..as CBN commencesÂ target examination
By Babajide Komolafe and Amaka Agwuegbo
The Central Bank of Nigeria (CBN) has ruled out the possibility of injecting bailout funds into distressed microfinance banks. The apex bank has also commenced target examination of the banks to ascertain their financial health.
Worried by the
increasing widespread incidence of illiquidity in the microfinance banking subsector, the CBN recently held a closed door meeting with chairmen and chief executives of microfinance (MFB) banks where it told them there would be no bailout for any of them having liquidity problem.
According to sources at the meeting, the Director, Other Financial Institutions Department (OFID), Femi Fabanwo who chaired the meeting categorically stated that the CBN would not bailout any distressed MFB. According to sources, the CBN director said that the apex bank has begun to conduct target examination of microfinance banks. He was quoted to have said, “We have target-audited 58 MFBs in Lagos and it is unfortunate that a good number of them are in a very bad state. I want to reiterate the fact that the CBN would bailout any MFB that closes shop. All we would do is pay off depositors.”
He also admonished MFB operators to be careful when lending, especially when the sum is from N50, 000 and above. He said “When you are giving out loans of N50,000 and above, you need a form of collateral or strong guarantee, otherwise, you should not give the loan except in cases where you are lending to groups” .
The apex bank it was also advice to MFBs to consider increasing their capital base as it is obvious that the N20 million minimum capital bases is inadequate to run the business. MFB Chief Executives at the meeting who spoke on condition of anonymity said the CBN expressed concern over the prevalence sharp practices in the industry and especially non-compliance with the microfinance policy. Investigation revealed that at a training seminar for chief executives of MFBs last week theÂ Â apex bank accused MFBs of a plethora of sharp practices, which include rendition of false returns.
Speaking at the seminar, the OFID director,Â who was represented by the Deputy Director OFID, Mr. William OgumbaÂ said, “SinceÂ Â theÂ Â inception of theÂ Â micro-financeÂ Â policyÂ Â inÂ Â 2007,Â Â thereÂ Â haveÂ Â been challenges in rendition of returns. These challenges include late or non rendition of returns, incomplete and falsification of returns.Â “Others include clerical errors, wrong classifications of items, and outright failure to balance the Total Assets with the Total Liabilities.
The CBN will no longer continue to accept such irregularities. As operators in the financial industry, you are expected to provide financial information that are credible andÂ in a manner acceptable to the regulatory authorities. The responsibilities for rendition of returns are clearly stated in Section 331 (1) and (2) of the Companies and Alliec Matters Act of 1990. These extensive provisions are further supported by Section 24 (1) and (2) of the Banks and Other Financial Institutions Act (BOFIA)Â Section 6.2 (i) of the Regulatory and Supervisory Guidelines for MicrofinanceÂ Banks in Nigeria.
“While the CBN had maintained moral suasion in addressing observed lapses in the past, the time has now come for practitioners to perform their roles as stipulated in the policy. Consequently from the end of this workshop, lapses in rendition of returns will be viewed with the seriousness it deserves. The board and management will be held responsible for any lapse in the rendition of returns.”
Microfinance banksÂ was introduced in 2008Â Â following the launching of the microfinance policy by the CBN. But less than two yearsÂ Â since inception the industry is basseted with problems ranging from fake operators, illiquidity andÂ poor corporate governance.
According to the CBN 2008 annual report, “The examination of the MFBs was conducted to ascertain the extent of compliance of the newly converted or licensed MFBs with the terms of their business plans and the extant rules and regulations as well as ensure a greater focus on core microfinance business. The exercise revealed a generally poor asset quality and weak corporate governance.”
But a former director of NDIC, Mr. Joel Ahimie in an exclusive interview with Vanguard attributed the liquidity crisis in the MFBs subsector to haste for profit and wrong lending practices as well as inadequate supervision by the regulatory authorities.
Ahimie, who as the Director, Special Insured Institutions Department (SIID) of NDIC was responsible for deposit insurance and supervision of MFBs andÂ primary mortgage banksÂ (PMIs) said, “Our people were just too much in a hurry and most of the operators see microfinance bank as a mini bank and that is wrong. Some see it as a profit making business, forgetting that the profit will come but not now. The money lenders are making money and they charge 100 per cent interest, but MFBs charge over 30 per cent, which is a lot of money.
An MFB Managing Director once told me that he can’t rely on the poor because they have no money. Yes, the poor don’t have money, but when you talk of volume, they have.
MFB operators should not expect to make profit in the next five years considering the number of MFBs, I doubt if the CBN and NDIC would be able to carry out proper examination on them. The examination cycle is usually one year, so if the CBN and NDIC were to examine, it is not possible for the CBN to examine for 356 days in a year since it spends, at most, three days to carry out an examination, so it would not be able to examine 400 nor can the NDIC.
We also have to consider the quality of the examination and three days might be grossly inadequate to examine a bank.
I should think that the CBN and NDIC, by now, should be thinking of outsourcing part of the supervision of the MFBs because when they were community banks , their examinations were outsourced by the CBN to some auditing firms. But we have to ask if the auditing firms are qualified enough to offer the kind of examinations that the Examination Department of the NDIC would provide.”