Introduction
On June 3, 2024, the Central Bank of Nigeria (CBN) revoked the banking license of Heritage Bank PLC. According to the CBN, this decision was taken in accordance with its mandate to promote a sound financial system in Nigeria and in exercise of its powers under Section 12 of the Banks and Other Financial Act 2020 (BOFIA).
The CBN stated that the bank's inability to improve its financial position posed a threat to the stability of the financial ecosystem and the CBN was compelled to take the decision in order to strengthen public confidence in the banking system and ensure the soundness of the financial sector. Further to this, the Nigeria Deposit Insurance Corporation (NDIC) was appointed as the liquidator of the bank in accordance with Section 12 (2) of BOFIA.
In this article, we answer pertinent questions about the factors leading to the revocation of the license of Heritage Bank and discuss the essential lessons businesses, especially fintechs, can learn from this crisis to avoid similar pitfalls.
- What led to the revocation of Heritage Bank's license?
In its public notice announcing the revocation, the CBN stated that Heritage Bank had breached Section 12(1) of the BOFIA, which outlines various infractions that can lead to the revocation of a bank's license. Although the CBN did not specify the exact infraction, the NDIC highlighted that the bank's loans exceeded its customer deposits. Additionally, public reports based on the audited annual report of the bank indicated that over 80% of the bank's loans were non-performing. These issues and more likely contributed to the CBN's decision to revoke the bank's license.
- What will happen to the deposits of Heritage Bank's customers?
The NDIC is the official body that insures the deposits of customers in financial institutions in Nigeria. It also functions as the statutory liquidator for financial institutions whose licenses have been revoked by the CBN as provided in Section 55 (1) and (2) of the NDIC Act. Further to this, the NDIC has moved to ensure that the Heritage Bank's customers recover their deposits. According to the NDIC, depositors with a bank balance of less than NGN5 million, the maximum insured limit by the NDIC, will be fully reimbursed.
For balances exceeding the insured limit, the excess amount will be treated as an unsecured credit. Depositors will receive liquidation dividends from the proceeds of the liquidated assets of the bank once the bank's assets have been realized and loans recovered.
- What strategies can help keep bad loans at the minimum?
Some of the strategies that companies in the financial services space can implement to keep bad loans at the barest minimum are:
i. Use of Credit Scoring Methods: Companies should utilize credit bureaus to provide an accurate assessment of borrowers' creditworthiness which would in turn help in determining the credit viability of a borrower.
ii. Partnerships and Collaborations: Businesses can enter into partnerships and collaborations with other financial institutions or fintechs to share risk. This can include co-lending arrangements or selling portions of the loan portfolio to other lenders.
iii. Efficient, Effective, and Ethical Loan Recovery Methods: Companies should implement efficient and effective loan recovery methods, including dedicated teams for collections and the use of technology for automated reminders and follow-ups. Companies can also explore legal avenues for recovery but must always ensure ethical loan recovery standards are upheld.
iv. Customer Education: It is advisable that companies invest in financial literacy programs to educate customers on responsible borrowing and effective financial management because improved borrower education can reduce the likelihood of defaults.
v. Good corporate governance: Effective corporate governance ensures accountability, fairness, and transparency in a company's relationships with its stakeholders. It helps prevent mismanagement and unethical practices while also signaling to potential investors that the company has robust governance structures and sound risk management systems. This assurance enhances investor confidence and indicates that their investments will be protected and yield returns.
For more on how startups can implement strong and effective corporate governance structures, please see our article on corporate governance best practices here https://pavestoneslegal.com/corporate-governance-and-startups-lessons-from-the-collapse-of-the-silicon-valley-bank/
- How can companies ensure they remain compliant with regulations?
It is important that companies prioritize compliance with regulations to avoid regulatory sanctions. Compliance steps that companies can take include:
i. Conducting regular risk assessments to identify potential areas of non-compliance and vulnerabilities within the company.
ii. Staying updated with the latest regulatory requirements and ensuring that all business practices align with these regulations.
iii. Appointing a Chief Compliance Officer (CCO) or Chief Risk Officer (CRO) to oversee compliance and risk management as they will have the authority and resources to enforce compliance across the organization.
iv. Implementing comprehensive compliance training programs for all employees to ensure that staff are aware of regulatory changes and understand their roles in maintaining compliance.
v. Working with legal advisers who specialize in regulatory compliance to help in interpreting complex regulations and ensuring that the company's practices are in line with legal requirements.
Conclusion
In conclusion, the revocation of Heritage Bank's license serves as a stark reminder of the importance of strong corporate governance, effective risk management, and strict regulatory compliance in the operations of a business. Companies must ensure that they put these standards in place to avoid regulatory sanctions and business hazards.
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