BANKING 1.7 FAILED BANKS ETC.
FAILED BANKS AND BANK EXAMINATION.
There are various provisions in the BOFIA, CBN Act, NDIC act and other enactments which seek to regulate the banking sector and forestall bank failure by making provisions for minimum capital requirement, registration, licencing, reserve ratio and so on.
When can we say a bank has failed?
The Failed Banks (Recovery of Debts and Financial Malpractices in Banks) Act defines a “failed bank” as a financial institution:
- Whose licence has been revoked. OR
- That has been wound up. OR
- Whose capital asset ratio is below the minimum required. OR
- Which the CBN or other authority has declared to be failed.
REASONS FOR BANK FAILURE.
- Lack of regulation: An unregulated sector is bound to fail. This was the feature in the early fifties where various newly established indigenous banks failed… such failure having dire consequences on the economy and depositors.
- Failure to comply with the provisions of the BOFIA, CBN act and other regulatory enactments: These provisions seek to ensure the liquidity and survival of banks and other financial institutions. Failure to observe them would usually lead to bank failure.
- Failure to keep proper accounts and inadequate record keeping.
- Management ineptitude, carelessness, weak internal control, unprofessionalism.
- Embezzlement and mismanagement by the managers, directors and other officials.
- Granting unauthorised loans and credit facilities without collateral.
What is a “failing bank”? In ordinary terms, it is a bank (which from the facts and circumstances) that is heading towards failure.
From the interpretation of Section 35 of the BOFIA, a failing bank is one that:
- May not be able to meet its obligations under the Act.
- Is about to suspend payment to any extent.
- Is insolvent or
- (In the opinion of the CBN) is in a grave situation (after special examination has been conducted).
When it has been settled that a bank is “failing”, Section 35 (2) provides that the CBN governor may in writing:
- Prohibit the bank from granting further credit facilities.
- Require the bank to refrain from certain acts and take corrective measures.
- Remove any manager, director or officer of the bank (reasons must be stated in writing) and replace with another. Notwithstanding any law or memorandum of association. There must be notice and fair hearing as provided by Section 36 of the 1999 constitution.
- Appoint any person to advise the bank.
Section 36 BOFIA provides that where after taking the above steps, the state of affairs of the bank does not improve, the management of the bank may be turned over to the NDIC on such terms and conditions as the CBN may stipulate. By Section 39, where symptoms persist after all these have been done, the CBN may apply to the court for the failing bank’s licence to be revoked.
Section 32 empowers the governor of CBN to conduct routine examination and Section 33 provides for special examination[1].
THE NDIC.
Section 1 of the NDIC Act 1988[2] establishes the Nigerian Deposit Insurance Corporation. It is a body corporate with perpetual succession and a common seal. It can sue and be sued.
The NDIC aims to protect customers (depositors) and enhance bank stability by administering an Insurance Deposit Scheme. The IDS is a risk control mechanism. It mandates that all banks and deposit taking institutions must insure their deposits with the NDIC in accordance with Section 15 NDIC Act (penalty of N500,000 for each day of default). The premiums/monies so insured shall be used to resuscitate a failing bank or settle depositors of a failed bank.
The NDIC is similar to “other insurance companies” in that they both seek to manage risk after the payment of a premium and under both, there is the element of uncertainty and indemnity. However they differ in these respect:
- The NDIC insures only banking (and other deposit taking) business while other insurance companies have a diversified base.
- Under the NDIC insurance, the beneficiary enjoys the premium paid by another (which is his banker), while under the general insurance concept, it is the beneficiary that usually pays for the premium which he enjoys.
- The NDIC is not just a contract of insurance but also a guarantee (whereby customers are encouraged to deposit in their banks with the assurance by NDIC that they shall be indemnified when the bank fails[3])
Justification for the NDIC.
- It redistributes the cost of bank failure by using funds from the common pool to manage a failing bank and offset its debt to creditors and depositors.
- It is in the best interest of the public.
- It couches the effect of bank failure on the economy thereby promoting financial stability.
How is the NDIC run?
It is run by the Board of Directors-Section 5. It consists of
- The Chairman.
- Managing Director.
- 2 Executive Directors.
- A representative of the CBN and a representative of the Federal Ministry of Finance not lower than the rank of director and
- 6 other members from the 6 geo-political zones.
The members are appointed by the president subject to the confirmation of the senate. No board member shall own or have significant interest in an institution insured with the NDIC. Where a board member has an interest in an insured institution, he must disclose the nature and extent of his interest.
A board member shall be disqualified where:
- He goes bankrupt or insane.
- Has significant interest in an insured institution.
- He/she resigns.
- He is guilty of gross/serious misconduct.
- Convicted for a felony or suspended from practicing his profession.
Section 3 grants the NDIC exclusive rights to insure deposit liabilities and guarantee payment. Non-complying institutions shall be liable to pay a fine of 100,000 or not exceeding 5 years or both. For corporation, N500,000 fine for each day of contravention.
The NDIC has an authorised share capital of N5billion-Section 11 NDIC Act. 60 percent of this share capital is for the CBN and 40 percent for the Federal Ministry of Finance.
FUNCTIONS OF THE NDIC (SECTION 2).
- To insure all deposit taking institutions like banks and other financial institutions in Nigeria.
- Give assistance to insured institutions and ensure its well-being.
- Guaranteeing repayments to depositors where a bank cannot meet up to its obligations. Section 20 of the NDIC Act provides that the maximum indemnity it can cover/repay to a customer is N200,000 (for bank depositors) and N100,000 for other deposit taking institutions… (this figure can be varied upwards. Sadly enough, the Act goes further to provide that all accounts held shall be merged as one. For Example, Mr A has two accounts in Waso Bank Ltd… N900,000 in the first account and N 750,000 in the second account. If Waso bank fails, the maximum Mr A can get from the NDIC as indemnity is N200,000.
- To promote the implementation of banking policy.
- To pursue other necessary measures that ensure a sound financial system and heal the economy.
- It can (through the board), act as liquidators. The courts in Savannah Bank V CBN, and the case of NDIC V IGP have maintained that they must act in good faith.
Section 30 empowers the NDIC to carry special examination of books of deposit taking institution to ensure compliance with the Act and to ensure that the bank can meet its liabilities.
[1] Which has been discussed above.
[2] now 2006.
[3] Some conditions must however be met.
