Investadvocate in its usual manner sought to find out more about the activities of Finance Houses in Nigeria over the past few years.

In this interview with PETER OBIORA of investadvocate, Eddie Osarenkhoe, President of Finance Houses Association of Nigeria (FHAN) gives s status update on the activities of the sub sector in the Nigerian economy, extent of the impact of Market Meltdown on Finance Houses, number of  Finance Houses registered by the Central Bank of Nigeria (CBN), Market share of illegal Leasing Firms and Strategies of FHAN to tackle the activities of these group of people.

 

Other issues discussed are Assessment of Sanusi Lamido Sanusi as Governor of CBN, Modalities to ensure that Finance Houses play their role of developing Small and Medium Enterprises (SMEs) in Nigeria like in Togo, West Africa and future outlook of FHAN amongst other things. Excerpts:  

 

Status update on Finance Houses in Nigeria

 

Finance Houses is a sub sector in the Financing sector of the Nigerian economy.  There operations are supervised by Other Financial Institution Department (OFID) of Nigeria’s Central Bank. Our job is protected by Bank and other Financial Institution Act (BOFIA); we are registered under them as Finance Houses; that means we are supposed to carryout all the functions of Finance Houses in BOFIA.

 

Finance Houses Association of Nigeria (FHAN) is a Trade Group approved by the CBN to act as a self regulatory body within the Finance Houses sub sector in Nigeria.

 

All the Finance Houses licensed by the CBN; are members of this Trade Group. It is compulsory you must be a member of FHAN; with this, we are able to fight against fake Finance Companies. If you recall some years back when we had a lot of illegal Finance Houses; we were able to work with the Press and the CBN to check these companies.

 

As at today, Finance Houses are suppose to be involved in leasing, LPO financing, Financial Consultancy and all financial related issues that would help to boost the activities of the SMEs; especially those setting up businesses by way of raising start up capitals. This is the way we are structured.

 

Before the advent of this present Government, we had a problem because of Universal Banking. This system which was being operated by Banks almost subsumed the operations of Finance Houses; because they took over our entire job. Some of the Banks set up their own Finance Houses competing alongside Finance Houses. However, they did it to the extent that smaller businesses were almost extinct in Nigeria.

 

But today, we are grateful that Sanusi Lamido Sanusi, the current Governor of Nigeria’s Central Bank in his wisdom has actually directed that Universal Banking should stop. This will encourage small businesses; Finance Companies will definitely come back to the forefront playing their role of providing finance and operating leasing.

 

The area that was actually hard hit by the Capital Market collapse is short term loan; we had to rely on shares as collateral for borrowing. Now with the Market Meltdown, that area have been adversely affected because most of our members cannot borrow small money against Real Estate; it does not make economic sense if you want to give N5.0 million and you go and get a house of N20 million.

 

Also if you consider the time of confirming ownership and other processes, it makes it unattractive for you to go into that. These are the areas we are still struggling and are working with the CBN; we are anticipating the ongoing reforms in the Financial Sector would be able to address all the issues that are affecting the sub sector for now.

 

FACTS CHECK:

 

“Guidelines for Finance Companies from other Financial Institution Department   (OFID) of the CBN September 2002 states that a Finance Company, unless otherwise stated, means a person or company licensed to carry on Finance Company Business.

 

Finance Company Business means the business of providing financial services for consumers and to industrial, commercial, or agricultural enterprises.

Such services include, Funds management, Equipment leasing, Hire-purchase, Debts factoring and securitisation, Project financing or consultancy and Debt administration.

 

Others are Local Purchase Order (LPO) financing; Project financing, Export financing, Financial consultancy and so on”.

 

(Source: CBN)

 

Extent of the impact of Market Meltdown on Finance Houses

 

Finance Houses were only involved to the extent of accepting shares as collaterals for borrowing. When these collaterals started melting down, it actually affected the exposure of Finance Companies. Few Finance Companies played in the Capital Market by borrowing and buying shares.

 

They also got hit by the Margin Loan syndrome; which affected everybody. So, you can look at it from two ways they were really affected, you can no longer borrow short term with the collateral; because of the uncertainty of the value. We are supposed to be the short term end of the Market where we borrow money for people who need funds for immediate use.

 

But since the credit history is not very good in Nigeria, abroad they look at your credit history they may not look at collateral sometimes; but in our case, we only rely on collateral like those shares; which we can quickly put lien on and borrow with it, if it fails, then you sell the shares and go back to business.

 

With the present state of the Capital Market, there is nowhere any Finance Company can borrow money against such things. Like I said earlier, we are not in the long end of the Market, but short end.

 

If we are going to borrow money, we should be looking at collateral that is realisable in the short period. We may not be able to use Real Estate to borrow as collateral against 90 day money; it doesn’t make sense, because you may not be able to sell a house within a year.

 

This is the effect the collapse of the Capital Market had on Finance Houses, it actually had a lot of adverse effect on our members; some of them carrying on a lot of loans the collateral couldn’t cover.

 

How many Finance Houses are registered by the CBN and under FHAN?

 

We have about 57 registered Finance Houses by the CBN under our auspices. However, having fought the ugly battle of illegal Finance Houses, we are beginning to see a new trend emerging by way of leasing; people just set up Leasing Companies and they start to Finance related operations. This is our new worry in FHAN and until this aspect is quickly addressed, same people that are around the illegal Finance Companies may come in through this area and begin to operate.

 

So, Finance leasing as it is especially, is part of the things Finance Companies are licensed to do in Nigeria; but I am saying now that we have a lot people coming up with different type of activities these days; they just started this year and it is an area we are asking the CBN to check early enough by coming up with a pronouncement.

 

This is the major part of our work, allover the world, lease deals are done by Finance Companies; even Banks also do it, but we as Finance Companies are suppose to be taking money from Banks to carryout some of those things that would reach the grass root and to enable people take care of their immediate needs and pay later.

 

Like I affirmed earlier, we are beginning to see a lot of leasing Firms emerging that are not members of our Association. We expect for any firm to be a leasing company, is either you are a Bank or a Finance Company; however, under the purview of the CBN; because they monitor and regulate this sub sector as well; especially if the company is engaged in Finance Leasing where they have to accept deposit from the public, you need to protect the Depositors money.

 

Therefore your books should be made available to the Central Bank for examination at regular intervals; but some of these firms are not under any supervision and they operate in this present environment.

 

Market share of illegal Leasing Firms

 

It is difficult to assess, like I earlier affirmed, Banks are also involved in Leasing, they do this through Finance Companies or lend money to them to finance their operations. The CBN monitor Depositors funds and that is why they got those involved in Wonder Banks and sanctioned them. We thank the Press for supporting us during the fight against Wonder Banks.

 

Strategies of FHAN to tackle the activities of emerging illegal Leasing Companies

 

The CBN is now aware of it, FHAN is making a case for them to actually see how the sub sector can be regulated properly; especially the Finance Lease aspect. Finance Lease is taking people’s money to finance Asset. We found a lot of cases of people who are not registered trying to give lease to some customers and almost duping them with high rates.

 

We have a case at hand which failed and the customer had reported the matter to us and we are taking it up to the level of the CBN to see the danger some of these things are posing to the economy.

 

If you are no Bank or Finance Company doing business under the purview of the CBN, I don’t think there is anybody in this company for now that supervises Finance Lease where you have to take public money to buy Asset which you give to people and which they pay overtime before they can claim ownership of such Asset. If there is litigation, there should be somewhere to go to. This is new; it is just coming up now, a lot of people just set up this company and are giving out lease facilities without a license.

 

We are open in our Association, these companies should go and register with the CBN and obtain licenses to operate, and we are ready to accept them as members of FHAN.

 

On the current Capital Base of Finance Houses in Nigeria

 

We are still operating at N20 million Capital Base; FHAN is still awaiting the ongoing reforms if this will change.

 

FACTS CHECK:

 

“Guidelines for Finance Companies from other Financial Institution Department   (OFID) of the CBN September 2002 states that a Finance Company are required to have a minimum paid-up Capital of N20 million”

 

Assessment so far of Sanusi Lamido Sanusi as Governor of CBN

 

We see a ray of hope; like I earlier affirmed on the stopping of Universal Banking, it is a major ray of hope for Finance Companies. The only major problem we are having for now is lack of access to funds. This is a major constraint, the Banks are not borrowing, few Insurance Companies that used to give us money are now setting up their own Leasing Companies; which is illegal; because they are registered to operating in the insurance sub sector of the Nigerian economy and not to do leasing; by law, they are not suppose to engage in doing leasing.

 

Majority of our members are having liquidity problem, they have no access to fund in order to execute some of the jobs they are suppose to do. The CBN have given time to be able to borrow from the public or Institutional Investors; but the funds are not there to borrow, when we have business to do, we are unable to execute them.

 

Thus, our members are actually stifled with none availability of funds. In our last Annual General Meeting (AGM) in the President’s Statement we actually advocated if the CBN could create a window for funding to do our work; since we are unable to access the Bank, we cannot access the Insurance Companies, the high networth individuals are not borrowing to us either; because of the past image of Finance Companies. Our members are starved with funds, we don’t have enough money to execute what we have identified as business; this is our major challenge.

 

Again, why we are becoming more worried is that when you talk about the local content in the Petroleum Industry, Finance Companies are supposed to play a major role in it; but we believe this funding problem needs to be addressed so that we can provide the necessary funding for common Nigerians that would play in the Oil Industry inline with the local content rules.   

 

We believe as the Government is looking at this local content; which is a laudable objective, because it is our major source of strength, we should first partake in it before we allow outsiders to do it. This is done in every part of the world, even in the United States (US) they do it through the United States Export Import Bank (US EXIM) the entire loan taken from US EXIM, all the equipments must come from America and they must bring their Expatriate to do the job. We also believe that in the same vein, if we have oil in Nigeria, the major industry that continue to provide about 90 percent (90%) of our income earner, Nigerians should be allowed to partake in it. However, if we want to partake, the infrastructures have to be in place to enable our people have access.

 

We believe that Finance Companies should be strengthened to play in this envisaged role especially for us in local content.

 

EDITOR,s NOTE:

 

“The President of FHAN in his statement at the Associations year 2010 AGM held Tuesday October 26 2010 in Lagos Nigeria affirmed that its major business challenge has been lack of robust regulatory supervisory reform programme that will address the issues of the pervasive low investor confidence and narrow funding structure, and the concomitant inability to attract and retain high managerial capacity in the system”.

 

Modalities to ensure that Finance Houses play their roles of developing SMEs in Nigeria like in Togo

 

This is the battle Finance Houses are fighting all along; even with the CBN. We believe that we are in the right position to work on SME’s, we are closer to them than the big Banks. They are people we relate with on a daily basis and better appreciate their plight and can do business plan for them.

 

When the intervention fund issue came up, we affirmed that this area belongs to us. I personally met the Governor of CBN at the Lagos Chambers of Commerce and Industry (LCCI) and told him that Finance Houses are supposed to play a major role in all these things.

 

Like you said, Togo is a small country, we have the Market, if SME is going to grow in Nigeria, there is no way you can achieve such without Finance Companies, you must carry them along. There are so many ways we can help them, for instance writing their business plans, helping them access funds, manage them and provide capacity building. We are closer to them, so that the thing will not fail. This is one of the things we have been advocating.

 

FHAN has done a paper to the Central Bank on this matter and we are still ready to whatever organisation that will make them listen to us that this is our own area. Unlike Togo, we believe that over 50 companies operating as Finance Houses is too few to take on the SMEs in this country because of its nature.

 

We have some companies we have personally put our interest and success has been made out of them. Also, we personally took them to the Banks and they are able to raise loans. This is our problem and we are hoping that CBN and others would work with us to develop SMEs in Nigeria.

 

As a Finance Company, before you are registered to do business, you must have array professionals such as Chartered Accountants, Bankers with lots of experiences; tested by Central Bank before the license is giving out. FHAN is ready, it only needs a lot support; that is what we have been agitating for the past few years that CBN should reform our sector.

 

Each time a new Governor of CBN comes on board, the focus is on the Banks; like I told them, the system should be taken holistically, you don’t do one and leave the rest, until we are able to address the problems of all the sub sector at a ago, the CBN’s reforms will not be complete; because as you do the big one and leave the others, there would always be a loophole. This was exactly what happened when they allowed Universal Banking; they didn’t look at the other sub sector that would be affected. So the Banks went to town with the license they got and almost swallowed every other business in this country; these include Stockbroking, Insurance operations, Microfinance, Issuing Houses and so on. They set up everything and the small businesses were all out of business. Until Sanusi came and discovered that there were insider dealings going on in all these, that the Banks were no longer doing Banking, they decided to reform; but I urge them to do a general reform. They should do that of Mortgage Banks, Finance Companies, Discount Houses and so on; these are all sub sectors that work to make a full sector.

 

Future outlook of Nigerian Finance Houses

 

I see a lot of hope, that is the reason some of us are still in the business, the Petroleum, SME, Leasing sectors are there, the Leasing business is yet untapped in Nigeria. All these are sectors that provide business opportunities for Finance Companies. Therefore, I see a big Market; all we require is the enabling environment that would synchronise all of these things that would enable us unleash the opportunities in the sector.

 

In the developed countries, you have Finance Companies helping to do consumer financing and so on, I see a lot of those things are coming; so we have a lot of hope that the future is bright for Finance Companies in Nigeria.

 

Due to this problem, a lot of investors have shied away from investing in the sub sector; because the returns are not there. If we create the enabling environment and the returns are forthcoming, if a lot of people invest into the sub sector; they would have created a huge Capital Base to take on big projects.

 

We also have to talk about the image problem facing Finance Houses; I am one person who believes that you cannot judge me by what happened 10 years back. The whole idea of talking of Finance Companies is that the Banks have failed in this country and they are back. Finance Companies also failed those days and they are equally back now. So, if Banks that failed and distressed are able to come back, they can equally do the same with Finance Houses.

 

This image thing on the stigma that has been associated with Finance Companies should be erased once and for all; as far as we get the support and backing. This will make the people develop confidence in dealing with Finance Houses; then the image problem would have been solved once and for all.

 

If we do all these, before we know it, investors would come rushing down to the sub sector and there would be enough capital to do businesses; which would be better for the whole country; this is our goal in FHAN. We are calling on people; especially the Press to help us impress on the CBN and Federal Government (FG) on the way forward; that this sub sector is one of the engine of growth and should not be killed.

 

 

End