The lure of largess from foreign exchange (forex) and capital market transactions, among others may be responsible for the conversion of the two remaining discount houses, Kakawa (KDHL) and Associated (ADHL) to merchant banks, BusinessDay investigations show.
Further investigations show that an increasingly harsh operating environment has thinned out the profits of discount houses, institutions created by the Central Bank of Nigeria (CBN) for participation in the buying and discounting of money market instruments.
The CBN however says that the non-existence of discount houses would not create any gap in the economy, as they were originally created as a stop-gap to provide liquidity in the money market.
“The action, (approval of conversion requests) is in line with the developmental principle of the CBN under the leadership of Godwin Emefiele, as it has assisted people who would have been otherwise thrown into the labour market, to retain their jobs under the new banks”, says, Ibrahim Mu’azu, the CBN’s spokesperson.
Responding, a prominent player in the money market said, “It is pertinent to note that discount houses (DHs) were initially created as stopgap measures for intermediation in the money market. “Thus, the activities of DHs are constrained by regulatory restrictions, even as they do not have the kind of privileges merchant banks enjoy. Converting to a merchant bank will expand the scope of their business coverage. As a merchant bank, a DH can augment its business lines with the following:
“Take deposits from any natural or legal persons, in an amount not below the sum of N100 million per tranche, provide finance and credit facilities to non-retail customers, deal in foreign exchange and provide foreign exchange services.
“They can also provide treasury management services, including the provision of money market, fixed income, and foreign exchange investment on behalf of clients, act as issuing house, or otherwise manage, arrange or co-ordinate the issuance of securities and provide underwriting services with respect to equity issuance of securities. Above all, they can now participate in the lucrative forex business”, he said.
A discount house is a money market dealer that participates in the buying and discounting of bills of exchange and other financial products, certain government bonds and banker’s acceptances. They are involved in buying, selling, discounting and/or negotiating bills of exchange or promissory notes, usually performed on large scale transactions.
Consequently, while, ADHL has been converted and is now to be called Coronation Merchant bank (CMB), Kakawa, a subsidiary of FBN Holding Plc, has gotten approval from the CBN for conversion to merchant banking.
The duo may have joined FSDH Discount House, which was the first to convert to merchant banking a few years ago.
But Consolidated and Express Discount Houses could not survive the turbulent operating environment and had to be liquidated by the CBN after failing in their financial obligations to their customers a few years ago.
However, determined to create an enabling environment for the new entrants, the CBN last week amended its regulation to allow merchant banks own subsidiaries for the sole purpose of the capital market and asset management activities, which hitherto made it mandatory for them to incorporate a separate legal entity to carry out such activities.
Sources close to management of Associated Discount House told Business Day last week that the new Coronation Merchant bank would soon announce itself into the market, as finishing touches are being put at major activities for the launch of the bank.
Bello Maccido, managing director of FBN Holdings, at the recent annual general meeting of the company said, “Another good news is that the CBN on Monday has graciously approved the request for merchant banking license for Kakawa Discount House. To have a merchant banking license in our stable is a strong one for us and our business.
“You, our shareholders, are going to be the biggest benefeciaries of this new business. It is an additional avenue to sell investment banking products to its customers”.
Following the introduction of the revised banking model in 2010, which made provision for the re-emergence of merchant banking in Nigeria, the CBN licensed a number of merchant banks.
However, efforts by the newly licensed merchant banks to carry on capital market and asset management activities were constrained by section 188 of investment and securities act (ISA) 2007 and pension commission rules, which require merchant banks to incorporate a separate legal entity to carry out such activities.
Some analysts said at the weekend that amended guidelines on Operations of Group Structure by merchant banks that own such downstream, released by the CBN, was in response to criticism to inhibitions to operations of merchant banking in the Nigeria.The amendment which takes immediate effect, is expected to strengthen the operations of merchant banking in Nigeria.
John Omachonu
