By Amaka Agwuegbo
The Central Bank of Nigeria, CBN, has said high level of non-performing loans, resulting in high portfolio at risk (PAR), which had impaired their capital and gross undercapitalization in relation to the level of operations, are some of the reasons why the operating license of some microfinance banks (MFBs) were revoked.
The CBN had, last Friday, revoked the licenses of 224 MFBs while the affected banks’ directors and management would be handed over to the Law Enforcement Agencies for investigation and prosecution.
The CBN had, earlier in the year, conducted Target Exam on 820 MFBs across the country of which of 224, or 27 per cent, of them were found to be ‘terminally distressed’ and ‘technically insolvent’ and/or had closed shop for, at least, six months.
Vanguard had, on Jul 19, 2010, exclusively reported the result of the target exam conducted by CBN and Nigeria Deposit Insurance Corporation (NDIC), which revealed a lot irregularities and unethical practices besetting the MFB sector.
It is not surprising that the CBN has sanctioned 224 failed MFBs as the CBN had earlier, in Vanguard’s exclusive report, promised “to review the section of penalties to be meted out on offences committed with the aim of so as to reduce cases of unethical practices.”
According to Vanguard’s investigations, 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.
Also, it was also discovered that most MFBs have fixed assets above their limit of 20 per cent of their shareholders fund.
It was also 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.
According to Deputy Governor, Financial System Stability (FSS), CBN, Dr. Kingsley Moghalu, non-performing loans, resulting in high portfolio at risk (PAR), which had impaired their capital; gross undercapita-lization in relation to the level of operations; poor corporate governance and incompetent boards; high level of non-performing insider-related credits, and other forms of insider abuse; heavy investments in the capital market, with the resultant diminution in the value of the investment after the meltdown are some of the factors that contributed to the failure of these banks.
Others are poor asset-liability management owing to portfolio mismatch; heavy investments in fixed assets beyond the maximum limit prescribed; operating losses sustained as a result of high expenditure on staff and other overheads; weak management evidenced by poor asset quality, poor credit administration, inadequate controls, high rate of fraud and labour turnover; and failure to meet matured obligations to customers.
To this effect, the operating licenses of the 224 MFBs that were found to be ‘Terminally Distressed’ and ‘Technically Insolvent’ have been revoked pursuant to S.12 of BOFIA 1991 (as amended).
As insured institutions, NDIC shall pay up to the maximum insurance coverage of N100,000 per depositor, while directors and management of the closed banks that have abused their positions would be handed over to the Law Enforcement Agencies for investigation and prosecution, and those found culpable would be blacklisted accordingly.
Continuing, Moghalu said the impact of the global financial crisis on MFBs had been more severe than anticipated as credit lines dried up, competition became more intense and credit risk increased while many customers of MFBs were unable to pay back their credit facilities owing to the hostile economic environment.
These combined factors had significantly weakened MFBs and their ability to achieve the policy objective of economic empowerment at the lower end of the market.
Below are some of the affected banks.