Nigeria: CBN Supervision in Financial Sector’s Best Interest, Say Bank Directors

CBN Supervision in Financial Sector’s Best Interest, Say Bank Directors
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The Bank Directors’ Association of Nigeria (BDAN) has expressed confidence that the Central Bank of Nigeria’s (CBN) decision to revoke the license of Heritage Bank was in the best interest of the banking sector.

Mustapha Chike-Obi, Chairman of BDAN and Fidelity Bank,  emphasized the association’s trust in the CBN’s judgement, stating, “BDAN accepts and respects the unique position of the CBN in making this kind of decision in the interest of the banking sector. BDAN is confident that CBN analyzed all the pros and cons of this decision and took the best decision in the interest of the banking sector.”

The CBN announced the revocation of Heritage Bank’s license in a statement signed by Acting Director of Corporate Communications, Sidi Ali. The decision aligns with CBN’s mandate to promote a sound financial system in Nigeria and bolster public confidence in the banking sector.

“This action has become necessary due to the bank’s breach of Section 12 (1) of BOFIA, 2020. The board and management of the bank have not been able to improve the bank’s financial performance, a situation which constitutes a threat to financial stability. This follows a period during which the CBN engaged with the bank and prescribed various supervisory steps intended to stem the decline. Regrettably, the bank has continued to suffer and has no reasonable prospects of recovery, thereby making the revocation of the license the next necessary step,” part of the statement read.

The Nigeria Deposit Insurance Corporation (NDIC) has been appointed as the liquidator of Heritage Bank under Section 12 (2) of BOFIA, 2020.

Tunde Amolegbe, Managing Director of Arthur Stevens Asset Management Limited, noted that the current CBN leadership, under Olayemi Cardoso, prefers not to prop up failing banks, thereby minimizing the risk of contagion within the financial space.

Amolegbe explained, “Apparently, Heritage Bank has been struggling with a huge non-performing loans portfolio for a while. So, I guess the question is why its license has just been withdrawn now. Various CBN management make their choice as to the different available models for resolving banking distress and insolvency. The (former CBN Governor, Godwin) Emefiele model is to prop up the banks, change their management or even nationalization.”

Amolegbe suggested that the current strategy of the new CBN management is to ease weak banks that are not systemically important out of the system. “Both models have their merits and demerits. While the former model adopted by Emefiele seeks to maintain confidence in the banking system by ensuring no bank dies, it is, however, too expensive and more often than not leads to the CBN taking a huge loss by the time it succeeds in selling off the banks it took over. It is also fraught with all manners of moral hazard because bank shareholders know the worst that can happen is a government takeover.”

He expressed a preference for the latter model, which is less costly for the country and ensures that banks which could spread their risk through the banking system are eased out before they infect the whole system. “It also takes care of the moral hazard issues. Luckily we have an active NDIC that is likely to take care of depositors in Heritage Bank with N5m and below which I understand is about 98 percent of their customers,” he noted.

The NDIC has commenced the liquidation of the bank, starting with the verification and payment of bank customers with N5m or less in their accounts, with others to be paid under the assessment and sale of the failed bank’s assets.

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