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Bank Audit, Fear Grips Micro Finance Operators

By Amaka Agwuegbo
The sack of five managing directors of commercial banks is making investors and asset managers to sit up in the microfinance sub-sector, Amaka Agwuegbo reports

CBN building
CBN building

The recent upheaval in the financial sector is generating apprehension in the micro-finance sub-sector of the industry and the reason is not far-fetched. Recent examination conducted by the CBN to ascertain the extent of microfinance banks (MFBs) compliance to ensure greater focus on core microfinance business, revealed that most of them generally have poor asset quality and weak corporate governance, even though on the average, they seem well capitalized above the prescribed minimum level of N20 million.

The CBN has asserted that most microfinance banks have poor asset quality, with average non-performing loan at 40 per cent and Performance at Risk at 45 per cent as against the 25 per cent prescribed for MFBs. The fear is that should the CBN decides to visit them the way is visiting the banking sector at the moment, many could be thrown out.

The Director, Other Financial Institutions Department (OFID) of the CBN, Mr. Femi Fabamwo, said though most MFBs are liquid, have moderate earnings and report profit, but, the quality of management is still poor with weak board members with 19 per cent of MFBs sustaining losses. “Liquidity is high, but there are few cases of illiquidity due to the fact that some MFBs have high level of insider credit, especially their directors, high investment in fixed assets, making it difficult for operators to match assets to liabilities. These have greatly contributed to the high level of illiquidity which leads confidence crisis,” he said.

The managing director of Meridian MFB, Mr. Innocent Ezema, is of the opinion that the asset quality of microfinance banks can be improved upon if elements of risk management are employed. “One of the policy goals of microfinance banks is to create employment opportunities and increase the productivity of the active poor in the country, thereby increasing their individual household income and uplifting their standard of living.

“This we do through giving loans to the active poor, but we been recording a high level of default in loans repayment due to the activities of some dubious people and this has led to a huge drop in our asset quality, which the CBN is harping on,” he said.

Continuing, Ezema said “We scaled down on a lot of risk element principles that apply in normal lending propositions, but that doesn’t seem to be working. What we are doing now is to go back to risk management and try to put things in place to make sure that we improve on asset quality.”

The managing director of Moorgate MFB, Mr. Gbolahan Bello, shared his opinion. He attributes the poor asset quality of MFB to the perception and misconception that people have about the industry. “Because the industry is still new, all that some people are interested in is to borrow money because they feel we are government owned and have limitless funds to throw about, making them want to borrow without wanting to pay back.

“We are low-leveled banks that are established to help the active poor and small traders, but poor asset quality of MFB has been a problem from the beginning because some people have not had good intentions,” Bello said.

He is of the opinion that strict monitoring must be employed to follow up on borrowers and to ensure that the loans are used for what they are intended for so as to improve the borrowers’ businesses and operators can recoup our money back. “It is a challenge, but as a new industry, we have to be resilient to get the desired results,” he opined.

Though the Managing Director of Imperial MFB, Mr. Ejike Azubuike, is of the view that the rate of loan repayment in the MFB sector is still very high, with the percentage of default at below 10 per cent, he blames the poor asset quality to the delay in payment that they experience. “Most of the loans that are created are not paid up before the due dates and by the time it is one day past, it is classified as poor asset quality because they are not meeting the payment schedule,” he said.

The CBN, while observing that improper practices have led to an increase in the generation of poor quality loan assets, said some MFBs and financial institutions have 20 per cent of non-performing assets on their loan portfolio. “You must all go out to recover outstanding loans to your customers while at the same time ensure that you maintain quality assets from now,” the CBN warned.

“About 46 MFBs have not rendered their returns for the past six months. You all know that the action is criminal and could be sanctioned with revocation of license, and that may assist in reducing the number of operators in the country,” a CBN official stated.

Not only is the microfinance sector bedeviled with poor asset quality, the issue of corporate governance is now topical, with most of operators flouting it.

At the last Committee of the Microfinance Banks in Nigeria (COMBIN) meeting, the CBN cautioned operators of MFBs against exposing themselves to high level of insider-related credits which are always beyond the stipulated limits by the law establishing MFBs.

Section 20(2)(a) of BOFIA, 1991 stipulates that a bank shall not, without prior approval in writing of the CBN, permit to be outstanding, unsecured advances, loans or unsecured credit facilities of an aggregate amount in excess of N50,000 to any of its directors, to any firm, partner-ship or private company that any of its directors is a guarantor or any public or private company in which any of its directors maintains a shareholding of not less than 5%, either directly or indirectly.|

Secured loans, advances and other credit facilities, which are secured by acceptable collaterals shall not exceed 1% of the share-holders’ fund for any individual borrower and 5% for group borrowers.

Aggregate insider-related lending shall not exceed 5% of paid up capital of any MFB at any time. This includes both secured and unsecured lending, but excludes staff loans and advances. But it is expected that the share-holders’ fund would be higher than the paid-up capital.

This the operators agree with as they said that another area of ensuring good corporate governance is by reducing or eliminating insider related credits, which the CBN is harping on.

According to Azubuike, “Directors and CEOs, on the aggregate, are not supposed to take loans over and above 5 per cent of the paid up share capital.”

Ezema argues that the individuals who have controlling shares and control the affairs of the MFBs don’t believe in corporate governance and this has not helped in the running of the microfinance banks.

“The CBN’s insistence on corporate governance is the only way we can improve on our sector so that the aim of microfinance would not be in vain. What the CBN is saying is that the board of MFBs must contribute to the running of the banks through three committees – audit, financial and general/multipurpose and board credit committees. These three committees are to meet at agreed times to review the activities of their banks and report to the board so that actions can be taken.”

Ezema is of the belief that these committees are in existence in the traditional system of conventional banking, but corporate governance is being insisted upon in the MFB sector because of corporate failures in Nigeria, to improve our performance and enable us excel.

Tracing the history of corporate governance to the days of community banks, the Moorgate MFB boss said those community banks were owned by one or two people or the community, making it difficult to divorce the owners of the banks from the bank, to the extent that whatever money the take from depositor, a good percentage is used for their personal businesses, thereby killing the aim of the community banks.

“But with the new guidelines, the CBN is very clear on the corporate governance issue to the extent that the boards of these banks are more responsible. We have a code of conduct and their responsibilities are spelt out. Apart from the guidelines, it behooves them as individuals not to engage in things that would tarnish their names and be sure that all MFB boards are run properly by getting regular reports from the management about what goes on in the banks, the committees of the boards should have regular meetings so as to be briefed by management on the activities of the bank.

“Also, the CBN has been encouraging us by conducting seminars to enable us understand what I expected of us.”
But the Managing Director of Imperial MFB is calling for broad-based boards of directors as panacea to the problem of poor corporate governance in the sector.

He said “Corporate governance in microfinance banks can be improved on by the CBN ensuring that the board of every microfinance bank is broad-based.

“This is can be achieved by insisting on a minimum of 5-7 board members and by eliminating a situation where family members dominate boards of microfinance banks. Once the board is broad-based, that is a solid step towards ensuring good corporate governance.”

For the microfinance industry to be able to achieve its policy goals of providing diversified, affordable and dependable financial services to the active poor, creating employment opportunities and increasing the productivity of the active poor in the country, among others, it has to do all within the acceptable best practices to shore up its asset quality.


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