Managing Director, Crownrise Finance Limited, Mr. Babatunde Rufai-Lariba spoke on the challenges and opportunities in the finance house sub-sector under the regulation of the Central Bank of Nigeria. Obinna Chima presents the excerpts:
In the 90s, the Finance Houses sub-sector used to be very vibrant and played prominent roles in the economy, but today the sub-sector appears comatose. What was responsible for that?
Then we had over 1,000 Finance Houses and everybody was just trying to outplay each other. In the course of that, they started offering interest rates and items that were not possible at that time. While it exhibited early then was because we had no windows. Of course, you know banks have windows and because of the special position they hold in the economy, government must always create window for them to ensure that such commercial remains afloat. But that wasn’t given to us. Also, at that time, some operators didn’t even know that Finance Houses were set up to bridge the gap of those that didn’t have access to the larger banks.
We were set up to assist the SMEs. The first 50 Finance Houses were licenced in 1992 and everybody was happy then. So, seeing that the Central Bank of Nigeria (CBN) had started licencing the sub-sector, all manner of operators started springing up all over the country and we had over 3,000 firms then. And some of those firms went under because unlike what we have now, there was no corporate governance, no risk management framework and the firms then didn’t have strategic plans.
But considering the challenges in the sub-sector, few firms including yours have continued to survive. What are those things that have kept your firm afloat?
As a banker, I had rigorous training on financial discipline and I had mentors I was always looking up to. These included the likes of Otunba Subomi Balogun, Jimi Lawal and people that were young and had made it in the financial sector. So, we made financial discipline our principle. Also, we made sure we selected shareholders that were also focused on doing the right things. My staff members are also committed. So, financial discipline has helped me and is still our main principle till today.
Some of your members are clamouring for Nigeria Deposit Insurance Corporation’s cover for the sub-sector. What do you think would be the benefits of that policy to the sub-sector?
It will be another confidence boosting initiative. That a customer has his or her money in a Finance House and if anything happens, the regulators would arrest the situation and to alleviate customers’ suffering in case of any unpleasant outcome, the NDIC would pay the customers a certain amount of money and they would take over the company’s assets. That alone will enhance confidence in the sub-sector.
How can one differentiate a Finance House from a Merchant Bank as well as a microfinance bank?
A finance house generally can do everything the commercial banks do, except deposit-taking and foreign exchange. The regulators now gave us a caveat that we can do financial consultancy and services whose range wasn’t defined. But you have to look at your core competence in whatever you choose to do. On the other hand, a merchant bank is like with Crownrise Finance is all about. The only difference is that while we call the funds we receive borrowings, they call theirs deposit.
The merchant are allowed to do foreign exchange, but we are not allowed to do it. They are not allowed to have counters for savings, just like the finance houses. So, finance houses are mini-merchant banks. That is why they call us investment banks as well. So, we are doing virtually everything the merchant banks do. If you are a big customer of Crownrise, we can give you indirect cheque book. All we need to do is to have an agreement with our bank. But if you don’t have the financial capability, you don’t just dabble into merchant banking. For you to operate a merchant bank today, you need about N25 billion. But microfinance banks are just like the conventional banks. The only thing they cannot do is foreign exchange. Before, by law they couldn’t grant more than N500,000 as loan. But that amount has just been increased to N5 million.
But a finance house can grant any amount of loan to its customers, if its capital, multiplied by 20 is more than what the customer is asking for. For example, if you have capital of N100 million, multiplied by 20, that gives you N2 billion, if a customer is asking for N1 billion loan, we can grant the customer. That is why the NDIC cover I talked about earlier is important. If we are telling the whole world that we can multiply our capital before giving out loan, that means we should have a cover to hedge against risk. And we are not allowed, just like all other banks to do things directly, but to finance firms. So, the microfinance banks were developed to take the form of the commercial banks, while finance house were modelled after the merchant banks. You know at some point in time the regulators phased out merchant banks.
But they saw that wholesale banking was lacking in the economy and had to bring back the sub-sector. What we are fighting now is that there are some areas that the central bank must stop the commercial banks from going into. What is a commercial banking doing in leasing business? In other climes, a commercial bank should work with a finance house or a merchant bank to execute such transaction. Go to America, India or Britain, you can never see a commercial bank going into business outside its core competence.
Do you foresee a bright future for the sub-sector and what are your plans for expansion?
There is a bright prospect for the sub-sector because from over 3,000 operators, we are just 71 presently. There has been increased supervision from the central bank and they now come every six months to look at our operations. So, before any industry issue that would affect the sub-sector would arise, the CBN would have arrested it. We have a department at the CBN that was wholly assigned to monitor our activities and we send returns regularly through a software. So, there is room for expansion and we are desirous of exploring it.
The financial discipline and resilience that has been with us has been inculcated in every staff. We emphasis on training and re-training of our staff. At Crowrise, we are very ethical. We don’t do anything outside the permissible areas and that has helped us a lot. So, we like to operate within the rules and regulations of the regulators. Our products and services are within the permissible areas. For instance, we have what is called the Crownrise Running Account. We have the Crownrise Retirement Scheme, which enables young entrepreneurs and chief executives to save till they retire.
How do you intend to utilise the N1 billion you plan to raise through bond offering?
Of course, we are putting 35 per cent into project financing. We are going into operating leasing which requires money, so we are putting 40 per cent into that. Of course, loan syndication and loan facilities will get about 20 per cent and five percent will go into trade financing because we have to service small scale businesses. So, we are going into operating lease and project financing seriously. We will never run away from lending because that is the traditional way of helping majority of small scale business owners. The bond offering is not for any capital project.