Why discount houses transformed to merchant banks

Presently, there is no discount house operational in the country. There were five discount houses some years back. Two of them including Express Discount House and Consolidated Discount House went under, while the surviving three converted to merchant bank.

The three discount houses that transformed to merchant banks were- First Securities Discount House Limited, now FSDH Merchant Bank Limited, Kakawa Discount House Limited which was acquired by FBN Holdings plc in 2014, as Kakawa Merchant Bank Limited and Associated Discount Limited, now Coronation Merchant Bank limited.

One of the major challenges faced by discount houses at that time was systemic risk. In 2003, there was a joint study carried out by the Central Bank of Nigeria (CBN) and the Nigerian Discount Market Association, aimed at finding a way for the future of discount houses. Apart from this, some operators looked at how discount houses are being operated in other countries and discovered that they have transformed to other financial services sector.

Rilwan Belo-Osagie, managing director/CEO of FSDH Merchant Bank Limited is one of those who visited other countries in relation to operations of discount houses.

“We went to South Africa, Zimbabwe, Malaysia, Singapore and UK. It was clear they had all transformed to investment banks and merchant banks. At that time in Nigeria, we had only one license – universal banking. At that time also, most of the discount houses were owned by banks. It did not make sense selling these discount houses to transform to commercial banks owned by other commercial banks,” he said.

According to him, “one of the risks inherent in that business was systemic risks, where when one discount house goes under, all others will be affected because everybody will reassess the risk of the discount house.”

The CBN in pursuant of its objective to promote a sound financial system in Nigeria determined that the Universal Banking Model and the resultant expansion of banks into a broad range of financial services, exposed the banks to higher operating risks, increased the propensity to put depositors’ funds into risky non-banking business, and consequently heightened the risk of financial system instability.

Subsequently, in 2010, the Apex bank under the leadership of Sanusi Lamido Sanusi, former governor of CBN, repealed the universal banking model.

The revised banking model guidelines gave room to three types of banking, including commercial banks; merchant banks; and specialised banks, which comprise non-interest banks, microfinance banks, development banks and mortgage banks.

“We looked at the guidelines for merchant banks and found they were similar to everything we were doing apart from the foreign exchange bit. We were the first to take it up and convert. It was in 2007 that we converted to FSDH Merchant Bank, Belo-Osagie said in Lagos.

Meanwhile, FSDH Merchant Bank group in its financial performance for the period ended December 31 2015 recorded N4.09 billion profit after tax (PAT), which was 34.98 percent higher than N3.03 billion recorded the previous year.

The bank’s tremendous performance in spite of the challenges in the economy and in the financial markets was a reflection of its spread, which was higher than the previous year, according to Belo-Osagie.

HOPE MOSES-ASHIKE