Impact of Solvency Margin Regulation and Lending Practices on the Performance of Microfinance Banks in South-West Nigeria

In spite of the Central Bank of Nigeria's (CBN)’s prudential regulations that aims to bolster the financial sustainability of microfinance banks (MFBs), and safeguard depositors' interests, they seem to suffocate between balancing solvency margin and lending practices against performance. This paper assessed the impact of solvency margin regulation and lending practices on the performance of microfinance banks. This research used Granger Causality (GC), Fully Modified Ordinary Least Square (FMOLS), and Generalized Methods of the Moment (GMM) on data spanning 2019 to 2023 of 20 microfinance banks in six Southwest States in Nigeria. The findings indicate that solvency margin and lending rates impact the return on assets (ROA) of microfinance banks marginally. This further implies that the management of assets (loans and investments) less liabilities (deposits and capital) is not effectively managed to boost ROA extensively. Likewise, lending rates may have been conservatively managed to reduce exposure to non-performing loans and hence marginal influence on ROA The study upholds public interest theory of regulation, and recommends that the Central Bank of Nigeria (CBN) should fully adopt risk-based monitoring and supervision of microfinance banks to ensure capacity building. MFBs should be innovative about deposit rates and asset-liability management, so as ensure the intrinsic balancing between lending rates, solvency and ROA.