the liquidation of so many banks had to be kept in abeyance (permanently, perhaps). Thus, ‘exhuming’ the ghost of bank liquidation in the Nigerian economy and financial system of today could portend more harm than good. At a time that the government of the day is working hard to attract and sustain local and global confidence in its doings, it is highly counterproductive for any of the banks to be made to go under (that is, willfully liquidated). 

Even if Heritage Bank has been literally in the Intensive Care Unit (ICU) of the regulators for a couple of years, as claimed by the CBN, must the ‘euthanasia’ come now, and in the way it has happened? Since 2005/06 when the last recapitalisation exercise was concluded, and during which the number of banks crashed from about 89 to only 25, many deposit money banks (BMBs) have gone through vicissitudes. None was allowed to sink; this is because the ripple and multiplier effects of bank failure are usually far-reaching and unfathomable.

With Heritage Bank now gone, it is obvious that all its existing staff (bona fide and contract) are pushed into the already overflowing unemployment market in Nigeria. The bank’s clientele in terms of suppliers, contractors and consultants have lost the ‘honey pot’ that is Heritage Bank. It is already being widely reported that a lot of commotion and upheavals are erupting at the 116 branches of the bank nationwide, where its bewildered and confused depositors and customers are besieging each branch, hoping to withdraw their ‘trapped’ funds.

It also goes without saying that the ‘dead’ Heritage Bank must have been heavily indebted to many other DMBs, both from interbank transactions and other corporate dealings. Obviously, much of this huge debt cannot be recovered, in the short term, pending months and years of the bank’s assets disposal processes. For depositors who cannot for now (each) be paid more than five million naira, many have been forced into ‘temporary’ loss of their life savings/investment. How soon they could realise in full their deposits/savings/investment is uncertain and indeterminate, given the methods and style of the undertaker — the NDIC.

While the Heritage Bank liquidation saga was playing out, some ‘fifth columnists’ have, unfortunately, also gone ahead to speculate that a few more banks are already on the card of the CBN for liquidation. Although the apex bank has since issued a rebuttal to this ‘fake’ news, the point is that the revocation of the operating licence of Heritage Bank at this time that Nigerian banks are wooing investors (from everywhere) amounts to a ‘de-marketing.’ This is because Heritage Bank might not be the only ‘distressed’ or ‘sick’ DMB in the system; perhaps, the condition of a few others could be deteriorating, going forward.

In fact, a report by one Nigerian newspaper on June 3, 2024 was titled, “Liquidity Challenges: Banks, Others’ Borrowing from CBN up 436% to N53.7 trillion.” The report says amid liquidity challenges in the financial sector, banks (including merchant banks) borrowing from the CBN increased to N53.7 trillion in five months of 2024, about 436 percent Year-on-Year (Y-o-Y) from N10.02 trillion borrowed in the corresponding five months of 2023.

“Checks revealed that banks (including merchant banks) have since the beginning of this year consistently borrowed from the CBN to meet their daily obligations amid rising inflation and unstable foreign exchange market,” the report said. Clearly, banks’ resort to borrowing from the apex bank reflects biting illiquidity in the financial system. It is not obvious how deep any of the banks is, in this regard, nor is it known how stressed any of them is in terms of illiquidity. But the point remains that the tight monetary stance of the CBN could be scorching for not a few operators.

It really took a while for the rot in Heritage Bank to manifest and warrant taking it to the ‘hangman’; and which is why the timing and mode of its ‘removal’ from the system would have been reconsidered. All the banks (including Heritage Bank) are in the market, wooing investors (local and foreign) to raise fresh funds. Some have commenced officially, some are yet perfecting their plans and mode of entry into the market. So, is it auspicious for the apex bank to commence some ‘weeding?’ So, who next; and when? 

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