What Happens To Your Money When Your Bank’s Licence Is Revoked?
The revocation of Heritage Bank’s licence by the Central Bank of Nigeria (CBN) has unnerved some banking customers in Nigeria, prompting an array of questions regarding the safety of the money in their bank accounts.
Nigeria’s apex bank on June 3, 2024, announced that the licence of Heritage Bank, founded in 2012, has been revoked due to the bank’s non-compliance with Section 12(1) of the Banks and Other Financial Act (BOFIA) 2020.
Banking customers are questioning further the stability of Nigeria’s financial sector with the alleged revocation of three other banks: Unity Bank, Polaris Bank, and Keystone Bank. While the CBN has debunked the rumour as false, stating that the country’s “financial system remains safe, sound, and resilient,” the revocation of Heritage Bank’s licence is not the first time the licence of a financial institution has been revoked.
In 2023 alone, CBN revoked the licence of at least 132 microfinance banks, stating that the “banks ceased to carry on in Nigeria, the type of business for which their licences were issued for a continuous period of six months.”
For depositors in Heritage Bank, the Nigeria Deposit Insurance Corporation (NDIC) announced on June 5 that it will commence the payment of Heritage Bank’s customers.
But its statement that only those with ₦5 million and less will first be paid, until the bank’s assets are sold, has raised more concern among the Nigerian banking population.
One such concern was raised by reality TV star Mercy Eke, who claimed that she had over ₦100 million in the now defunct Heritage Bank.
Reacting to the news of the revocation, the Big Brother Season 4 winner wrote via her X handle; “I really don’t know how to react about this. I have been hoping for the best, thinking there’s a way out.”
Would Eke be able to have access to her full money? How safe is your money in your bank account?
What Can Lead to the Revocation of a Nigerian Bank’s License?
There are many reasons why the licence of a bank or other financial services can be revoked by CBN.
According to Section 12 of BOFIA 2020, the licence of a bank in Nigeria, among other things, could be revoked by CBN if the bank goes into liquidation, fails to comply with any conditions subject to which the licence was granted, has insufficient assets to meet its liabilities, conducts its business in an unsound manner, or is involved in circumstances which constitute a threat to financial stability.
How Depositors’ Money Is Insured
In Nigeria, there are at least 122 million who are banked. The Nigeria Deposit Insurance Corporation (NDIC) Act, 2023, mandates that “all licensed banks and such other financial institutions in Nigeria licensed to engage in the business of receiving deposits shall insure their deposit liabilities with the Corporation.”
This is achieved through the establishment of Deposit Insurance Funds for the different categories of insured financial institutions in Nigeria.
Microfinance banks and Primary Mortgage banks insure depositors’ money under the Special Institutions Insurance Fund (SIIF), while Banks and Mobile Money Operators insure their customers’ money under the Deposit Insurance Fund (DIF).
Insuring deposit liabilities, which are essentially the bank’s debt to its depositors, means that the bank is responsible for holding onto depositors’ money safely and making it available when they want it.
What Happens to Your Bank When Its Licence Is Revoked
Once the licence of an operating financial institution is revoked and announced by CBN, the bank automatically ceases to exist in Nigeria. With the revocation, NDIC is appointed as the liquidator which has the legal authority to sell the bank’s assets and recover all loans.
Section 2(a) of the NDIC Act accords the Corporation with the responsibility of “protecting depositors by providing an orderly means of compensation in the event of failure of their insured institutions or the inability of such insured institutions to make payment to depositors.”
According to Section 25 of the Act, depositors of a disbanded bank can receive a maximum amount of ₦500,000, in the case of a depositor of an insured institution and ₦200,000, in the case of a depositor of a Microfinance Bank.
However, NDIC has the power to vary upwards the maximum amount which a depositor shall receive when a bank’s licence is revoked.
Emmanuel Adepelumi, a financial officer of one of Africa’s fastest-growing companies, explained that recently NDIC increased the maximum deposit insurance.
“In the event of a financial institution’s failure and the revocation of its licence by the Central Bank of Nigeria (CBN), the NDIC will reimburse eligible depositors up to the maximum insured amount of ₦5 million in Deposit Money Banks (DMBs) and ₦2 million in Microfinance Banks (MfBs) and Primary Mortgage Banks (PMBs),” he told Neusroom.
What Happens When the Assets and Funds of a Revoked Bank Cannot Cover Insured Deposits?
There has been growing fear that Heritage Bank’s assets, even after complete liquidation by NDIC, will not be able to cover deposits of money, particularly those that have substantial amounts deposited in the bank.
According to The Cable, Heritage Bank has a negative shareholders’ equity of ₦230 billion.
Negative shareholders’ equity, also known as negative net worth or negative book value, occurs when a company’s total liabilities exceed its total assets. This means that the company has more debts than assets, and its shareholders’ equity is in deficit.
With a liability of that amount which exceeds all of Heritage’s total assets, from building to any asset of value, depositors who have over ₦5 million in their accounts are understandably worried.
But Adepelumi explained that not only does NDIC have the right as a liquidator to sell the assets of failed banks, but it also collects debts owed to the banks so “that depositors whose claims exceed the maximum insured sums can receive their refunds on a pro-rata basis.”
Pro-rata basis, in this context, means that if the available funds of a failed bank are not sufficient to cover all deposits fully, each depositor receives a percentage of their total deposits, based on the proportion of the total amount owed to all depositors.
In addition to this, Section 23(7) provides provisions that aid NDIC in fully discharging its duties of protecting depositors’ money in cases where the corporation does not itself have sufficient funds to provide assistance to a troubled financial institution.
It states; “Where the funds of the Corporation are not sufficient for giving assistance to insured institutions within the meaning of Section 4(b) of this Act or otherwise insufficient for implementation of the public policy objectives of this Act, every participating insured institution or any category of insured institutions may be obliged, without prejudice to subsections (1) and (2), to pay as a special contribution out of its profits before tax, a sum equal to its annual premium or such other sum as the Board may require, not exceeding 200% of its annual premium, on such terms and conditions as the Board may determine.”
However, since only 5 percent of Nigerians have more than ₦500,000 in their bank accounts, according to Nigeria’s Finance Minister and Coordinating Minister of the Economy, Wale Edun, it is expected that in the circumstance of bank failure, the ₦5 million maximum insured depositor will cater to the majority of banking customers.
