Nigerian Microfinance Bank Subsector Assigns 3.0 Risk Score

The Nigerian Microfinance Bank (MFB) subsector has been assigned a financial institutions risk score of 3.0, 0.5 below the 3.5 assigned for Nigerian Deposit Money Banks (DMBs).

According to the GCR rating, the 0.5 difference was necessary to reflect the disparities in terms of weaker governance, different accounting standards/Basel adoption, lower barriers to entry, lack of access to Central Bank of Nigeria (CBN) funding and other external funding sources.

Also, asset quality tends to be weaker for the MFBs given their exposures to largely the informal sector. Total number of licensed players have been quite volatile as players are usually susceptible to license withdrawals by the CBN, with anticipation for further reduction in the players due to ongoing recapitalisation.

Positively, MFBs are not exposed to foreign exchange risk like the DMBs, and loan portfolio is usually well diversified.

Explaining the modalities for its rating, GCR stated that the Financial Institutions’ sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score.

The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology.

GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor an insurer to its current operating conditions. For more details on the above, please read the related criteria and research listed below.