by: Law press
This was a major news headline on the 21st September, 2018. It was announced that the banking license of Skye Bank Plc has been revoked by the Central Bank of Nigeria (CBN), the regulatory institution of the banking industry in Nigeria.
The news has brought to fore many questions in the minds of individuals in the society, lay men and legal minds alike. Questions like what is the effect of the new bank taking over Skye bank? What will happen to customers, staff and others who did business with the now defunct bank? What will be the effect of loans taken before the bank went defunct and deposits of customers in the bank?
These questions are not at all unfounded as it mirrors the concern of every stakeholder in the now defunct bank. It is these questions that this article seeks to address.
The revocation of Skye bank’s license is reported to have been as a result of the long term indebtedness of Skye Bank, its permanent presence at the debt margin on the CBN index reports and the postulation that the bank will eventually collapse in the absence of continuous hand-outs from the CBN. Simply put, Skye bank’s license was revoked because the bank was in very deep debt and the CBN found it irredeemable.
The revocation of the license of Skye Bank by CBN is not ultra vires as it is within the purview of the CBN’s powers in line with the CBN Regulations and the Banks and Other Financial Institutions Act (BOFIA) 1991, two fundamental Acts that guide the regulation of the Nigerian banking industry. Section 12 of the BOFIA provides thus:
The Governor may, with the approval of the Board of Directors and by notice published in the Gazette, revoke any license granted under this Act if a bank-
- Ceases to carry on in Nigeria the type of banking business for which the license was issued for any continuous period of 6 months or any period aggregating 6 months during which a continuous period of 12 months;
- Goes into liquidation or is wound up or otherwise dissolved;
- Fails to fulfil or comply with any condition subject to which the license was granted;
- Has insufficient assets to meet its liabilities;
- Fails to comply with any obligation imposed upon it by or under this Act or the Central Bank of Nigeria Act
Section 12(d) (e) are the relevant sections in this case as Skye bank’s license was revoked as a result of the fact that the company’s debts were increasingly high compared to its assets.
The CBN based their decision to revoke the bank’s license on the results of examinations and forensic audit of the bank carried out in line with Section 33 of the BOFIA, which revealed the shareholder’s failure to recapitalize the bank in light of huge liabilities. The CBN sought to save the funds of depositors and to ensure the company continues as a ‘going concern’. To avoid a compulsory winding up and liquidation of the company, which will lead to the loss of jobs by members of staff and a downturn effect in the labour market, the CBN decided to make use of a bridge bank- Polaris bank to save the jobs, funds and assets of the Bank.
Bridge banking is a solution adopted by the CBN to tackle the Skye bank situation. A bridge bank is simply a bank appointed by a regulatory institution to hold assets and liabilities of another bank (which is usually at a deregulated and insolvent state) for the purpose of cushioning the effect of the liquidation and dissolution of the failed bank.
A bridge bank is charged with the function of maintaining the operation of the defunct bank until such a bank is solvent or acquired by another company licensed for banking or other financial activities). Essentially, the job of a bridge bank is to provide an easy transition from an insolvent state, while continuing banking operations, to successful acquisition. It is a temporary set up and it is insured by a deposit insurance organization or regulator in order to avoid system risks.
Polaris bank is a newly licensed bank by the CBN. The bank was appointed by the CBN to act as a bridge bank with the insurance backing of the Nigerian Deposit Insurance Commission (NDIC). This takeover by Polaris is a temporary one. The CBN has in this transaction, injected a fresh long term loan of N786 billion to give Polaris a fine underpinning, with a single digit interest rate. This is to soften the effects of the takeover especially since Polaris itself is not buoyant financially.
The NDIC has insured this transaction in line with its function of insuring all deposit taking financial institutions to guarantee a sound banking practice. Section 36 of the BOFIA makes a provision for risk management through the NDIC, upon the failure of a bank.
To this end, the questions of concern on the minds of individuals who had business relations with the defunct bank is to be quelled with the response that the customers of Skye bank automatically become the customers of Polaris. Customers’ deposits are safe and if for any reason, there was a case against Skye bank, the customer can sue the new entity Polaris bank on the same matter.
Members of staff of the defunct Skye bank remain members of staff of the Polaris bank, except of course they choose not to continue with the new entity. In fact, the members of staff have been given fresh contracts which they are to either agree to or decline with the bridge bank.
In all, the Polaris bank has assumed all assets and liabilities of Skye bank pending the acquisition by an interested buyer who will buy out the AMCON.
