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All eyes on MFBs’ asset quality

By Amaka Abayomi

Despite the euphoria that greeted the establishment and operations of microfinance banks (MFBs), the upheaval in the financial sector, particularly the microfinance sector, has dimmed their candle light as most of them are battling undercapitalization, huge non-performing loans, poor corporate governance, huge investment in fixed assets, weak capacity, insider related abuses, and poor asset quality.

These have led the Central bank of Nigeria (CBN), MFB operators and investor to weigh the sector’s risks by applying sophisticated analysis to MFBs’ financial performance and asset quality.

In the recent examination of MFB conducted by the CBN to ascertain their extent of compliance and to ensure greater focus on core microfinance business, it was revealed that most of them had high level of non-performing loans, resulting in high portfolio at risk (PAR), which had impaired their capital; gross undercapitalization 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; and heavy investments in the capital market, with the resultant diminution in the value of the investment after the meltdown.

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; failure to meet matured obligations to customers.

The past two years held many challenges for the microfinance sector, but despite these challenges, most microfinance institutions (MFIs) proved to be up to the challenge.

But these challenges are not peculiar to the Nigerian microfinance sector as asset quality has become a global microfinance issue.

According to ‘All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010’, beginning in January 2009, MFIs’ portfolio delinquency levels began to deteriorate rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2 per cent to 4.7 per cent during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18 per cent at year-end 2008 to 6 per cent by May 2009.

However, since June 2009, delinquency has moderated and profitability levels have come back to stabilize at 4 per cent for PAR30 and 10 per cent for ROE, respectively. Most MFIs continue to maintain solid reserve and capitalization levels, with equity ratios unchanged from the 18–20 percent range established over the past two years.

The effects of the downturn were also far from uniform. While Central America, Eastern Europe, and Central Asia were particularly hard hit, large areas in South America and South Asia have witnessed little or no impact. At the same time, a few countries experienced severe delinquency crises but for reasons not directly related to the global downturn.

Commenting earlier on the asset quality of the MFBs, the Director, Other Financial Institutions and Supervisory Department (OFISD), Mr. Femi Fabamwo, observed that though the quality of loan portfolio is a key driver of profitability, bad debt ratio and write off ratio are very high in the sector.

“On the double bottom line, emphasis on their social missions is negligible as most of the MFBs are highly commercialized. Net interest margins have shown that higher rates are charged more than the mainstream banks.

On the cost of operation, relatively smaller size and shorter maturity of loans drive transaction costs higher. Therefore, cost per borrower and operating expenses to total assets are high.

“Long term funding has seen MFBs invest heavily in fixed assets, capital market and branch expansion. Thus, there is pronounced asset-liability mismatch.”

Explaining further, the OFISD Director said as against 2007, the total assets of MFBs grew by 136.3 per cent from N75,549m to N178,516 m. Aggregate deposit also grew by 101.6 per cent from N41,217m to N83,072m. Number of customers as at 31st October 2010 stood at 2,020,567 while the average deposit size was 41,110.

Aggregate loans and advances rose by 170.5 per cent from N22,850.23 to N61,811.52. The number of loan account as at 31st October 2010 was 623,353, average loan size was 104,750, while average case load was 144.

For the microfinance sector 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, among others, it has to do all within the acceptable best practices to shore up its asset quality.


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