Revocation of Licence: The Role of the NDIC

In the past few months, we have been providing updates on the flurry of regulations impacting Nigeria's financial sector. The Central Bank of Nigeria (CBN), the nation's apex bank, has unsurprisingly been the most active player as the CBN is the primary regulator for all financial institutions. But a recent development sent shockwaves through the industry – for once, a different regulatory body stole the spotlight: the Nigeria Deposit Insurance Corporation (NDIC).

Heritage Bank License Revoked: CBN Steps In, But What About Depositor Funds?

In a move to safeguard the stability of the Nigerian financial system, the CBN revoked the operating license of Heritage Bank Plc on June 3, 2024. This decisive action stemmed from the bank's persistent underperformance, which threatened its overall financial health. The CBN, acting as the nation's financial watchdog, cited Heritage Bank's failure to comply with Section 12(1) of the Banks and Other Financial Institutions Act (BOFIA) as the primary reason for the revocation. This section states the different conditions for which a bank's license can be revoked, including where a bank is involved in a situation, circumstance, action, or inaction that constitutes a threat to the financial instability of the Nigerian financial institution.  The bank's shortcomings, falling under the purview of this section, necessitated regulatory intervention from the CBN to protect the integrity of the financial system. This revocation sparked a lot of comments, complaints, and worry, especially from the customers of the bank. The news of the reevocation of the bank’s license left the general public concerned about only one thing, “What will happen to the money of their customers?” This is where the NDIC comes in. 

The NDIC

The Nigeria Deposit Insurance Corporation (NDIC) serves as a critical safety net within Nigeria's financial system. Established as an independent federal agency, the NDIC acts as a risk minimizer by guaranteeing deposit payouts up to a specific statutory limit in the unfortunate event of an insured financial institution's failure. A failed insured financial institution is simply one whose licence has been revoked by the CBN.  This guarantee takes on particular importance when a bank's license is revoked under Section 12(2) of the BOFIA. In such scenarios, BOFIA appoints the NDIC as the official liquidator, tasked with overseeing the bank's orderly closure. Here, the NDIC prioritizes ensuring depositors are compensated for their insured deposits, following the limits outlined in its statutes. Beyond its role as a safety net, the NDIC proactively safeguards the financial system by supervising banks. Through this supervision, the NDIC aims to reduce the likelihood of bank failures and ultimately protect customers from such financial disruptions.

The functions of the NDIC are further outlined in Section 2 of the Nigeria Deposit Insurance Corporation Act 2006. Some of the other functions of the Corporation include assisting insured institutions in the interest of depositors, in case of imminent or actual financial difficulties of banks particularly where suspension of payments is threatened, and avoiding damage to public confidence in the banking system. 

What Happens In The Event of a Liquidation

Liquidation, as defined in general terms, refers to the controlled dissolution of a business. It entails ceasing all operations, converting assets into cash (or readily saleable holdings), and utilizing those funds to settle outstanding debts (liabilities) owed to creditors. Any remaining capital is then distributed to the owners of the business.

Bank liquidation, however, prioritizes specific objectives within this broader framework. The key is to achieve an orderly and efficient closure, minimizing disruption to the entire banking system. This involves the cost-effective realization of the bank's assets and settling claims in a specific order. Depositors and creditors are prioritized; if any funds remain, shareholders may also receive a distribution.

The NDIC assumes the critical role of liquidator in such situations, empowered by Section 41 (2) of the NDIC Act. During this process, the NDIC is vested with different responsibilities which include:

• Realization: The conversion of the failed bank's assets into cash.‍
• Enforcement of Individual Liability: Holding shareholders and directors personally accountable for their financial obligations.‍
• Winding Up Affairs: Ensuring a complete and compliant closure of the failed institution as mandated by the NDIC Act.

The NDIC: Dual Roles in Bank Failure

The NDIC plays a vital role in safeguarding depositors' interests during bank failures. However, the NDIC fulfills two distinct functions in such situations: deposit insurer and liquidator.

• Deposit Insurer: As a deposit insurer, the NDIC acts as a safety net for depositors. Section 20(1) of the NDIC Act empowers the corporation to reimburse depositors up to N500,000.00 for insured deposits in the event of a bank failure. This serves as a crucial financial protection measure for individuals who entrust their savings to insured banks. It's important to remember that depositors who don't receive their insured amount may have the right to take legal action against the NDIC.‍
• Liquidator: In contrast, when the NDIC takes on the role of a liquidator, its primary objective is to manage the orderly closure of the failed bank. This process involves overseeing the bank's remaining assets and liabilities, including its pre-existing relationships with customers. It's essential to understand that the NDIC, acting as a liquidator, does not assume personal responsibility for any issues or disputes arising from those pre-closure customer relationships. Their focus is on facilitating a smooth wind-down of the bank's operations, not resolving historical banking matters.

NDIC Repayment Plan

The NDIC has initiated a process to ensure depositors of the recently failed bank receive their insured funds. Here's a breakdown of the plan outlined by the NDIC spokesperson:

1. Depositors with Alternate Accounts: Those with accounts at other banks will be reimbursed up to the insured limit of ₦5 million per depositor. The NDIC will leverage the Bank Verification Number (BVN) system to efficiently locate these alternate accounts and expedite the payout process.‍
2. Depositors with Higher Balances: Depositors with balances exceeding ₦5 million will receive a liquidation dividend. This payout will occur after the NDIC recovers debts owed to the bank and sells off its assets (realization).

Customers who do not fall into the above categories should visit the NDIC website to file their online claims.

Conclusion

Adherence and compliance with the regulatory laws in Nigeria are essential for the growth of your company. Non-compliance can cost you and your company a lot, from payment of heavy fines to total closure. Customers of financial institutions also benefit greatly from regulatory awareness. Understanding these regulations empowers you to navigate the financial system with confidence.