MFBs licence revocations expose need for stronger governance, credit ratings

The Central Bank of Nigeria’s (CBN) recent revocation of the operating licences of 46 microfinance banks (MFBs) has underscored the growing importance of independent credit ratings as a tool for strengthening resilience, improving governance and restoring confidence in the sector.

The action, taken under Sections 12 and 13 of the Banks and Other Financial Institutions Act (BOFIA), 2020, reflects the regulator’s commitment to preserving the safety and soundness of the financial system. But it also provides a timely opportunity to examine what truly distinguishes resilient institutions from vulnerable ones.

“Microfinance banking is a business of balancing opportunity and risk,” says a report by DataPro, one of Nigeria’s leading credit rating agencies. “Institutions are expected to extend credit while maintaining sound governance, prudent lending standards, adequate capital, sufficient liquidity and sustainable profitability.”

Looking beneath the surface

Financial statements tell an important story, but they rarely tell the whole story, experts say. Strong earnings, a growing loan portfolio or an expanding customer base may suggest positive momentum, yet they do not necessarily reveal whether that performance is sustainable.

“The true measure of a microfinance bank extends beyond meeting regulatory requirements or reporting growth in assets and loans,” the DataPro report stated. “It lies in its ability to withstand financial stress, manage risk effectively, preserve capital, maintain adequate liquidity and adapt to an evolving operating environment.”

Critical questions should guide any assessment of an MFB’s health, including whether loan growth is supported by disciplined underwriting, whether capital buffers are sufficient to absorb unexpected losses, whether liquidity positions can withstand financial pressures and whether governance structures support sound decision-making during periods of uncertainty.

Complementing regulatory oversight

The responsibility for maintaining a safe and sound financial system rests with the CBN. Through licensing, supervision, prudential regulation and enforcement, the apex bank plays a critical role in protecting depositors, maintaining confidence and promoting financial stability.

Independent credit ratings serve a different, but complementary, purpose, DataPro explained. “While regulatory supervision ensures compliance with prudential standards, credit ratings provide an independent assessment of an institution’s financial strength and creditworthiness,” the agency said.

“Ratings help the market to differentiate between strong and weak players,” DataPro added. “When combined with effective regulation, they contribute to stronger market discipline and a more resilient banking sector.”

Resilience is not an accident

The recent licence revocations are a reminder that resilience is built long before supervisory action becomes necessary, the agency noted. “Strong institutions are not defined solely by growth but by the quality of the foundations supporting that growth,” DataPro said.

For microfinance banks, sustaining confidence requires disciplined governance, prudent lending, effective risk management, adequate capital and the ability to adapt to an evolving operating environment.

Independent credit ratings reinforce these objectives by providing objective, forward-looking assessments of financial strength. Alongside effective regulation, they contribute to stronger market discipline, greater transparency and a more resilient banking sector.