Appropriate penalties will tighten loose ends in MFBs’ operation, CBN


Jul 19, 2010 By

The recent examination of microfinance banks (MFBs) by the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) has revealed some irregularities and unethical practices in the MFB sub-sector.


It would be recalled that, following signs of distress in some MFBs and growing complaints of fraudulent practices leveled against some operators, the CBN and NDIC had conducted target examination of the banks. This was done to ascertain the true financial health of the banks so as to separate healthy MFBs from the pack.Dr. Kingsley Moghalu, CBN’s Deputy Governor (Financial Sector Stability), said “We have embarked on a comprehensive target examination of all the MFBs in Nigeria and the result of this examination will form the basis of detailed policy guidelines of the MFB sector to be released by the middle of the year.”


Vanguard, however, gathered from the un-compiled reports of the examination that all may not be well in the MFB sub-sector as a lot of irregularities and unethical practices have become the order of the day.According to CBN sources, most MFBs are yet to invest 5 per cent of their deposits in treasury bills, thus, flouting the CBN rules.


“Though a comprehensive report of the examination is yet to be compiled, but most MFBs are not investing, at least, 5 per cent of their deposits liabilities in treasury bill, which is against the CBN rule of them keeping, at least, 5 per cent of their deposits in liquid form by using it to buy treasury bills, which is as good as cash anywhere in the world.”Treasury bills are short-term securities that mature in one year or less from their issue date and are issued with three-month, six-month and one-year maturities. They are purchased for a price that is less than their par (face) value, and when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity.


Continuing, the CBN source said, in their bid to compete with commercial banks, most MFBs have resorted to investing depositors’ fund in fixed assets like posh cars, expensive buildings and the likes.“Also, it was also discovered that most MFBs have fixed assets above their limit of 20 per cent of their shareholders’ fund. Thus, money to be used for loans is reduced because it has been used to acquire assets that would not earn anything for the bank or impact on the bank’s profitability.


“Asa MFB, a Nigerian-based Bangladesh MFB, is making a lot of profit, but when you go to their office, what you’ll see are long benches, instead of the posh chairs that most Nigerian MFBs have in their offices. This is because they understand what microfinancing is all about.“Equally, it was discovered that the ratio of non-performing loans to total loans of most MFBs is above 2.5 per cent, which has resulted to poor credit management and loss of assets. This is because, if you give someone a loan of N20,000 to be repaying N10.00 everyday and he fails to do so, the N20,000 is lost and as long as the loan is not repaid, it is non-performing.


“The ratio is above 2.5 per cent either because the credit officers are not knowledgeable in areas of credit administration or there are cases of insider abuses by management. Also, proper appraisal may not have been carried out on the customer to ascertain the person’s cash flow to know if he can repay the loan.”All these have prompted the regulatory authorities to specially review the section of penalties to be meted out on offences committed with the aim of so as to reduce cases of unethical practices.


“We reviewed the section on penalties so as to come up with appropriate penalties for any offence committed. Though the existing penalties are okay, but given the changing times and the means devised to carry out these unethical practices, the section had to be reviewed.Speaking on the delay in the release of the reviewed operational policy framework of microfinance banks, the CBN said the stakeholders have to approve the recommended framework because it is not the sole responsibility of the apex bank.


Earlier, CBN’s Deputy Governor (Financial Sector Stability), Moghalu, said detailed guidelines regulating the operations of the MFB sub-sector would be released mid this year, and would allow the NDIC and CBN adopt policies that would better resolve the challenges facing the microfinance banking sector.


According to sources, the regulatory bodies have the options of liquidating, injecting rescue funds or looking for new owners who can bring more in fresh capital. But they were quick to add that the option of merger or acquisition is the personal decision of the banks involved as the CBN is not compelling any MFB to choose that option.“One of the recommendations we made on the policy review was the need for MFBs to recapitalise, and we are looking at having national MFBs recapitalise to the tune of N2bn, state MFBs to N100m, while that of unit MFBs will be N20m. N20m was a lot of money in 2005 when MFBs were licensed, but that can hardly set up the buildings MFBs operate from and still facilitate loans.


“National MFBs are those that will have branches in more than one state, state MFBs will have branches in different local government areas of a state, while unit MFBs will operate only in a local government area of a state. This is to ensure that they are well funded to perform their primary duty, which is to give loans.”Like the CBN Governor, Mallam Sanusi Lamido Sanusi, it is believed that raising the capital base of MFBs and retooling with corporate governance may be the most important solutions to improve their performance.






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