In this interview with PETER OBIORA of Investadvocate, Eddie Osarenkhoe, former President of Finance House Association of Nigeria (FHAN) and Chief Executive Officer of TFS Finance Limited discusses issues relating to the recent revocation of Licenses of 47 Finance Houses by the CBN, capacity of Operators in the Industry to Fund SMEs, business strategies and other related issues : Excerpts.

CBN revocation of licenses of 47 Finance Companies

I see that as fallout of their routine examination exercise and that is actually what has put the sub-sector in order for now; the public are regularly kept informed of the activities of CBN on Operators in the Industry.

The CBN made it clear that 47 of the Finance Companies have been inactive. Some of them do not have location addresses, the others have closed shops and some found wanting on breaching the CBN regulations on the Industry. The BOFIA is their guiding rules. The whole idea was to alert the public so that they will not do business with such Companies.

In the same vein, they came up with the ones that are active, like I said earlier; the whole objective is to guide the public in their dealings with Finance Companies so that they do not fall into the hands of some unscrupulous individuals. This is a welcome development, it will help to sanitise the Market in the sense that only those who are cleared should be seen to be doing such job; while the public be guided on the choice within the list that are cleared to now know who to do business with; it is a free Market for clients to do business with whom they choose. For FHAN, it was a welcome development; it came out from our persistent pressure for the CBN to continue to help us sanitise our industry so that some unscrupulous people don’t destroy the name of the Association.

Prior to this time why is FHAN not proactive in its regulations

Let me make a clarification, FHAN is a Self Regulatory Body, we regulate ourselves, we have a Disciplinary Committee within the Association, and the list you saw didn’t just emerge. It has been on for a long time, some of them were members in the past and after a lot of consultations they couldn’t meet up and the CBN intervened. So FHAN monitors the operations of its Members to ensure we are able to operate within the rules and regulations. If there are complaints from the public, they also alert FHAN and we have a Committee put in place to examine such complaints and find a way to sanction erring members.

If you look at the list of 47 Companies in the industry whose Licenses were revoked, some of these Companies have been operating in the industry for a long time and people have not been hearing about them. I think the CBN wanted to clear the air; CBN after its Routine check discovered that some these Companies are unable to meet with the requirements of operating as a Finance Company. Some overtime has not made available their Returns to the CBN and may have breached the Banking & Other Financial Institution Act (BOFIA). In the cause of examination, some of these Companies were not available to be examined.

Also, the environment has been very harsh and its only Companies with the right strategy were able to survive; those who were doing what they were doing before were not able to survive.

They need to do a retreat to see what makes them relevant; some of them could not meet up with changes in the environment; overtime and couldn’t cope with the opportunities in the new environment.

EDITOR’s NOTE:

“On March 19 2012, the CBN revoked the Licenses of 47 Finance Companies and informed the General Public.

Nigeria’s Central Bank said the revocation was as a result of recent Routine Examination it carried out; which revealed that forty seven (47) Finance Companies had closed shop, ceased to operate, or abandoned Finance Company business”.

Click here to download full list

CBN and Capital Base of Finance Houses

The issue has not been fully resolved, on our part at a time pushed for structuring in the Finance Sector; like they did with the Banks and CBN in their wisdom saw the need to do a thorough job on that and they did a lot of job on it which I must commend them. Before I handed over as the FHAN President, they conducted an International Workshop in Lagos where they brought in people from India, Ghana and other countries to come and tell us the best way to practice in the industry, and it was quite rewarding for both the Operators and Regulators in the Industry.

In India, with the huge population they have, they have a sizeable number of Finance Companies to take care of the Small and Medium Scale Enterprises (SMEs). Even in Ghana, we also noted how the operations of Finance Companies in that country are structured. These inputs has further helped the CBN in their work and they are still working on the restructuring of Finance Houses Operations in Nigeria; which they are yet to unfold and I am sure the new Capital Base will be unveiled at the same time with the restructuring programme we are all expecting. We believe they have taken care of all areas of concerns of stakeholders to see how Finance Companies Capital Base will be structured. We are still waiting for them to complete their work and I am sure it will be ready soon.

Currently, the Capital Base of Finance Houses remains at N20 million, but a Company that it worth its salt know that N20 million cannot do a good business these days. Therefore, you have to think of how you can further improve on your own; so part of the things we at FHAN talk about is that we don’t have to wait for the CBN to dictate Capital Base for our business, we need to grow same as our business grows.

In business, if you want to meet the expected standard, first and foremost, you need to recruit high caliber people, get the equipments and Assets that will support such operations. If you are into credit related areas, you need to have money to fund the initial credit before you can now start accessing loans in the Market; these are initial challenges.

But some who are into Consultancy, do not really need Capital Base; but to generate their own Capital. Finance Companies in itself that start rendering consultancy can take on restructuring of Companies that are moribund and make same better; by attracting funds to achieve this.

Most of these Private Partnership Programme are jobs Finance Companies should bankroll and if they have the skill to be able to attract funds where it is cheap and put them into projects that are viable in Nigeria. All that is needed is people with skill and the right structure to thrive in.

Capacity of Finance House to fund SME’s in Nigeria

This has been our major argument with Government, we believe we are in the best position to carryout SME’s financing, we are close to the people in the grassroots and we know their problems. The major challenge that we have is accessibility to fund these projects. I will tell you some of the Finance Companies get involved into a project from the planning stage to the structuring; even to management; to make sure the business is well implemented.

If we want SMEs to grow in Nigeria, it is Finance Houses that we need to use in doing that; because Finance Companies are close to the SMEs as the engine of growth in the Nigerian Economy and Finance Companies are closest to them and understand their peculiar needs; because if you get involved with the structures of the SMEs, you will understand that their funding structure is different from the big Companies. So, if you are able to access such funding structure whether local or offshore, it will meet their immediate need and you will be able to help them manage in such a way that they can grow for the big Banks to do business with.

What we are saying is that if the Government wants SMEs to grow, they should first see how they can make Finance Companies very relevant. So if they create funds and allow Finance Companies to be the ones to help these people access, manage and nurture these funds, then you can be assured that your funds are protected.

Let me give an example, most of these Intervention Funds in Bank of Industry and others, a lot of people walk in there and do not know how to package their business and are unable to access the funds; whereas if there have been a collaboration with Finance Houses and Bank of Industry, Finance Houses will help them with a good business model, access the funds and help them with the managerial skill to run the business, then it is a win situation for all stakeholders.

If Finance Companies have their roles as intermediaries and BOI provides the funds, Finance Houses provide the Entrepreneurial skill required for those businesses to grow, that way, there is guarantee for the money to be paid back. This is the basic way Finance Companies could be used to grow the SME sector of the Nigerian Economy.

Most of the SMEs lack the skill, like I have always said, the major challenge in this country is financial illiteracy; some people open businesses because the other person has done so. Whereas, the major thing you need in business is strategy.

The difference between a successful Company and a failed one is strategy; it’s only a well trained Financial Consultant; able to formulate Corporate Strategy that should be able to know where in the business environment one should capitalise on. Your strengths and weaknesses is not the same thing as the other persons; so to formulate strategy, you do what is called a SWOT Analysis, (Strength, Weakness, Opportunities and Threats), an environmental scanning and when you juxtapose this, which determines your niche and when this happens, you make your goal.

Again, this is where we believe the Finance Companies are very relevant in nurturing some of these Small Businesses to growth and making sure the funds are actually channeled to the right sources.

On cashless policy

Cashless Policy cuts across all sectors and the whole idea is to stop money laundering, so that all funds will move to the Banking system. Secondly, the only thing I see we need to work hard on with the cashless policy is whereby people who issue dud cheques are actually penalised. If you say cashless, which means we now rely on cheques and other electronics ways as payment systems. Electronic transfer can even be visible; because the money is already there; but if you say cheque and you are issued one and there are no funds in the person’s Accounts, then we must enforce that rule of dud cheque to discourage people from such practice.

Current interest rates on funding by Finance Companies

I am happy to be a Nigerian; it’s a country you can make all the money you want to make. Those who talk about interest rate are those who cannot see. The Only challenge I find in this country, is the human Resource Gap. As far as interest rate is concerned, Electricity, water and others may be a general problem.

If MTN can come in here and make money, that suggests strategy. I earlier mentioned strategy, Shop Rite is making huge sales, they understand strategy, what I mean by strategy is that Firms like Shop Rite is operating on margin, they are pulling the people, their prices are very affordable, so a large crowd goes in there to patronise them. When I talk about Human Resources, it is a major challenge in this country, if you open a business today and employ somebody; the person gets in there, they first thing he starts thinking is how to defraud the Company. That is a major challenge not interest rate, not water of electricity; because this is a country where you have the highest return on investment because of the risk factor.

The return you make here cannot be made here in America or England. All you do as a good businessman is to find a way to work around those risk factors which are attributable to everybody and you block out those Human Resource problem and you make gain.

On the Interest Rate, Finance Companies do not operate on what I refer to as “Hot Money” this means you get your funding fast, do your business and get away. We don’t take deposits, CBN laws states that Finance Companies borrow. So when you borrow, you negotiate the terms of your borrowing with your clients; before you borrow, you have already known what you are going to do with the money; so you now live on a margin.

If we take loan from a Bank at the normal Bank rate, you do not expect us to lend it at the same rate; because we need to meet up with our overhead cost. If I borrow at 25% and give it out at 27%, I leave at the margin of 2% and if I do volume, and am I able to meet my overhead cost; then I will make my profit. That is the whole strategy, since we borrow, we negotiate rate from where we are borrowing from. The money I borrow, how I give it out depends on how I borrow.

If somebody knows he is going to make a 100% on total return, and he knows he needs the money urgently to do business so that he wouldn’t lose the opportunity, if he has to go to the Bank for a 25%, the Bank may never attend to him until the business expires, he can go to a Finance Company that may give to him at about 30% and he makes 70%. This is better than nothing.

How do you overcome the challenges of erring clients?

The major challenge we all face is how to deal with people issuing us dud cheques, if they lease from us and they don’t pay, we now have a situation whereby you try to recover the Assets and you are unable to do that and the dud cheques are in your hands and you cannot cash them. For sometime now, the Police have been helping to implement that.

Also, like in the Motor vehicle, the tracking thing that has come in vogue is equally helping, in this situation; you can track the vehicle and block it anytime the man fails to pay. All these are devices that you can put in place to protect your interest.

On TFS Finance Limited

In TFS Finance, we do a lot of Consultancy and we are currently doing that on a Refinery. We know the areas of need for this country, it may take some time, but we believe in it; if you consider what is happening now with the removal of fuel subsidy, which is the way to go.

TFS Finance has actually narrowed to Leasing and Consultancy. As part of our strategy, over the years, we carried out our environmental scanning, and found out that Leasing is Asset backed financing since the Capital Market Meltdown; shares that used to be Security are no longer relevant.

We now reviewed our strategy and decided to go into Asset Financing by way of Leasing and we found out that Leasing and Rentals are the way some of the Oil Companies and other Multinationals go and these you can track, block and recover your Asset in the event of failure to pay. The major aspect of TFS Finance, we pride ourselves is in the area of Consultancy. Our business model is like a one-stop-shop. With this model, there is no way we can go to a client and would not come out with business.

It is either the clients needs finance by way of Lease or he has surplus money we can take from him by way of borrowing or the Company is in bad shape and needs Consulting help; then we can go with our consulting Group to try and turn the Company around for good. A typical example of this which we have just done now is Crystal Line a Transport Company in Benin Edo State. For those who have been around for long; knows that Crystal Line in Benin used to be a very popular Transport Company those days; but with the death of the founding Managing Director, the Company took a nosedive.

Since it wasn’t a one man Company anymore, they called us in to come and help them turnaround the place; since they have had what we are doing at the Refinery. We went in there to do consulting and we found that they had a good business; so we came out with a new strategy focus for the Company. To that extent, from consulting, we have now moved in to providing them with vehicle, we have just given them a Lease on vehicles and it will generate additional money for us to take by way of Treasury. It is a win situation; that’s why I talk about our Business Model as One-Stop-Shop; there is no client that we meet that we cannot do business with.

At TFS Finance, we are actually waiting for the Petroleum Industry Bill to do a very good business in that Sector.

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