In view of the significance of the financial sector to the economic well-being of the country, it is no surprise the banking industry is one of the most regulated industries in Nigeria. Credit statistics reports reveal that the banking sector contributes significantly to the effective functioning of other sectors of the economy, hence the government through the principal regulator of the sector, the Central Bank of Nigeria (CBN) regularly introduce various business rescue tools to assist ailing banks and support them to a position of sustainability and stability.2
Business Rescue is the process of attempting to rehabilitate financially distressed companies from collapse. It entails the reorganisation and/or restructuring of an insolvent company based on a reorganisation plan.3 It is an alternative legal route for a financially distressed company which seeks to balance out the interests of both the creditors and the debtor in line with international best practices.
Business Rescue aims to restructure the affairs of a company in such a way that either maximises the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company than would ordinarily result from the liquidation of the company. Thus, where successful, Business Rescue can provide a win-win solution for failing businesses.
Unlike other restructuring procedures like liquidation proceedings, where the company is liquidated and ceases trading, its assets will be sold and distributed to creditors following an order of preference. Business Rescue seeks to save distressed companies from financial ruin and ultimately closure which will in turn benefit all stakeholders of the business.
History of failing banks in Nigeria
The Banks and Other Financial Institutions Act 2020 (BOFIA) is the primary legislation that governs the conduct of banking business in Nigeria. It defines a failing bank as one which informs the CBN that it is likely or unable to meet its obligations under the Act, it is about to suspend payment to any extent, it is insolvent or where, after an examination under Section 33 of the Act, the Central Bank is satisfied that the bank is in a grave situation.4
The history of bank failure in Nigeria dates back to 1930 when the Industrial and Commercial Bank failed. Thereafter, the Nigerian Mercantile Bank failed in 1936 while the Nigerian Penny Bank failed in 1946.5 Twenty-one (21) out of the 25 indigenous banks that were established collapsed in quick succession due to bad management, inadequate capital, inexperienced personnel, excessive branch expansion, lack of banking regulation and unfair competition from foreign banks. Others included outright fraud, lack of acceptable prudential guideline and lack of right banking orientation among the operators. Most of the bank failures were resolved mainly through self-liquidation. 6
These bank failures led to a significant financial loss to depositors and loss of confidence by the public in the Nigerian banking industry and in the ability of Nigerians to manage banking business. The government was therefore apprehensive of banking operations. The Paton Commission of inquiry set up in 1948 by the government on the need and form of control required in the banking sector further exposed the precarious position of Nigerian banks. This subsequently led to the first banking regulation in 1952 and the establishment of the Central Bank in 1958 to regulate and supervise the activities of banks in Nigeria.7
The Central Bank introduced regulatory frameworks as part of the efforts by the government to promote a sound financial structure and monetary stability in Nigeria. These reforms introduced into the banking system from 1986 (i.e., the structural adjustment programme) generally led to a banking boom. This culminated in the establishment and rapid increase of new commercial and merchant banks, finance houses etc.
For example, at the beginning of the reforms in 1986, there were a total of 29 commercial banks and 12 merchant banks. Coincidentally, by 1994, there were a total of 66 commercial banks and 54 merchant banks. There was also an upsurge in the number of other financial institutions.8 However, neither the industry nor the regulators were sufficiently prepared to sustain and monitor the sector's explosive growth. This led to a soar in unhealthy competition in the industry and prudent banking standards went out the window. Thus, these factors resulted in regulatory authorities being overstretched and distress set in, in the banking industry.
Efforts of the CBN to rescue failing banks
In the early 2000s, the Nigerian banking sector underwent major structural reforms. In an effort to strengthen the banks, the CBN announced a plan to consolidate the country's fragmented financial sector. The CBN justified the policy with the need to "grow the banks and position them to play pivotal roles in driving development across the sectors of the economy".9 Thus, the CBN mandated all banks to increase their paid-up capital from NRN 2bn (USD 13mn) to NRN 25bn (USD 166mn).
Banks had until December 2005 to reach the new minimum required capital, a period of roughly 18 months. The announcement resulted in several forced mergers and acquisitions in the banking sector. From the 89 licensed institutions active in Nigeria in 2005, 25 emerged from the process while 13 saw their licenses removed due to their inability to reach the mandated capital level in time.10 These forced mergers meant that small banks would merge with another bank and become stronger and so would not easily collapse during times of economic hardship. Furthermore, this high threshold set by the government ensured that banking business had high barriers of entry and so banks are not being opened easily and would not fail with ease. This will allow only the strongest banks to operate and thus restore the faith of the Nigerian public in the Nigerian Banking system.
Where a bank is unable to meet its obligation under the Act or upon examination, the CBN is satisfied that the bank is in a grave situation or it is insolvent, the BOFIA empowers the Governor by an order in writing to do any of the following:11
- prohibit the bank from extending any further credit facility for such period as may be set out in the order and from time to time, by further order similarly made, extend the period;
- suspend any payment or delivery obligation pursuant to any contract to which the bank is a party;
- require third party service providers to the bank, to continue to provide services to the bank for such period as may be set out in the order;
- require the bank to take any steps or any action or to do or not to do any act or thing, in relation to the bank, its business, its directors or officers which the bank may consider necessary and which is set out in the order;
- remove, for reasons to be recorded in writing with effect from such date as may be set out in the order, any manager or officer of the bank;
- appoint any person to advise the bank in relation to the proper conduct of its business, and provide, in the order, for the person so appointed to be paid by the bank such remuneration as may be set out in the order; or
- employ any other intervention tool as the bank may deem fit.
If, after any or all of the steps stipulated in the BOFIA or such other measures as in the opinion of the Bank may be appropriate in the circumstances including but not limited to the measures and steps provided in the BOFIA, the state of the bank concerned does not improve, the CBN may invoke its powers to revoke the operating licence of the bank.12
One of the recent policy actions taken to strengthen the reform process was the creation of Asset Management Corporation of Nigeria (AMCON). The AMCON was created as a resolution vehicle to soak the toxic assets of the CBN-intervened banks and provide liquidity to them as well as assist in their capitalization process. At the time of the establishment of this corporation, the body identified 10 banks with crisis in system assets and responded by the injection of ?736 billion liquidity to buy up their assets. Among the 10 banks only three banks were unable to meet up and were finally acquired by AMCON and tagged as Bridged Banks: Mainstreet Bank, Keystone Bank and Enterprise Bank.13
In 2009, the economy faltered and the banking system experienced a crisis triggered by global events. The stock market collapsed by 70% in 2008-2009 and many Nigerian banks had to be rescued. In order to stabilize the system and return confidence to the markets and investors, the CBN injected N620bn of liquidity into the banking sector.14
Overall, Business Rescue of failing banks is necessary as it is anticipated that the business rescue reforms would reduce the risk of corporate insolvency, directly boost foreign investment in Nigeria and ensure that the Nigerian corporate insolvency regime is in line with international best practices. The goal for the CBN must be to make the financial system more resilient to localized economic shocks in order that a crisis at one financial firm does not generate a cascading series of failures by interconnected financial institutions. The CBN should take action by embarking on a systematic review of regulations and guidelines around the key contributors to the financial crises that plague Nigeria's history such as corporate governance, margin loans, the fraudulent use of special purpose vehicles, data quality, enforcement, and risk management.
Regulatory steps such as the creation of AMCON to resolve the problem of failing banks are a useful tool towards making the financial system more resilient. Furthermore, the use of legislation such as BOFIA to rescue failing banks by empowering the CBN to suspend the exercise of termination rights in certain contracts is another useful tool which will certainly assist in rescuing failing banks and revamp their operations for the benefit of its stakeholders and the crucial role banks play in the economy of the nation.
1 Uche Matthew, Associate Corporate Finance & Capital Markets Department, SPA Ajibade & Co., Lagos, Nigeria.
2 Uche Matthew and Demilade Odutola " Banks and Other Financial Institutions Act 2020: The Making of a Super Regulator in Nigeria" available via http://www.spaajibade.com/resources/wp-content/uploads/2021/01/Banks-and-other-Financial-Institutions-Act-2020-The-Making-of-a-Super-Regulator-in-Nigeria/ accessed 14th December 2021.
3 Perenami Momodu and Odinaka Okoye, "The Evolution of Business Rescue in Nigeria" available via https://www.mondaq.com/nigeria/insolvencybankruptcy/809026/the-evolution-of-business-rescue-in-nigeria / accessed 13th December 2021.
4 Banks and Other Financial Institutions Act 2020, Section 34.
6 Olutokun, G. et al "Bank Distress in Nigeria and the Nigeria Deposit Insurance Corporation Intervention" Global Journal of Management and Business Research Finance, available via https://globaljournals.org/GJMBR_Volume13/6-Bank-Distress-in-Nigeria.pdf / accessed 13th December 2021.
9 Lawrence Uchenna Okoye et al "Impact of Banking Consolidation on the Performance of the Banking Sector in Nigeria" Journal of Internet Banking & Commerce, available via www.icommercecentral.com/open-access/impact-of-banking-consolidation-on-the-performance-of-the-banking-sector-in-nigeria/ accessed 12th December 2021.
10 Pascal Ungersboeck "The Global Financial Crisis in Nigeria: AMCON's Banking Sector Recapitalization" available via https://ypfsresourcelibrary.blob.core.windows.net/fcic/YPFS/Ungersboeck_Nigeria/ accessed 13th December 2021.
11 Section 34(2) of Banks and Other Financial Institutions Act 2020.
12 See section 34(4) of the Banking and Other Financial Institutions Act 2020.
13 Babajide, Komolafe."Finally AMCON transfers Mainstreet Enterprise to skype Heritage Banks" available via https://www.vanguardngr.com/2014/10/heritage-bank-completes-payment-acquire-enterprise-bank/ accessed 13th December 2021.
14 Sanusi, L.S., (2010), "The Nigerian Banking Industry: What went wrong and the way forward" available via https://www.proshareng.com/report/Others/The Nigerian Banking Industry what went wrong and the way forward-By-Sanusi-Lamido-Sanusi/ accessed 14th December 2021.
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