Clamp down on portfolio investment firms: failure of regulation?

Financial markets thrive on public confidence and that is why regulatory actions need to be weighed and counter checked and consequences of actions clearly understood and communicated before decisions that affect operators are taken and enforced.

The reported clampdown on portfolio investment firms appears to negate this regulatory decorum. The financial linkages of the N1 trillion-strong sub-sector are capable of stirring consequences of systemic proportions.

The operators and their customers in that arm of the financial markets are taping a window of an opportunity, as others are doing in the sector. Such new opportunities are welcome, as governments and regulators are unable to create sufficient opportunities to accommodate a large segment of population within the domestic economy. Financial markets everywhere in the world are an evolution and they are yet evolving. The evolution is normally driven by the needs of the market participants – good returns to owners of financial capital and supply of capital to businesses. Ensuring an orderly functioning of the market – in which no group of participants is mistreated, is a solemn duty of financial system regulators.

In Nigeria, portfolio investment firms sprang forth from a void in the market created by poor returns on conventional financial assets in a runaway inflationary environment. Interest rates
are skewed in such a manner that depositors get peanuts on their money while borrowers pay cut-throat rates on loans and advances. Head or tail the intermediaries, reminiscent of the marketing boards of old, win to the detriment of both owners and users of money and society at large. It is apparent that the unsustainable role of the intermediaries will be challenged at some point. This is clearly the opportunity that ushered in the portfolio investment firms into the financial markets. They are a response to the yearning of the owners of financial capital to optimise the returns on their money and this is a natural tendency in the world of finance and investment. Investment capital has to find its way to the best possible combinations of risk and return.

It is the duty of regulators to ensure that this happens in a fair and firmly regulated operating environment that creates and spreads opportunities to everyone willing to play within the rules of the game in any segment of the markets whether existing or evolving. The portfolio investment companies represent a group of outside the box thinkers as to how to create opportunities for more productive use of capital than conventional financial services organisations are able or willing to offer. They, therefore, present a new competitive force in the investment market, which is needed to jolt the apparent return to armchair banking in Nigeria. Their entry is apparently the same course that the new generation banks followed to bring innovation in customer services delivery that has worked to the benefit of the entire system.

Banks have generally retreated from customer-oriented service culture and are on their ways back to the armchair banking era. And the new state is turning out worse than before. Banks have unilaterally slashed interest rates on customer deposits on a matter of take it or leave. Even the piddling interest rate they agree to pay is usually subjected to all manner of terms and conditions that savings account holders hardly get anything at all any more on their money.

Hiding under the coronavirus environment, banks generally have moved back into shells of conservatism and complacency. They need to be jolted once again to pay depositors decent interest earnings on their funds. Not even in the era of armchair banking did banks keep customers in the heat of the sun for hours for even less than 5-minute services such as printing account statements that are happening now. This is the entry niche for portfolio investment companies and presently the crocks of the matter that has been visited with a clampdown by security officials. How an operational issue in the marketplace would be allowed to become a criminal matter places a big question mark on the efficacy of regulatory conduct.

In the evolutionary process of Nigerian banking, a time came when non-bank financial institutions sprang forth and dominated the financial services landscape. It was a market-induced development, which attracted a regulatory-based response. The central bank responded by bringing them under its regulatory framework. When competition in the banking industry intensified in the late 1990s, merchant banks opted to become commercial banks. This again was a market originated pressure – which the central bank allowed to proceed and later on culminated in the issuance of universal banking licences.

A market originated pressure is like a surging stream that is unstoppable. The job of regulators is simply to give it an orderly course to flow. Regulators didn’t have to clamp down on the promoters of non-bank financial institutions in the 1990s because there was a sizeable demand for their services. In the same manner, they couldn’t suppress the influx of community and later microfinance banks. They are all part of the variety of financial institutions that drive the unending sophistication and complexity of the financial system. What a clampdown does usually is to drive the business offshore. In the case on hand, it is a market-driven by innovation to meet market needs. You lock the window, you divert the flow of investment capital offshore.

Financial system regulators should be alive to their responsibility to discover current trends in the demand and supply functions of financial services and move proactively to put the rules to guide the operations ahead of time. It is rather a matter of serious concern that it is the portfolio investment firms themselves that are, on their own, calling for regulatory guidelines for their business. It is quite disappointing that there are no regulatory procedures for handling issues concerning a group of financial sector operators as significant as portfolio investment firms with assets in the region of N1 trillion. The use of security officials with some regulatory shadows at the background to crush them as claimed presents a big show of crude control measures in modern-day financial markets.

Disorderly conduct of a few of the operators may not be ruled out in terms of honouring their obligations to investors. That is the very reason why they should be recognised and admitted
into the financial system regulatory framework as quickly as possible. Yet, the few that fail to honour their obligations cannot justify a total clampdown any more than we can reasonably shut down the highways or the airports because of reckless drivers and pilots. The operators don’t have to show that they are significant labour employers in order to be allowed to continue to operate; that should be taken for granted. They don’t have to plead to show they contribute to GDP or consumer spending capacity; they even needed to be applauded for the courage to set up in a significantly disabling business climate that constitutes the Nigerian economy.

They are part of the engine of the new economy – the small-scale enterprises that need to be courted and not stifled. They are the economic growth drivers that future-oriented economies spend a lot on financing and training to promote and to groom. They are the mustard seeds that hold the promise of great oaks of the future.

Let regulators give them the same chance they gave new generation banks to transform banking services in Nigeria. Let them have the same chance given to non-bank financial institutions, microfinance banks and other non-conventional financial institutions that are now in operation.

Mike Uzor is chief financial analyst, Datatrust