MICROCAPITAL.ORG STORY: Central Bank of Nigeria (CBN) Considering Outsourcing the Supervision of Microfinance Banks (MFBs)

Central Bank of Nigeria (CBN) governor, Mallam Lamido Sanusi, said recently, while speaking in a meeting at corporate headquarters, that the supervision of the 800+ microfinance banks (MFBs) in Nigeria may be outsourced. 

According to Mr. Sanusi, the need for supervision of MFBs in Nigeria has increased substantially over the past three years. This is primarily due to non-performing loans (NPLs) and fraudulent practices, giving rise to the prevalent illiquidity crisis in Nigeria’s microfinance sector [1]. NPLs are loans that are in default or close to being in default [2]. To learn more about Nigeria’s NPLs, please visit: https://www.microcapital.org/microcapitalorg-story-nigerian-central-bank-warns-of-increase-in-non-performing-microfinance-loans-poor-corporate-governance-and-commits-to-impose-sanctions-on-errant-officials-at-microfinance-bank/.

Several MFBs across Nigeria have closed shop, either temporarily or permanently, as a result of the illiquidity crisis. At the top of this list is the Integrated Microfinance Bank [3]. For MicroCapital’s detailed coverage of this temporary closure, please visit: https://www.microcapital.org/microcapitalorg-story-nigerian-mfi-integrated-micro-finance-bank-plc-imfb-temporarily-closes-doors-due-to-lack-of-liquidity/.

The illiquidity crisis has raised concerns over the ability of the CBN and the Nigeria Deposit Insurance Corporation (NDIC) to effectively supervise the activities of the widespread MFBs of Nigeria. Former Director of the Special Insured Institutions Department of the NDIC, Joel Ahimie, said it is beyond the current capacity of the two institutions to carry out proper examinations of all MFBs. Mr. Ahimie said outsourcing the supervision would be wise, if qualified auditing firms were hired. Mr. Adenekan, Chairman of the Lagos State chapter of the Association of Microfinance Banks of Nigeria, is in agreeance with Mr. Ahimie, asserting that the decision to outsource is long overdue [4].

Mr. Sanusi has sent a team from CBN to Ghana and South Africa, where the supervision of MFBs has been outsourced to independent audit firms. Mr. Sanusi hops the team will come back with some insights about this approach, explaining that “the oversight capacity of the CBN in terms of human beings cannot cope with the supervision of these institutions” [1].

Some individuals, however, are strongly opposed to the idea of outsourcing MFBs’ examination. One such person is William Ogumba, Deputy Director of the Other Financial Institutions Department (OFID), explaining that examination is the responsibility of the CBN and rather than outsourcing it should create another department that would focus primarily on MFBs [4].

For further MicroCapital coverage of the illiquidity crisis in Nigeria, please visit: https://www.microcapital.org/microcapitalorg-story-nigerian-mfi-integrated-micro-finance-bank-plc-imfb-temporarily-closes-doors-due-to-lack-of-liquidity/.

By: Diya Chopra, Research Associate

Bibliography:

[1]  Vanguard

http://www.vanguardngr.com/2009/10/23/cbn-open-to-outsourcing-examination-of-mfbs/

[2] Investopedia

http://www.investopedia.com/terms/n/nonperformingloan.asp

[3] MicroCapital

https://www.microcapital.org/microcapitalorg-story-nigerian-mfi-integrated-micro-finance-bank-plc-imfb-temporarily-closes-doors-due-to-lack-of-liquidity/.

[4] Vanguard

http://www.vanguardngr.com/2009/10/05/no-bail-out-for-micro-finance-banks/

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