By Babajide Komolafe
Edie Osarenkhoe is not happy about the situation of finance houses. “A great number of the well over 500 licensed finance companies have closed shop”, he lamented.

“Some 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”, 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.

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

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

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.

In their bid for funds, they offered mouth-watering   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.

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

But the apex bank disagrees and blames their plight on lack of focus. According to Moghalu, “Rather 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.

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.”

Despite this seeming disagreement, there is  consensus between the regulatory authority and FHAN that the sub-sector is not beyond redemption.

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  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.

The workshop, according to Moghalu, is part of CBN’s efforts to reform the finance houses sub-sector. “Strategic 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,” he said.

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.

“The 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”, he said.

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.

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.

Elaborating on this, Osarenkhoe said, “Presently, the business space for finance companies has become very crowded and an “all-comers” 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.

This confusion has even made it possible for the unwholesome activities of the so-called “Wonder Banks” and “Loan sharks” – reminiscent of the Umanah­Umanah voodoo banking of the 1990s – to continue to thrive in the system.

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.”

But this must be complemented by a paradigm change in the attitude and operations of finance houses operators. This   is reflected   in the turn-around story of C&I as told by Ndu. “Over 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.

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”, he said

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.

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.