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The directors and
management of 224 microfinance banks (MFBs) that failed a recent target
test are to be prosecuted, while those found culpable of abusing their
positions are to be blacklisted, the Central Bank of Nigeria (CBN) said
on Friday.

Kingsley Moghalu,
the bank’s deputy governor, Financial Systems Stability (FSS), who
announced the revocation of the operational licenses and closure of the
banks while presenting an update on the status of country’s MFBs in
Abuja, said the affected banks were either ‘terminally distressed’ or
‘technically insolvent’ or both.

Mr Moghalu put
total deposit of the 820 MFBs at about N18.2billion, total loans
exposure at over N19.6billion and shareholders’ funds of N6.1 billion,
explained that 178 of those classified as technically insolvent had
shareholders’ funds, capital adequacy ratio, and liquidity ratios that
were negative.

Besides, 46 others
under the terminally distressed category had either closed shop for
more than six months or failed to submit returns to the CBN as well as
response for requests for verification of their operational status.

He said that since
the launch of the Microfinance Policy Framework in December, 2005, the
industry encountered several challenges as a result of the operators’
lack of understanding of the microfinance concept and the methodology
for delivery of the services to the target beneficiaries.

“Many of them lost
focus and began to compete with deposit money banks for customers and
deposits, leaving their target market unattended, in spite of efforts
of the regulatory authorities to put them back on track,” he explained.

The situation, he
said became complicated by the impact of the global financial crisis,
resulting in credit lines drying up, competition becoming more intense
and credit risk increasing, while many customers were unable to pay
back their credit facilities owing to the hostile economic environment.

Special examination

To identify
factors that accounted for the failure of some MFBs to achieve the
policy objective of economic empowerment of people at the lower end of
the financial market, particularly their ability to meet matured
obligations to depositors, the CBN, in conjunction with the Nigeria
Deposit Insurance Corporation (NDIC), conducted a special examination
for the 820 registered MFBs in the country.

The special
examination, which lasted between February and June, revealed that most
of the MFBs was affected by high level of non-performing loans,
resulting in high portfolio at risk (PAR), which 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 abuses.

The test also
revealed other problems, including heavy investments in the capital
market, with the resultant decline in the value of the investment after
the meltdown; poor asset-liability management owing to portfolio
mismatch; heavy investments in fixed assets beyond the maximum limit
prescribed; operating losses 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.

Mr Moghalu, who
said the decision to wield the big stick against the erring banks was
pursuant to the provisions of section 12 of Banks and Other Financial
Institutions Act (BOFIA) of 1991 (as amended), said the NDIC would pay
a maximum of N100,000 as insurance coverage to each depositor in the
closed banks.

The action by the Bank, he said, sets the stage for the completion
of the ongoing comprehensive review of the microfinance policy
framework, which would soon be made public, warning that in line with
the reforms in the banking sector to ensure corporate governance and
prudent risk management, MFBs must henceforth operate as responsible
institutions by abiding with the regulatory guidelines.