By Jonah Nwokpoku

Director, Other Financial Institution Supervision Department, OFISD Central Bank of Nigeria, CBN, Alhaji Ahmed Abdullahi, has identified undercapitalisation as the greatest impediment to the growth of microfinance banks in Nigeria.

He stated this yesterday in Lagos at a one day sensitization workshop themed: ‘Deepening the practice of microfinance banking through effective enterprise risk management’ organised by the Nigeria Deposit Insurance Corporation, NDIC for operators of microfinance banks in Lagos.

He said, “Microfinance banks are facing a lot of challenges. They are generally undercapitalised and this hampers effective risk management. At the moment, their non performing loans are growing beyond regulatory requirements. This has implications on their capital assets and liquidity as banks. The industry in general is making losses and no business can survive without being profitable.”

According to him, one of the greatest challenges is the overheads (of most of the microfinance banks) because they are mimicking commercial banks.

He said MFBs should therefore re-examine their business models because they do not have the kind of opportunities that commercial banks have.

Also speaking, the Managing Director of NDIC, Alhaji Umaru Ibrahim in a keynote address emphasized the imperative of adopting effective risk management by MFB operators to drive growth in the sector, sustain profitability and boost access to finance especially to Micro, Small, Medium Enterprises, MSMEs.

Represented by the Director, Asset Management, NDIC, Alhaji B. D Umar, he said: “MFBs must be aware that risk management is a continuous process which should have its own champions within the organization. The Board of Directors and Management must play active part in the process. The advantages of an effective enterprise risk management framework include: Eligibility factor to access the MSMEs Fund of N220 billion for on- lending and provision of financial advisory services to MSMEs.

Financial advisory services

Effective risk management implementation assists MFBs to respond to risks; Guarantees lenders, depositors and other stakeholders’ peace of mind in the period of rapid changes. It promotes profitability and supports corporate governance and objective decision making.”

He added: “MFBs should be interested in enhanced risk management standards because their loan portfolios are on a variable rate and therefore sensitive to Monetary Policy Rate fluctuations. For instance, an increase in. the interest rate could make micro-loan repayment difficult.

Furthermore, new loans could become less attractive for small borrowers due to affordability pressures. Therefore, MFBs should be able to assess borrowers’ capacity and willingness to continue with loan repayments in the case of an interest rate rise. A lack of thorough and effective assessment of market risk could have devastating impact on banks.”