The Nigeria Deposit Insurance Corporation (NDIC) has significantly shifted its approach to handling failed banks, marking a crucial step towards reducing the risks of moral hazard in the country’s financial sector.
This shift is particularly evident in the recent liquidation of Heritage Bank and other recent failures, such as Aso Savings and Loans and Union Homes Savings and Loans, where public funds were not used to rescue the troubled institutions.
A Pinnacle analysis showed that between 2009 and 2018, the CBN and Asset Management Corporation of Nigeria (AMCON) (which the CBN supports) spent about ₦3.83 trillion rescuing “sick banks”. The figures include both capital injections into banks and support via AMCON to clean up bad assets
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In 2024, the CBN stepped in to settle a debt exposure of over ₦400 billion owed by the failing Heritage Bank to First Bank, effectively absorbing that risk as part of its attempt to manage the bank’s distress before licence revocation
Instead, NDIC has focused on ensuring depositors are protected through its insured deposits scheme while allowing the liquidation of assets to pay creditors and uninsured depositors.
This change signals a clear departure from the previous practice of using taxpayer money to bail out failing financial institutions.
A Shift from Bailouts to Liquidation
Historically, Nigeria’s financial system has witnessed several instances where public funds were pumped into struggling banks to prevent broader economic turmoil.
One of the most significant episodes of this occurred during the 2009 banking crisis, when the government intervened to stabilise failing banks by injecting capital.
However, this approach often came with unintended consequences, notably the increase in moral hazard.
Analysts have argued that in essence, banks knew they could take higher risks, knowing the government would step in if things went wrong. This created a cycle of failure and rescue that destabilised the system and burdened taxpayers.
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During the 2008–2009 banking crisis, the CBN injected about ₦620 billion into struggling Nigerian banks as emergency liquidity support and recapitalisation measures.
The latest development, however, marks a fundamental departure from this model. The Heritage Bank liquidation, in particular, illustrates a market-driven resolution strategy that prioritises depositors’ protection without the use of public funds.
In the wake of its failure, NDIC has begun to pay out insured depositors using funds from the bank’s assets—a stark contrast to previous practices.
What’s Changed in NDIC’s Approach?
The NDIC Act (Amended 2023), alongside the Banks and Other Financial Institutions Act (BOFIA) 2020, has enhanced the NDIC’s ability to manage bank failures without relying on government interventions.
The legislation now empowers NDIC to liquidate failing banks by seizing their assets and distributing proceeds to creditors and depositors.
Unlike before, bailouts are no longer seen as the go-to solution, meaning banks will face the consequences of their failures more directly, rather than expecting a taxpayer-funded rescue.
This shift comes amid a broader trend in global banking regulation, where regulators are adopting “no bailout” policies to prevent banks from taking excessive risks, knowing they will be saved in times of crisis.
According to global financial experts, this moral hazard problem is one of the key drivers of financial instability, and by eliminating government bailouts, the NDIC is aligning with international best practices.
The Impact of Asset Liquidation and Creditors’ Payment
The NDIC’s move towards liquidation means that failing banks will no longer receive capital injections. Instead, they will undergo a thorough asset sale process, which includes the sale of loans, properties, and investments.
Proceeds from these sales are then used to pay out insured depositors up to the limit set by the NDIC—currently ₦5,000,000 per depositor. This now covers about 98.98% of depositors in DMBs, up from around 89.20% previously.
For Microfinance Banks (MFBs), the limit rose from ₦200,000 to ₦2,000,000, providing full coverage of about 99.27% of depositors.
| Period | Banks Liquidated |
|---|---|
| 1990s | • Abacus Merchant Bank (1998) • Allied Bank of Nigeria (1998) • Alpha Merchant Bank (1994) • Century Merchant Bank (1998) • Commerce Bank (1998) • Icon Merchant Bank (1998) • Great Merchant Bank (1998) • Republic Bank (1995) • Commercial Trust Bank (1998) • Crown Merchant Bank (1998) |
| 2000s | • Ivory Merchant Bank (2000) • Premier Commercial Bank (2000) • Rims Merchant Bank (2000) • Pinnacle Commercial Bank (2003) |
| 2010s | • City Express Bank (2010) • Transatlantic Savings & Loans (2016) • Ahocol Savings & Loans (2016) • Accord Savings & Loans (2016) • Aso Savings & Loans (2017) • Union Homes Savings & Loans (2017) |
| 2020s | • Aso Savings and Loans Plc (2025) • Union Homes Savings and Loans Plc (2025) • Microfinance banks in batches (2020s) |
For uninsured depositors and other creditors, their recovery will depend on the bank’s remaining assets. This tranche-based payout system ensures that NDIC is not overwhelmed by the need to provide upfront funding but can instead rely on proceeds from the bank’s liquidated assets.
For example, when Heritage Bank was liquidated, ₦46.6 billion was paid to depositors as the first tranche of liquidation dividends, helping to restore confidence among customers.
International Influence and Best Practices
The NDIC has also sought to align its procedures with international bank resolution practices as recommended by organisations like the International Monetary Fund (IMF) and the Bank for International Settlements (BIS).
These global bodies advocate for approaches like bail-ins (where creditors absorb some of the losses), early intervention strategies, and the use of asset separation techniques to protect taxpayers.
In the European Union (EU), the Single Resolution Board (SRB) has successfully employed these techniques, allowing banks to resolve their issues without using taxpayer money.
Similarly, in the United States, the Federal Deposit Insurance Corporation (FDIC) focuses on purchase and assumption transactions or asset sales to avoid the direct use of public funds.
By shifting towards liquidation and asset sales, the NDIC is also taking steps to mitigate risks and reduce future financial instability caused by excessive reliance on public funds.
The strategy signals fiscal prudence, where the focus is on protecting depositors and preserving financial stability without putting the burden on taxpayers.
Customers Want Faster Resolution
Defunct Heritage Bank’s customers with deposits of N5 million and above have recently cried out to the National Assembly to prevail on the Central Bank of Nigeria (CBN) to refund their deposits.
The aggrieved depositors made the appeal in a petition to the legislature, saying their livelihoods and businesses are in distress due to non-payment of their money.
The depositors further proposed that the CBN should extend a loan to the NDIC to facilitate the prompt settlement of their claims, stating that the loan would enable the NDIC to immediately pay them out, thereby alleviating their financial distress.
“We expect that the principal amount of the loan would be recuperated through the eventual disposal of Heritage Bank’s assets.
“This approach would ensure a seamless recovery process, minimising the risk of further financial instability and by extending this, the CBN would be supporting the stability of the financial system, protecting depositors’ funds, and promoting confidence in the banking sector,” they said
Looking Ahead: The Future of Bank Liquidations in Nigeria
Analysts have posited that this change in the NDIC’s approach could lead to long-term positive effects on Nigeria’s banking sector. While it might take longer for depositors to recover their funds in the case of uninsured amounts, the shift ensures that banks, not taxpayers, bear the cost of failure.
Moreover, the moral hazard issue, which has plagued the sector for years, is likely to diminish as financial institutions face stronger incentives to manage risks more carefully.
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Furthermore, this new approach strengthens Nigeria’s banking sector by ensuring that only well-capitalised, efficient banks remain operational.
As the NDIC’s role evolves, its continued commitment to protecting depositors while fostering a stable financial environment will prove crucial to the country’s economic growth and financial development.
Assurance to the Banking Public
Reassuring the wider public, the NDIC said the liquidation does not signal systemic weakness in the banking sector. “Banks whose licences have not been revoked remain safe and sound,” the corporation said, urging Nigerians to continue their banking activities without fear.
The Managing Director of NDIC, Thompson Oludare Sunday, while speaking about the recent liquidation and prosecuting parties responsible for bank failures, said, “The enhanced legal framework now allows NDIC to prosecute parties at fault in bank failures, marking a significant shift from past constraints when weak legal provisions made accountability difficult.”
The NDIC added that its actions underscore its commitment to protecting depositors’ funds and preserving confidence in Nigeria’s financial system.
Sunday Michael Ogwu is a Nigerian journalist and editor of Pinnacle Daily. He is known for his work in business and economic reporting. He has held editorial roles in prominent Nigerian media outlets, where he has focused on economic policy, financial markets, and developmental issues affecting Nigeria and Africa more broadly.
