DFIs’ poor capitalisation hampers intervention efforts

Deteriorating performance of the Development Finance Institutions (DFIs) due to low capital is hindering their ability to fund projects that would add to the growth of the economy.

The six DFIs currently operating in Nigeria include Bank of Industry (BoI); Federal Mortgage Bank of Nigeria (FMBN); Nigerian Export–Import Bank (NEXIM); Bank of Agriculture (BoA); Infrastructure Bank (formerly Urban Development Bank of Nigeria plc), and National Economic Re-construction Fund (NERFUND).

The DFIs are largely owned by the CBN and Ministry of Finance, which act on behalf of the Federal Government, and are to a large extent mandated to provide financial services to sectors and projects that would contribute to the growth of the economy and promote real sector activity.

The provisional total assets of the six reporting DFIs decreased by 2.48 percent to N962.3 billion at end of December 2015, compared with N986.8 billion at end-June 2015, according to the financial stability report of the CBN.

Similarly, the net loans and advances of the institutions decreased by 14.73 percent to N687.02 billion at end-December 2015, from N805.70 billion at end June 2015. These decreases were largely attributed to continued deterioration in their financial performance.

However, capital rating of the six DFIs by the CBN was “weak” for two DFIs, “needs improvement” for one, and “acceptable” for three. Meanwhile, the composite risk rating remained “high” for two of the institutions, “above average” for another two and “moderate” for the remaining two.

The prudential and soundness analysis of three of the DFIs revealed continued deterioration in their financial performance, owing to inadequate capital, poor asset quality, continuous stream of operating losses and weak board oversight.

The poor performance of these institutions was attributed largely to instability of the board of directors, owing to the frequency of their dissolution and reconstitution. The long period of absence of effective boards in the affected DFIs denied them of strategic direction and effective oversight.

Agbola Bolade, executive director, Cash Craft Asset Management, said the deteriorating financial performance of these institutions was not unexpected given the low capitalisation of the institutions and government dabbling into the running of their affairs.

“These institutions were designed to drive growth of the non-oil sector of the economy and provide the framework for its diversification. Government should pay the balance of the set-up capital of the institutions, which had remained unpaid since inception, create avenue for them to raise bonds to fund their activities and support the institutions to recover their past due obligations,” Agbola said in an emailed response.