{"id":11183,"date":"2011-12-11T23:15:38","date_gmt":"2011-12-11T23:15:38","guid":{"rendered":"http:\/\/www.ghanamma.net\/2011\/12\/finance-houses-in-search-of-game-changing-reform\/"},"modified":"2011-12-11T23:15:38","modified_gmt":"2011-12-11T23:15:38","slug":"finance-houses-in-search-of-game-changing-reform","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2011\/12\/11\/finance-houses-in-search-of-game-changing-reform\/","title":{"rendered":"Finance Houses: In search of game changing reform"},"content":{"rendered":"
\n

By Babajide Komolafe
Edie Osarenkhoe is not happy about the situation of finance houses. \u201cA great number of the well over 500 licensed finance companies have closed shop\u201d, he lamented.<\/p>\n

\u201cSome have willingly given up their operating licences due largely to their genuine inability to make sense out of the situation whilst just a few are truly active and viable. This is indeed a very sad story for a subsector that has great potentials if properly positioned\u201d, the Managing Director\/Chief Executive, TFS finance Limited and President, Finance Houses Association of Nigeria (FHAN) said at an international workshop on the operations of finance companies.<\/p>\n

But he is not the only one troubled about the gloomy state of the subsector. The Central Bank of Nigeria is also worried. \u201cTwo decades after inception, however, the finance companies sub-sector is yet to attain its optimal potential,\u201d said Kingsley Moghalu, Deputy Governor, Financial Sector Surveillance (FSS), CBN.<\/p>\n

\u201cA recent on-site examination of the finance houses sub-sector by the\u00a0 CBN revealed that only 22 finance companies or 21 per cent of the 104 licensed companies were considered to be sound, 10 were\u00a0 marginal while two were unsound. However, 20 were technically insolvent, 33 others were either inactive or ceased operations totally,\u201d he said at the worksop.<\/p>\n

Finance houses came into being courtesy of the post-SAP liberalisation of the financial sector. Just like in the banks, the subsector attracted an influx of investors who saw the flexibility of their operations and lax regulations as opportunities to make quick profit.<\/p>\n

In their bid for funds, they offered mouth-watering\u00a0\u00a0 interest rates, which was as high as 40 per cent, and paid the interest upfront. The banking distress of the 1990s however, revealed the many malpractices in the sub-sector and occasioned the collapse of most of the 1000 finance houses that sprang up then. Since then, the sub-sector has remained comatose.<\/p>\n

Osarenkhoe, however, believes that the situation was aggravated by regulatory neglect. He said the apex bank\u00a0 neglected the sub-sector while reforming the banks and other sub-sectors. Hence,\u00a0 the first in his reasons for the dwindling fortunes of finance houses is an \u201cAbsence of a robust institutional framework and regulatory environment which impedes business navigation for operators\u201d.<\/p>\n

But the apex bank disagrees and blames their plight on lack of focus. According to Moghalu, \u201cRather than playing its expected role of financial intermediation for the middle tier of the economy, the sub-sector had shown an apparent lack of capacity to develop appropriate products that will be attractive to that segment of the market.<\/p>\n

The sub-sector had also failed to create a niche for itself in the Nigerian financial system and has instead seen itself as being in direct competition with the commercial banks. This apparent lack of focus on its areas of comparative advantage has put the sub-sector in grave danger of possible extinction.\u201d<\/p>\n

Despite this seeming disagreement, there is\u00a0 consensus between the regulatory authority and FHAN that the sub-sector is not beyond redemption.<\/p>\n

And this was the rationale for the workshop, which was organised by the apex bank and featured international experts including Prince Kofi Amoabeng, Group Chief Executive Officer of\u00a0 UT Bank, Ghana, who spoke on Creating an enabling Environment for the Operations of Finance Companies-The Ghana Experience and Mr. Scridhar, former Chairman and Managing Director, Central Bank of India, National Housing Bank and Former Executive Director, Exim Bank of India, who spoke on Integrating Finance Companies into the National Financial System-The India Experience.<\/p>\n

The workshop, according to Moghalu, is part of CBN\u2019s efforts to reform the finance houses sub-sector. \u201cStrategic reform in the finance companies sub-sector is of paramount importance and is imminent. The final outcome from this workshop would ultimately be incorporated into the strategic reform agenda to chart the path for a vibrant and healthy finance companies sub-sector,\u201d he said.<\/p>\n

This vision of a vibrant finance houses subsector requires two critical ingredients, revealed the various presentations and discussions at the workshop. The first is regulatory and the second is conduct of operators. The need for the two and the connection between them was articulated by Emeka Udu, Group Managing Director of C&I Leasing PLC.<\/p>\n

\u201cThe term, finance company, is rather broad and encompasses many fields of endeavours available to finance companies that is both a source of strength and a source of weakness. The fact that there are many areas for a finance company to choose from means that you have broad potential area of engagement to try and achieve profitable growth\u201d, he said.<\/p>\n

That is because the scope of finance houses is very wide as implied by their name, most finance houses in Nigeria attempted to be Jack of all trade and ended up being masters of none, and incurring losses in the process. Also the breath-taking scope of their activities has made the sub-sector an all-comers affair including fraudsters.<\/p>\n

To minimise this inherent weakness, the experience of India as presented by Sridhar and that of Ghana as presented by Amoabeng, there is need for regulation that would clearly define the various segment and services as well as appropriate players for each segment.<\/p>\n

Elaborating on this, Osarenkhoe said, \u201cPresently, the business space for finance companies has become very crowded and an \u201call-comers\u201d affair. Finance companies now face stiff competition from other players in the financial services industry who directly offer the supposedly core and traditional services covered by our operating licences.<\/p>\n

This confusion has even made it possible for the unwholesome activities of the so-called \u201cWonder Banks\u201d and \u201cLoan sharks\u201d \u2013 reminiscent of the Umanah\u00adUmanah voodoo banking of the 1990s \u2013 to continue to thrive in the system.<\/p>\n

This lack of clarity in our functions is capable of premeditating the resurgence of confidence crisis in the system that is yet to resolve its credibility challenges.\u201d<\/p>\n

But this must be complemented by a paradigm change in the attitude and operations of finance houses operators. This\u00a0\u00a0 is reflected\u00a0\u00a0 in the turn-around story of C&I as told by Ndu. \u201cOver the years we have had our own fair share of dabbling until we took a decision six years ago or so not to get involved in any activity that does not involve our area of expertise, which we have identified as equipment leasing and ancillary activities.<\/p>\n

So we stopped giving loans to anybody unless it is tied to a lease of a piece of equipment. We also cancelled our registration with SEC to act as financial advisers etc as we felt there were many other people that were better qualified than us to carry out this activity\u201d, he said<\/p>\n

The implication of this is that the reform programme that would deliver a vibrant finance houses sub-sector must above everything else, emphasise segmentation and specialisation in the sub-sector. This in turn would compel operators to focus by limiting themselves to and carving a niche in one or two segments.<\/p>\n

This can then be complemented by a stimulus package or a Refinancing and Rediscounting Facility or Revolving Credit Guarantee Scheme and other measures listed by Osarenkhoe, which are also critical to the restoration of public confidence and revival of the sub-sector.<\/p>\n<\/div>\n

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\nFinance Houses: In search of game changing reform<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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