I am delighted to be here today to rub minds and share my thoughts on the assigned topic which borders on the Access-Diamond Bank Merger.
Hearty congratulations to my friend, Joseph Ogunmodede, and his team for the great work they have done over the course of 2 years.
The Legal Diary is a platform for knowledge and enlightenment. I am certain that all those who have visited the site and read one of their pieces would have gained considerably.
I was asked to share my thoughts on the effects of mergers of banks on customers’ funds. I believe this a logical consequence of the proposed merger of Access Bank Plc and Diamond Bank Plc.
I would not face the topic directly. I would make some slight modifications and speak generally on the fate of depositers’ funds when deposit taking institutions (with focus on banks) restructure or fail.
The banking insustry in Nigeria is highly regulated. The lead regulator is the Central Bank of Nigeria (CBN); others include the Nigerian Deposit Insurance Corporation (NDIC), the Corporate Affairs Commission and the Financial Reporting Council of Nigeria.
The primary legislation for the regulation of banks in Nigeria is the Banks and Other Financial Institutions Act which gives the CBN the powers to supervise and regulate banks and other financial institutions in Nigeria.
The other relevant legislations are the Companies and Allied Matters Act, Nigerian Deposit Insurance Corporation Act and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act.
The sector is highly regulated so as to protect investors’ funds, deposits and to preserve the confidence the public in the sector.
C. CORPORATE RESTRUCTURING
A company may decide to undergo a corporate restructuring as a result of harsh operating environment, stiff competition or difficult regulatory compliance; also, ailing companies avoid liquidation on adoption of restructuring options as a survival strategy.
As stated above, there are several restructuring options, but the commonest form is mergers.
A merger is a business combination which involves the fusion of two or more corporate entities into one, largely on equal terms.
Mergers are caried out for several reasons such as: diversification of risks; stock exhange listing; survival of regulatory requirements for consolidation; desire for growth and increase in market share amongst others.
Merger is not a strange occurrence in our banking ecosystem. The option was embraced during the CBN Consolidation Policy between 2004 and 2005, which invariably forced many banks to merge with their counterparts rather than go extinct.
We are all aware of the proposed merger of Access and Diamond Banks. This has made some members of the public gittery as to the fate of their funds in the merging entities.
A merger is just the combination of the business operations of two or more corporate entities. The merger encapsulates the fusion of both assests and liabilities, and the fusion of customers.
Upon the successful completion of the merger, the customers of the defunct Diamond Bank automatically become customers in the newly restructured Access Bank with nothing happening to their deposits.
It thus means that if I were a customer of Diamond Bank and I had deposits in the bank prior to the merger; after the merger, I automatically become a customer in the merged entity. I can use my Diamond Bank debit card, Diamond Bank cheque book until it is exhausted and a new one of the resultant bank is issued to me.
The commonest changes customers might experience after a merger of banks is branding and change in account numbers.
For the case of the proposed merger of Access and Diamond Banks, the banks have assured their customers that they would do everything to ensure the integration is as seamless and efficient as possible, to the point of not changing anyone’s bank account number.
So as far as mergers are concerned, customers deposits are safe; no need for alarm.
On the other hand, for shareholders, they are usually affected either slightly or significantly.
The merger of two banks causes significant volatility in the stock price of the merging entities. The stock price of a newly merged bank is expected to be higher than that of both the merging entities.
In the absence of unfavorable economic conditions, shareholders of a merged bank usually experience greatly improved long-term performance and dividends.
The shareholders of merging banks may experience a dilution of voting power due to the increased number of shares released during the merger process.
This phenomenon is prominent in stock-for-stock mergers, when the resultant bank offers its shares in exchange for the shares of the target bank, albeit at an agreed conversion rate.
Shareholders of the acquiring bank (or the bidder) may experience a marginal loss of voting power, while shareholders of a target bank may see a significant erosion of their voting powers in the relatively larger pool of stakeholders.
For instance with the proposed merger of Access and Diamond Banks, Diamond Bank shareholders are to receive N1.00 per share in cash and, in addition, 2 Access Bank shares for every 7 Diamond Bank shares they currently own.
D. A FAILING BANK
The narrative is, however, different in the case of a failing bank. A bank is deemed to be failing, amongst other reasons, if it has difficulty in meeting its obligations to its depositors.
This is where the NDIC comes in handy. The NDIC administers the Deposit Insurance Scheme (DIS) in Nigeria.
The DIS is a system established by the government to protect depositors against the loss of their insured deposits placed with financial institutions in the event an institution is unable to meet its obligations to depositors.
The DIS ensures that a depositor does not lose all his money in the event of a bank’s failure. It makes a bank’s failure an isolated event, hence it eliminates the danger that unfounded rumours will start a contagious bank run.
The NDIC insures all Current Account deposits, Savings Account deposits, Time or Term deposits and Foreign Currency deposits in certain financial institutions (deposit banks inclusive).
The NDIC insures bank deposits of natural persons as well as legal entities, no matter whether they are from Nigeria or from any other country.
Where the CBN and/or in consultation with the NDIC is of the opinion that a bank is falling, what do the regulators do?
The NDIC is empowered by the NDIC Act to take over the management of a failing insured institution until its financial position has substantially improved; the NDIC may also make specific changes to the management of the failed bank or arrange a merger with or an acquisition by another insured institution.
Another available option is for the NDIC, in consultation with the CBN, to incorporate 1 or more banks known as bridge banks.
This second option is a situation whereby a failed bank is turned over to a new bank specifically set up to assume the assets and liabilities of the failed bank.
The bridge bank ensure continuity of banking services to all customers and fully protect all the depositors and creditors of the failed bank.
Fresh in our memory is the taking over of Skye Bank Plc by the newly created bridge bank, Polaris Bank which happened late 2018.
In such an instance, the deposits of customers are safe as they are automatically transferred to the management of the newly formed bridge bank.
E. LIQUIDATED BANKS
At the bottom of the ladder is a failed bank which cannot be salvaged by the NDIC and/or by the CBN. In such a case, the bank goes into liquidation.
The billion dollar question is – what happens to the deposits of customers of a bank that has failed and has been liquidated?
By NDIC Act, the insured limit is currently a maximum of N500,000 for each depositor in respect of deposits held in each insured universal bank and N200,000 for each depositor in Microfinance Bank and Primary Mortgage Institutions in same right and capacity.
What this means is that if a bank fails, the maximum claim that can be made by a customer is N500,000.00 irrespective of whatever the amount of deposit one had before the bank failed. This is quite frightening.
It should be noted that deposit insurance is payable only when an insured bank has been closed as a result of an action taken by the CBN.
From the discussions above, it is clear that customer’s deposits are safe whenever a bank merges or whenever the NDIC/CBN takes over the management of a failing bank or incorporates a brigde bank.
Where there is a problem is when a bank has failed and become liquidated.
Notwithstanding the statutory comfort provided by the NDIC Act through the introduction of the deposit insurance scheme managed by the NDIC, more needs to be done in order to protect customer deposits and to boost the public’s confidence in the banking system.
Flowing from the above, the NDIC Act should be amended to amongst other things, empower the NDIC to make prompt payments of insured deposits to depositors of failed banks.
The NDIC should be empowered to pay insured depositors of failed insured banks even in the face of litigation challenging the revocation of the operating license of the failed banks.
This is to ensure depositors do not suffer due to inability to access their money trapped in such institutions.
In addition, the NDIC should be vested with the powers to pay insured depositors whenever a bank becomes insolvent and has suspended payment to depositors.
This means that when a bank becomes distressed and cannot pay depositors their money, but its license is yet to be revoked by the CBN, the NDIC can step in and pay the depositors their insured deposit, thus minimising their suffering as a result of the insolvency of the bank.
Lastly, the maxium claim on the insured deposits should be reviewed so that depositors can get value for their money.
Once again, I congratulate the Legal Diary team on the commemoration of its second anniversary.
Many thanks for this opportunity to share my thoughts on your platform.
You have my best wishes for the years ahead.
To everyone who followed the conversations, thank you for doing so. I hope it was worthwhile.
Associate, Aluko & Oyebode
Joseph Jagunmolu Ogunmodede is the Founder/CEO of THE LEGAL DIARY.
He is a Double First Class lawyer from the prestigious University of Ibadan and the Nigerian Law School. Joseph is an Asaociate at Udo-Udoma and Belo-Osagie with interest in Corporate Law, Energy Law, Real Estate Law and Commercial Litigation.