Checking excesses of microfinance banks

Nigeria Deposit Insurance Corporation’s (NDIC) latest financials show that microfinance banks (MFBs) invested their total assets of N224.57 billion in Treasury Bills (TB) which they consider as risk-free, contrary to the 5 percent or N11.2 billion of their deposit liabilities stipulated by the Microfinance Policy and Supervisory Guidelines. The corporation also reported that the grassroots banks examined operated like deposit money banks (DMBs) with high investment in fixed assets and unsustainable overhead costs.

Consequently, the sum of N54.12 billion of the sub-sector’s total assets were held with the DMBs in 2013 as against lending to the Micro Small and Medium Enterprises (MSMEs) considered as agents of development. Within the same period, the records show that a good number of the MFBs were said to have preferred to grant loans to high net-worth individuals instead of the economically active poor who should be their target customers.

The NDIC report also reveals that portfolio-at-risk (PAR) ratios of some of the institutions were in excess of 50 percent as against the prudential maximum rate of 5 percent. The rule of “Know-Your-Customer” (KYC) which ought to be the prime driver in lending decisions had been overtaken by the desire for immediate profit and weak/inadequate underwriting and non-adherence to conditions precedent to draw-down, including failure to obtain security where necessary.

This, for us, is a dangerous development that requires urgent attention from both the Central Bank of Nigeria (CBN) and the NDIC. This is so because the mandate of the banks at establishment was to reduce the level of poverty through making small credit available to the active poor and small entrepreneurs.

And coming at a time that the DMBs have completely abandoned their intermediating role for investment in fixed instruments or keeping their excess liquidity with CBN, this means that the MSMEs are in for real hard times. This apathy towards lending to MSMEs, if not checked now, would negatively affect the CBN’s determination to embark on developmental banking so as to empower the youth economically and thereby generate employment opportunities with the attendant economic development.

It is instructive that some MFB operators have kicked against the practice. Godwin Ehigiamusoe, managing director/CEO, LAPO Microfinance Bank limited, sees the development as having negative impact on the sub-sector and economic empowerment since the MSMEs would be less funded. According to him, the solution lies in MFBs strengthening their credit risk management systems and becoming less risk-averse since “lending is the prime role of micro-financing”.

It also speaks volumes that the development has heightened concerns about judicious use of the N220 billion Micro Small and Medium Enterprise (MSME) Development Fund launched by the Federal Government in 2013, which was supposed to be disbursed through the MFBs, with analysts expressing fears that considering the propensity of the MFB operators to toe the path of DMBs, there would be higher level of misapplication of these funds.

It is, therefore, not enough for the NDIC to announce the heinous crimes being perpetrated by the MFBs against the economy by depriving the poor access to credit, the culprits need to be identified and appropriately sanctioned.

On this note, we agree with an operator who blamed the whole development on supervisory laxity by both CBN and NDIC, saying that “the regulators are yet to show seriousness in the affairs of the banks, particularly in the areas of routine examinations and competency level of operators”. And so, for us, the only way out is for the regulators to act now!