June 10, 2024

Why finance houses need higher minimum capital requirement – Ayere, FHAN President

Why finance houses need higher minimum capital requirement – Ayere, FHAN President

In this interview, Sonie Ayere, President, Finance Houses Association of Nigeria, FHAN, provides insights into the challenges militating against the growth of finance houses. Ayere who is also the Group Chief Executive Officer of DLM Capital Group highlighted the need for higher minimum requirement for operators as well as introduction of two categories of operators.


By Babajide Komolafe, Economy Editor

The CBN recently announced a new minimum capital requirement for DMB, MFBs, PMBs and BDCs. What is the mood and expectation in the finance house subsector in this regard?

We’re already expecting a capital increase. We’re not yet sure what that would be, speculations are from N100 million to N500 million, which actually will be in line with what the CBN has done. Because when you look at the actual capital increase across the sectors, on a weighted average basis, it’s five times. So going from N100 million to N500 million will not be unusual for the sub sector.

So from that perspective, yes, we are expecting that, and I’m sure most of the players in the sector have already been gearing up for it. And once the announcement is made, I’m sure most participants, some will obviously again, will be raising capital, some maybe merging. But yeah, the whole idea obviously, is to strengthen the sector and allow it to actually be able to play a much stronger role in the society.

What are the notable developments in the sub-sector in the last one year?

So I think what’s happening now is there’s kind of like a bit of a blur between a finance house, let’s say, and a microfinance bank.

If we go a couple of years back, you know, finance houses were doing, you know, Local Purchasing Orders, LPOs you know, leasing, SME business and so on and so forth. And that was the bread and butter.

Now, if you look at the bigger finance houses in the country, they’re all doing consumer lending. Examples include Credit Direct, Zedcrest, etc.

What they’re all doing is mainly consumer loans. You see and that’s what I mean by the blur between microfinance banks and finance houses.

Of course, for finance houses to do what they’re supposed to do they really do need a lot of capital. That’s the trick. They need more than that N500 million.

Because the truth is, you’re going to be taking what I call lumpy loans. Because that’s loans to companies, right? So it’s not N5,00/ to N100,000 to Mr. XYZ, or N150,000 to Miss XYZ.

No, it is, you know, you’re giving somebody you know, N1 million or N2 million N10 million.

So in all circumstances, if you got one loan that goes bad, and that’s going to hit your balance sheet big time.

So that’s one. Secondly is for a finance company to really thrive. Your ability to create liabilities must be almost unhindered.

So whilst a deposit money bank finds it, very simple, very easy to raise money, you know, from deposits, etc. A finance company or even a microfinance bank, that is also a deposit taking, finds it difficult. So from that perspective, now you’ve raised your capital, now you need to leverage at least this even 10 times, which means, you know, N5 billion whatever, now to bring in N5 billion of liability, it’s not easy.

So, one of the things we are looking at, is also seeing if we can have a variation of the finance companies licence, in other words a categorization.

So the current finance houses, as currently drafted within the guidelines, could say for instance, being category one, just the same way we have regional, national and international categorisation for Deposit Money Banks, and for microfinance banks, you have unit, state and national licences.

So we can have a finance company, Tier 1, finance company, Tier 2. Now, what we could then do for the Tier 2 guys is that you’re going to have more capital. But for raising this capital I’m going to allow you to do a few things, maybe for instance, I might allow you to start taking deposits. I don’t know but that might require amending BOFIA. That might be a more difficult thing.

But maybe, for instance, now, the placements that you’re getting can be NDIC insured.

That’s one possibility. Then also as a central bank, I can allow you to do what? Maybe give you access to the interbank. The same way discount houses get access to the interbank before, the same way I can give you access to the interbank. But basically, for me to do that, you must have X percent of your balance sheet in say treasury bills or liquid assets. So a give and take for that sort of licence would really allow finance companies I believe, to play a more significant role in Nigeria.

So what are the challenges militating against the operators, and the growth of the industry, and what is FHAN doing to address this?

So I think in a way, I’ve kind of touched on some of the difficulties. We have for instance, that you know, the perception which obviously is lingering from the days of Owo blow.

So we have that reputational issue. Then of course, you know, size, like everything, size matters. By that I mean ability to scale. So the perfect example, take regional banks that started in those days and it’s changed now with say N10 billion, see how they have grown? So that’s N10 billion to N200 billion.

You can see the big difference. Yes. So look at ProvidusBank, look at the other banks, Premium Trust, they are all growing.

So, but by and large, if you are a small company, it is very difficult to raise liabilities because everybody wants their money where they feel it will be safe.

Then because they are small, the ability to raise bonds, to raise commercial paper and so on and so forth again becomes difficult. That may may change because I know for a fact that the DBN Development Bank of Nigeria which we were involved in putting together, has set up a guarantee company, which for instance, when structured right, might be able to provide guarantees to our to finance companies for them to be able to raise money from the markets and grow. We’ll see how that goes.

So those are the main difficulties. Perception, size, inability to create liabilities as easy as their counterparts in other subsectors.

Let’s say for instance there is this Credit Corp that is been developed by the government, which I think is a fantastic idea by the government. I think that for instance if it came up with a way it could provide guarantees, you know, to either the institutions themselves so they can raise more money or be able to wrap their loans that they actually bring. That would help.

FHAN is an umbrella body for the sub sector.

And, you know, our role basically, is to bring these sorts of issues to our regulators, to have dialogue. Just before the announcement, we were actually due to meet with the Director of Other Financial Institutions Department, at the CBN and we had a number of issues that we wanted to discuss, for instance, like the Tier 2 license.

So our job is to bring, the problems, the issues to the regulators, to at least, you know, to help improve the sub sector. The other thing, obviously, is also to educate the market about what the sub sector does.

And of course, you know, we also like to look at award ceremonies to reward those of us who are doing well because there’s nothing like your own colleagues, in your sub sector actually saying, Oh, you are good, you have done very well.

That’s something else that we would look at. So maybe at an annual meeting, it’s not just to come and eat.

I started that, for instance, at Association of Issuing Houses of Nigeria, AIHN, when I was president. When I was president of the association, I did the first award ceremony because it’s a very important thing.

Is FHAN satisfied with the current operational guidelines and scope for FHs? If not, what are the areas of concerns and suggested amendments?

Like I said earlier, we’re looking to and it still on the cards, we are waiting till the new director of OFIDs is appointed. But the idea actually is to look at the licence again, and see if we can create a Tier 2.

The Tier 1 licence we have today I believe, suffices for someone or group of people that want to run a finance company that is small, nothing too big, like a community, you know how community banks started and then morphed into Microfinance banks

But I think that, you know, a Tier 2, just like what the CBN cleverly did with the BDC licence, a Tier 2 finance house licence can be expanded to now look at some of the things we’re talking about.

So for instance, an NDIC can say, look, we can insure Tier 2 deposits, but Tier 1 no.

And that is how you do things. You allow different things for different classes of licenses to do. And therefore it gives incentives for someone that is doing Tier 1 now to grow into becoming Tier 2. So that is what we think we should do and that is in the card.

We have come up with ideas. We have actually worked on a draft guideline that we worked on as FHAN, which we wish to share with the CBN.

And you know, obviously they are more knowledgeable.

They will be able to guide us but at least let’s just give them an idea of what we think can help the sector, you know, flourish better.