As CBN Strips Banks of Unclaimed Balances, Dormant Accounts

James Emejo writes on  the potential impact of the Central Bank of Nigeria’s decision to remove unclaimed balances, and dormant accounts from the custody of commercial banks

In a move that apparently caught the banking sector off-guard, the Central Bank of Nigeria (CBN), on July 19, reeled out revised guidelines on the management of dormant accounts, unclaimed balances and other financial assets in banks and Other Financial Institutions (OFIs) in the country.
The new framework, which took effect from October 2015, further compelled financial institutions to ensure that accounts that have remained dormant for 10 years and above are transfered to the custody of the apex bank.
The circular signed by CBN Director, Financial Policy and Regulations Department, Mr. John Onoja, aimed to standardise the management of dormant accounts, unclaimed balances and financial assets, and outlines the procedure for the administration of these balances, funds, and assets by banks and other financial institutions.

The apex bank observed that financial institutions hold deposit accounts and other financial liabilities in their books with no customer-induced activity over a period, thus, rendering the accounts dormant.
Typically, dormant accounts constitute bank accounts that have been inactive for a certain period, typically 12 months or more, depending on the banks’ policies. These accounts are often bereft of transactions such as deposits, withdrawals, or fund transfers, except for interest credits or fees. After a period of inactivity, the bank typically classifies these accounts as dormant.
On the other hand, unclaimed balances refer to the money left in dormant accounts that remain unclaimed for a prolonged period. If the account holder does not reactivate the account or claim the balance, the funds may eventually be transferred to a government authority, such as a central bank or a treasury, depending on existing regulations.

Fraud- prone assets
In justifying its policy direction, the CBN argued that the continuous maintenance of such accounts results to accumulation of huge unclaimed balances at the disposal of the financial institutions for which the depositors may not be adequately compensated.
In addition, dormant and unclaimed balances are increasingly susceptible to fraudulent transactions or abuse.
The revised regulation also aims to curb abuses in the operation of dormant and inactive accounts and set operational standards, and to strengthen the oversight functions of CBN on the management of dormant and unclaimed balances.

In addition, the guidelines identify dormant accounts/unclaimed balances and financial assets with a view to reuniting them with their beneficial owners; hold the funds in trust for the beneficial owners; and establish a standard procedure for reclaim of warehoused funds.
Eligible accounts are dormant accounts balances that have remained with financial instructions for a period of 10 years and beyond. Others include current, savings and term deposits in local currency; domiciliary accounts; deposits towards the purchase of shares and mutual investments; prepaid card accounts and wallets; government owned accounts; proceeds of uncleared and unpresented financial instruments belonging to customers or non-customers of Fls; unclaimed salaries and wages, commissions, and bonuses.
Other assets affected by the new directive are proceeds of stale local and/or foreign currency drafts not presented for payment by beneficiaries; funds received from a correspondent bank without sufficient details as to the rightful beneficiary and/or a recall of funds made to the remitting bank to which the Nigerian bank account had not been debited; and judgment award among others.

Why unclaimed assets can benefit banks
Analysts agree that banks often benefit from dormant and unclaimed balances in several ways, adding that they could feel the impact of the revised directive, albeit moderate.
This is partly because banks often charge fees on dormant accounts for maintenance, which adds to their revenue. Though regulations may limit or waive these fees in certain cases, they can still be profitable.
The unclaimed funds in dormant accounts can also be used by banks to support their liquidity needs by investing the funds or deploying them for lending, contributing to the bank’s financial strength; and since these accounts are inactive, they require minimal management, allowing banks to reduce their operational efforts while still benefiting from the balance.
Also, depending on regulations, banks may eventually write off the dormant balances as profit if they remain unclaimed for a  long time, if the laws so permit.
Though these accounts can be advantageous to banks in some ways, regulations usually require them to attempt to contact account holders before treating balances as their own or transferring them to the state.

Potential discomfort for banks
It is,however, believed that when the central bank or government takes control of dormant accounts and unclaimed balances from commercial banks, this could potentially affect the bank’s operations, though the impact is generally not severe.
Notably, dormant accounts contribute to a bank’s overall liquidity, and stripping them of unclaimed balances cause them to loses access to these funds, which could reduce their available liquidity for lending or other investments. But, the impact is usually minor because dormant accounts generally represent a small portion of a bank’s total deposits.
Also, banks often charge maintenance or service fees on dormant accounts. When the accounts are transferred to the central bank, the bank can no longer collect these fees, leading to a small but notable loss in fee-based revenue.
The process of transferring dormant accounts and unclaimed balances to the central bank involves administrative tasks like notifying customers, tracking down account holders, and managing the transfer of funds. These tasks can add to operational costs in the short term.

In addition, if banks hold onto dormant accounts for too long without following proper procedures, they might face penalties or closer regulatory oversight. In this case, transferring dormant accounts to the central bank reduces this risk but might expose the bank to scrutiny if compliance was not followed properly.
Also, given that dormant accounts are considered liabilities on the bank’s balance sheet because they represent customer deposits, transferring them to the central bank reduces liabilities, which might make the bank appear more efficient or alter certain financial ratios.  However, this is generally a minor effect unless a large proportion of accounts are dormant.
It is yet unclear, the magnitude of these accounts with Nigerian banking system.
While there is some impact on liquidity, revenue, and administrative burden, the transfer of dormant accounts and unclaimed balances to the central bank is often seen as a manageable issue for most commercial banks as these accounts often represent a small fraction of total operations, and banks generally plan for such regulatory requirements.

Analysts’ perspectives
Nonetheless, the apex bank’s latest position on the dormant accounts and unclaimed balances have elicited conversations among analysts. While some welcomed the development, others picked holes in the revised framework.
Speaking on  the development, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the CBN directive came as a surprise to the industry.
He said: “The fact that an account is dormant today does not mean it will be dormant tomorrow. Some of the customers of these dormant accounts may be living abroad and may not have any need to transact on those accounts now.

“The accounts may have been left dormant by their owners for different reasons,maybe for savings purposes.”
According to the former Director General, Abuja Chamber of Commerce and Industry (ACCI), the revised directive may evoke legal actions.
He said: “Some of the accounts may belong to a deceased customer whose family members may be pursuing the letters of administration.
“Litigations may emerge in respect of this directive as the owners of such accounts may come for their accounts and monies anytime. These are the issues.”
However, Nigeria’s first Professor of Capital Market/pioneer President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said the policy move was desirous amid a lack of credible database of dormant accounts in the country as well as the potential to defraud their owners.

He said: “I recall that the CBN had issued a guideline on this back in 2015 which was overtaken by the provisions of Section 77 of the Finance Act of 2020 which provides that any unclaimed amount in a dormant bank account which has remained unclaimed for a period of not less than six years should be transferred to Unclaimed Funds Trust Fund.
“I think it is a welcome development not least because unlike many developed and developing countries, Nigeria lacks a credible database of dormant accounts.
“It’s also difficult to quantify the number of dormant accounts in the Nigerian financial system that have gone unclaimed, particularly in the old generation banks.”

Uwaleke said:”In addition, dormant and unclaimed balances are increasingly susceptible to fraudulent transactions or abuse.
The UK, for example, has a very elaborate regulation and scheme for the management of unclaimed banks deposits.
“Similarly, in other developed countries and some developing countries such as Japan, Ireland, United States(US), India, Kenya and Liberia, there are detailed regulations for dormant accounts and other unclaimed assets of banks.  
“The law provides for the transfer of the funds to the state or special organisations to be used for the general good of the society pending the identification of the rightful owners or heirs.”
He said: “This practice is based on the principle of escheatment.  Before escheatment, serious and concerted efforts are usually expected to be made to unite owners with their forgotten deposits.

“I am glad to note that the new CBN guideline has raised the dormancy period from six years to 10 years consistent with global standards and has established a procedure to standardize the management of dormant accounts as well as the reclaim of warehoused funds.
“What is now required is for the CBN and the financial institutions to step up sensitization campaigns to ensure that customers of banks are aware of these procedures.”
On his part, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the CBN directive will pool funds to government for the benefit of the economy.
He said: “The various banks have been enjoying the benefit of these funds in their pool to the detriment of the economy and have been using them lending purposes.
“The aggregate of the dormant assets is enough to boost the agricultural revolution plan of the government and help in granting single digit interest rates to deserving SMEs and companies to oil the economy.

“If properly utilised by government there will be no needs for borrowing to fund these ventures. The funds under control and supervision of the CBN will encourage banks to be more innovative and engaging with their customers so that incidences of dormant accounts can reduce and the prospects of using such accounts for fraudulent purposes will also be greatly averted.
“This is a welcome development for the economy because it will spread liquidity instead of benefits being retained by DMBs.”