BY AMAKA ABAYOMI

As the Central Bank of Nigeria (CBN) commences inspection of microfinance banks (MFBs) to ascertain the level of compliance with the CBN’s stated guidelines with regards to the 103 MFBs granted approval in principle, operators in the microfinance sector are thrown into frenzy as fears are heightened that the sledge hammer of the apex bank may fall on MFBs that failed to meet the deadline set by CBN.

Vanguard’s investigations reveal that the CBN has commenced another round of inspection to ascertain how well the affected MFBs have complied with the CBN’s directives

According to Vanguard’s investigations, the on-going CBN’s inspection, which is the first after the recent reforms, is targeted at liquidity, capital adequacy and level of compliance of the operators to the reform guidelines after numerous complaints from customers and operators.

While some MFBs may have survived the regulatory bodies’ tests, others who were granted approval in principle for new licenses, which is subject to their ability to meet some set conditions by the apex bank, are keeping their fingers crossed with the hope that it would be a smooth scaling for them.

But the task ahead is for them to ensure that they meet the set standards or face more penalties as the CBN has promised to ensure that appropriate penalties are meted out to defaulters.

According to a CBN source, who pleaded anonymity, the inspection exercise is aimed at revealing the true status of the MFBs which will enable to CBN take appropriate actions on those still lagging behind. The inspection is expected to end by June 2011,

It would be recalled that in February 2010, the CBN and the NDIC began an examination of all MFBs in Nigeria as a response to MFB failures and complaints from customers. The examination revealed that theCBN licensed many weak, failing community banks as MFBs, without addressing their original problems, proving that rebranding does not turn an incompetent financial institution into a strong MFB.

Also, too many MFBs were licensed at the same time, making it difficult to supervise them and most of their customers’ deposits were not insured, which negatively affected customer confidence.

In September, the CBN revoked the licenses of 224MFBs that were ‘terminally distressed’ and ‘technically insolvent’ and/or had closed shop for, at least, six months. According to the CBN, these MFBs were deficient in their understanding of the microfinance concept and the methodology for delivery of microfinance services to target groups.

The CBN cited ‘loss of focus’, and pointed out that although regulatory authorities tried to put them back on track, failure was inevitable.

Commenting on the state of the microfinance sector, the Deputy Governor, Financial System Stability (FSS), CBN, Dr. Kingsley Moghalu, said non-performing loans, resulting in high portfolio at risk (PAR), which impaired their capital; gross under-capitalisation 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.

Commenting on the preparedness of his bank to face the inspection team of the CBN, a Managing Director of one of the affected MFB, who spoke under the condition of anonymity, said though his bank is yet to be inspected, but all is in order and are being expected.

Another MFB boss whose bank is granted AIP stated that the bank’s directors are responsible for the increase in their capital base from N52m to over N100m as it depleted due to panic withdrawals from customers.