By Chinwendu Obienyi
For any economy to grow, well-functioning banking systems are critical.
These systems facilitate the efficient allocation of resources, provide necessary funding for businesses, and support overall financial stability.
However, banking systems do not always operate optimally, as evidenced by the recent global financial crisis as well as the debacle involving the Central Bank of Nigeria (CBN) and Heritage Bank Plc which has now spurred renewed interest in identifying reforms in bank regulation, which would work best to promote banks’ development, performance and stability.
Just about six years ago, the CBN revoked the operating licence of Skye Bank after its intervention in the ailing bank. This time around, the hammer has fallen on Heritage Bank Plc.
According to a statement from the Acting Director, Corporate Communications, CBN, Hakama Sidi Ali, the bank had persistently been financially unstable and breached regulatory requirements.
She added that the decision was part of the apex bank’s mandate to maintain a sound financial system in Nigeria, as outlined under Section 12 of the Banks and Other Financial Institutions Act (BOFIA) 2020, necessitating regulatory intervention.
The statement also indicated that Nigeria Deposit Insurance Corporation (NDIC) will be appointed as the liquidator of the bank in accordance with section 12(2) of BOFIA 2020.
With this statement, the NDIC swung into action, swarmed round the ailed bank books in attempt to sort out depositors and creditors’ funds.
This did not sit well with customers especially shareholders of the bank who felt their investments would be hard to recover or completely wiped off in a worst case scenario. Some of the shareholders who spoke to Daily Sun, noted that until now, they are yet to get funds from the defunct Skye Bank (now named Polaris Bank) and was critical of the apex bank’s timing of revoking the operating licence of Heritage Bank.
However, to dampen their abating fears, the NDIC who gave an indication that the liquidation of the bank had commenced, added that depositors would be protected even as it is currently verifying payment of N5 million to bank customers depending on their deposits.
Similarly, creditors of the bank were also instructed to visit the nearest bank branch to file their claims or use online platforms while debtors with outstanding loans were advised to contact the corporation’s Asset Management Department (AMD) to arrange repayments.
The Managing Director, NDIC, Bello Hassan, vowed to employ all resources at its disposal to recover over N700 billion loans and advances owed to the defunct bank while adding that the agency has the responsibility to recover all debts as well as pay eligible depositors and creditors.
He also added that the payment of insured deposits to customers of the failed banks will start in earnest, rather than 30 days as prescribed in the NDIC Act.
This development, according to economic analysts who commended the CBN for taking decisive action, explained that the failure of banking systems to function effectively can have severe repercussions on the broader economy.
They also added that inefficient banking practices, excessive risk-taking and poor regulatory oversight can lead to financial instability, which in turn, can stifle economic growth.
Taking a strict approach to the development, this situation could have been avoided. According to the National Coordinator, Progressive Association of Nigeria, Boniface Okezie, the CBN’s approach which often leaves depositors struggling to recover their funds through the NDIC, does little to address the underlying issues.
Okezie, who was critical of banks acquisition practices in Nigeria, stated that the lack of adequate recapitalisation of banks is an eye-opener whilst the effectiveness of the CBN’s regulatory oversight is weak.
“What now happens to depositors’ money or even our investments? We are now left to go and struggle with the NDIC for our monies. The question is if Heritage Bank has not been profitable, why have they been in existence for so long? Why is the CBN just taking that decision now especially during this unfavourable and harsh environment?”, he queried.
However, it is important to note that following the global financial crisis in 2007/2008, the CBN in its bid to achieve financial and banking system stability, at different times instituted various reforms aimed at ensuring effective performance of the banking sector.
CBN’s earlier reforms
The liberalization of the financial system in 1986 as one of the major components of the Structural Adjustment Programme (SAP) marked a major effort at ensuring the stability of the financial system in Nigeria.
Under the SAP initiative, the major reform in the financial sector was the deregulation of interest and exchange rates, implementation of market-based monetary policy, strengthening of regulatory and supervisory institutions, establishment of the NDIC and granting of licenses to more banks.
But the reforms failed to work due to interest rate spread and FX volatility. The situation worsened in 2000s due to structural and operational weakness, illiquidity, gross insider abuses among others. Rocked by the 2008 global financial crisis, the share of non-performing loans to total loans of Nigerian banks rose from 7.19 per cent in 2008 to 36.25 per cent in 2009.
The CBN came to the rescue of the eight banks affected by injecting liquidity to restore sanity and confidence in the banking sector.
Need for new reforms
Analysts who spoke at different forums, noted that there is an urgent need for new reforms from the monetary authorities and added that enhancing the capacity and authority of regulatory bodies to monitor and address banking sector vulnerabilities is of utmost importance.
For instance, Chairman, Association of Chief Audit Executives of Banks in Nigeria (ACAEBIN), Prince Akamadu, while speaking during a two-day training on “Internal Audit staff on Report Writing and Effective Communication Skills” held earlier in the year, urged banks to adopt more robust risk management frameworks to better handle potential financial risks.
The Managing Director, APT Securities, Kurfi Garba, said, stated in response to these challenges, policymakers typically undertake thorough assessments to identify the root causes of banking failures.
Garba said that although the process often involves scrutinizing existing regulatory frameworks, banking practices, and market conditions, the goal is to implement regulatory reforms that can enhance the stability and efficiency of banking systems.
“We already have the recapitalisation process in place which is good, however, the regulatory oversight is not really up to 100 per cent. Hence, I suggest that the apex bank use advanced data analytics and real-time monitoring tools to track these banks’ performances and risk exposure. There also has to be regular stress testing to evaluate how these banks can cope with severe economic conditions and market shocks”, he said.
For his part, the Head, Research at FSL Securities, Chiazor Victor, said, “There has to be a technological and cyber security measures in place. Innovation is here and so the implementation of a robust cyber security measures to protect cyber fraud or breaches has to be in place because the number of frauds reported last year was not a good one at all for the banking system.
The CBN should also ensure that these banks innovate continuously by developing a credible recovery and resolution plan that can manage distress situations without disrupting the financial space”.
Conclusion
Effective regulation and supervision are key to enhancing the stability of banks. However, this involves a multifaceted approach that includes stringent prudential requirements, proactive risk management, continuous supervision, and robust resolution frameworks.
By addressing both micro-prudential and macro-prudential concerns, regulators and supervisors can foster a stable and resilient banking system capable of withstanding economic shocks and maintaining public confidence.