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Thursday, October 7, 2010

Banking: 50 years of trial and error


SURE Nigeria is 50 years of age. It is a remarkable landmark in any nation’s life.
In the Nigerian banking clime it is like starting afresh as gale had blown recently across the banking industry.
In a related development, the same gale last month blew through the microfinance banks sector of the economy.
Instructively, at a press conference by the Deputy Governor, Financial System Stability, Central Bank of Nigeria, Dr. Kingsley Chiedu Moghalu on the status of microfinance banks in Nigeria, had stated that the microfinance industry in Nigeria had been confronted with numerous challenges since the launch of the Microfinance Policy Framework in December, 2005.
He pointed out that a significant number of the microfinance banks (MFBs) were deficient in their understanding of the microfinance concept and the methodology for delivery of microfinance services to the target groups, adding that 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.
Unfortunately, the impact of the global financial crisis on MFBs had been more severe than anticipated. Credit lines dried up, competition became more intense and credit risk increased, as many customers of MFBs were unable to pay back their credit facilities,
owing to the hostile economic environment. The combination of these factors had significantly weakened the microfinance sub-sector and its ability to achieve the policy objective of economic empowerment at the lower end of the market.
Given this scenario and following market reports about the failure of some MFBs to meet their matured obligations as well as several petitions received from aggrieved depositors, the Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) embarked on a Target Examination of all MFBs in Nigeria, to identify the problem and ascertain the scope as well as the extent of damage done to the affected institutions. The exercise started in February 2010 and was concluded in June 2010.
He explain that the Target Examination was conducted on 820 MFBs across the country and a total of 224 (27 per cent) MFBs were found to be ‘Terminally Distressed’ and ‘Technically Insolvent’ and/or had closed shop for at least six months.
The factors that contributed to the unsoundness of the MFBs were attributable to some or all of the following: High level of non-performing loans, resulting in high portfolio at risk (PAR), which had impaired their capital; gross under-capitalisation 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; heavy investments in the capital market, with the resultant diminution 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 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 and the operating licences of the 224 MFBs that were found to be ‘Terminally Distressed’ and ‘Technically Insolvent’ have been revoked pursuant to S.12 of BOFIA 1991 (as amended).
NDIC in line with its statutory responsibility shall pay up to the maximum insurance coverage of N100,000 per depositor and the bank directors and management of the closed banks that have abused their positions would be handed over to the law enforcement agencies for investigation and prosecution, and those found culpable would be blacklisted accordingly.
As a result of this, money deposit banks in the country have been officially ordered to freeze all transactions on the accounts of the 224 microfinance banks whose operating licences were recently revoked by the Central Bank of Nigeria.
They were also instructed to dishonour all instructions emanating from the previous management of the defunct MFBs and their agents with effect from 24th September 2010.
In a memo to all deposit money banks by the Nigerian Deposit Insurance Corporation, the banks were also ordered to make no further entries and charges on the accounts of the MFBs, while all cheques and other payments instruments are to be returned marked “Drawer Bank Closed”.
The memo, which was signed by A.G. Longe of Claims Resolution Department, NDIC, and Mrs. Emily Osuji, Assistant Director, also of Claims Resolution Department, the NDIC advised banks to forward certain documents to NDIC. The required documents are: A certified bank statement showing balances on all deposit, current, loan and other accounts which the closed microfinance banks had with banks.
Statement of particulars of any charge held by you over the microfinance bank’s asset together with a list of any Title Deed, Securities, Bills, etc held by the bank subject to such change.
A list of Title Deed, Securities, etc. and held by the bank on behalf of the closed microfinance banks for safe custody; a list of contingent liabilities due to you in respect of guarantees or endorsements or otherwise, (including foreign exchange transaction); statement showing verification of funds sold or purchased on behalf of the closed microfinance banks.
It would be recalled that the Central Bank of Nigeria recently revoked the licenses of 224 of the country’s 820 microfinance banks.
CBN deputy governor, financial system stability, said that after an examination of the nation’s MFBs, 27 per cent were found to be “terminally distressed” and “technically insolvent” and/or had closed shop for at least six months.
Moghalu said a significant number of the MFBs were deficient in their understanding of the microfinance concept and the methodology of delivery of microfinance services to the target groups. He added that many of the MFBs lost focus and began to compete with commercial banks for customers and deposits, leaving their target market unattended, in spite of efforts of the regulatory authorities to put them back on track.
The Microfinance Policy Framework was launched in 2005 in Nigeria to cater to low-income groups seeking small credits for their businesses.
“Unfortunately, the impact of the global financial crisis on MFBs had been more severe than anticipated. Credit lines dried up, competition became more intense and credit risk increased, as many customers of MFBs were unable to pay back their credit facilities owing to the hostile economic environment,” Moghalu said.
He said other factors such as high-level non-performing loans; gross undercapitalisation in relation to level of operations; poor corporate governance and incompetent boards were some other factors that contributed to the decay of the MFBs. Also to blame were heavy investments in the capital markets, with the resultant drop in the value of investments after the financial meltdown.
Because the MFBs are insured institutions, the Nigeria Deposit Insurance Corporation shall pay up to the maximum insurance of N100,000 ($643) per depositor.
Furthermore, the bank directors and management of the closed banks that have abused their positions would be handed over to the law enforcement agencies for investigation and prosecution, Moghalu said.
It will be recalled that in August last year, the Central Bank of Nigeria sacked the managing directors of some banks.
Justifying the reasons for this, the Governor of the CBN, Sanusi Lamido Sanusi, said that the action was aimed at saving the banks from collapse, because their balance sheets had shrunken, their shareholders’ funds impaired and they had liquidity problems.
He said when he became the governor of the CBN, he was alarmed at the quantum of exposure which some of the banks had.
Sanusi said their exposure to the capital market, which had lost over 70 per cent of its value was a long-term problem “unless people believe that the capital market will pick up in the next few months and I do not think that stocks are going to go back to that very high level within a short time.”
As a result, he said the CBN asked for a special examination of these five banks, which by the apex bank’s estimates were showing signs of distress given the length of time they spent at the Expanded Discount Window (EDW) introduced last September by the former CBN Governor, Chukwuma Soludo to shore up their liquidity.
Sanusi said: “If we take the average exposure at the discount window every month, between October last year and July this year, these five banks accounted for 90 per cent of transactions at the EDW.
“The remaining banks accounted for 10 per cent. This for me is an immediate sign of distress. We tested it further and closed the window and said no more money. We then guaranteed inter-bank placements. If we didn’t guarantee the inter-bank market, banks will not lend to them.
“But when we did this, we immediately saw the affected banks taking money from the inter-bank market to repay their exposure to the discount window. This was clear evidence that they do not have cash at all. Their balance sheet had shrunk. The cash had gone. There were clear signs of the banks going under.
“On seeing these signals, we sent in special examiners. The idea was to go and find out the true position of things.”
The CBN governor said what they found was not so much of a surprise, “but I think the extent was alarming because I did not believe that there were banks that have up to 48 or 50 per cent non-performing loans of their total loan portfolios.”
He said what the banks needed to do was to provide for these loans and to raise capital, which they could not do.
He said decisions by the management of the affected banks exposed them to the capital and oil markets and risked their depositors’ funds. “This was the basis for the decision to sack them,” he explained.
Sanusi added that once the decision was taken to inject capital into the institutions as a lifesaver, there is no way the CBN was going to allow the same team to manage the funds, which belong to the public.
Sanusi disclosed that the CBN would inject N405 billion into the five banks because they urgently needed fresh funds.

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