REVOCATION OF MICROFINANCE LICENCES
The recent revocation of the operating licences of 224 Microfinance banks by the Central Bank of Nigeria (CBN) is no big surprise. This is in view of the stiff regulatory measures handed down to deposit money banks in recent times, which left no one in doubt that the apex bank is determined to clean the Augean stable of the Nigerian financial services sector.
The Microfinance sub-sector was also subjected to strict checks, which must have informed the decision to revoke the licences of those found wanting. The banks which had their licences revoked were reported to hold a total of N18.2 billion of depositors' funds, N19.6 billion in loan portfolio and N6.1 billion of shareholders' money.
According to the CBN Deputy Governor in charge of financial systems stability, Dr. Kingsely Moghalu, the affected finance houses were found to be terminally insolvent. Beyond that, they were said to have closed shop for at least six months before the apex bank struck. Also, the directors and management of the affected banks were found to have flagrantly abused the Code of Corporate Governance, which guides their operations.
Other reasons given for the revocation order include insider abuse, high level of Non-performing Loans (NPLs), gross under-capitalization and poor judgment by the management of the affected banks regarding their investment in the capital market. This, CBN said, resulted in huge depreciation of their financials in addition to poor credit administration, weak internal control, outright fraud and failure of the management of the affected institutions in meeting financial obligations to customers.
The action of CBN came one year after the removal of some managing directors and chief executive officers (MD/CEOs) of commercial banks. We see the action of the CBN as part of its ongoing reforms to sanitise the banking and financial services sector of which the Microfinance banks are an integral part.
The revocation of the licences also came six months after the Nigerian Deposit Insurance Corporation (NDIC) concluded an audit of the financials of the 820 Microfinance banks in the country. The audit, which was instituted in March this year, was in line with section 2 of the NDIC Act of 2006. The mandate of the audit included, among others, to determine the exact number of the financial institutions, their solvency or otherwise, and those that were no longer operating.
NDIC had stated then that the outcome of the audit would determine the next line of action to be taken by the CBN. The result of that audit was, perhaps, the dossier needed by the apex bank to revoke the licences of the affected banks.
We are not opposed to the decision of the CBN, provided it will help instill financial discipline in the management of Microfinance banks and safeguard customers and shareholders' funds. However, the regulatory authorities should be mindful of actions that could be disruptive to the running of banks. The need to retain public confidence should be the watchword.
Admittedly, a combination of greed, incompetence, lack of professionalism and conflict of interests have ruined many Microfinance banks, but the current headmaster/pupil relationship, in which the apex bank often wields the big stick at the drop of a hat is not ideal. The best approach should be constant monitoring and scrutiny of the books of the institutions, with strict enforcement of regulations that would help them succeed.
The apex bank should not wait until things deteriorate irretrievably in financial institutions before intervening. We believe that if due diligence had been the norm in the past, the sorry state of most of the banks might have been avoided.
The microfinance banks play a key role in financial intermediation, especially in providing credit facilities to low income earners. Therefore, everything should be done to keep them alive and operating within the ambit of their statutory obligations. Those that have received clean bill of health should see the CBN action as a chance to prove their mettle.