hfc investors proposal v4 090310

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Consumer Finance and Leasing Company (Sierra Leone) Limited

Further information for prospective investors

Consumer Finance and Leasing Company Limited


(Formerly Home Finance Company Limited)


March 2010






1. Introduction This document is submitted by the Consumer Finance and Leasing Company Limited of

Sierra Leone which was previously, a mortgage finance company which is being re-organised

to become the first provider of leasing and hire purchase financing services in the country.

2. Background

The Consumer Finance and Leasing Company Limited established in 2001, as the Home

Finance Company Limited, to provide mortgage financing to households in Sierra Leone.

Whilst the company was able to raise capital of about Le 1.3 billion (approximately USD

325,000), this amount was insufficient to undertake substantial mortgage lending; a process

not helped by the uncertain political events of the time. Although the company was able to

acquire the building in which it currently resides, the business has not effectively traded

since 2003.

3. Project Description and Objective

In that light, the current Board, with the assistance of external consultants, have undertaken

a strategic review with a view to re-starting the operations of the company. The broad

conclusion is that the company can commence operations as a leasing and hire purchase

company providing services to households and businesses. This conclusion is further

supported by the work of an established market research company who has conducted a

nationwide market research exercise. There is currently no hire purchase or lease financing

company in Sierra Leone. The Board is extremely happy with the results of the process and

believe that it can now proceed with the re-organisation of the company. The company

intends to commence operation on the 1st

of June, 2010.

The preparatory work included the development of a business plan which seeks to develop

an overall framework for the company as well as preparation of full financial forecasts

incorporating the new strategic and operational stance of the company. The strategic and

operational direction of the company is defined to be very efficient with a substantial

technology input to reduce longer term operating costs. The staffing requirement of less

than 20 represents the optimum level given the operational arrangements but would

require effective leadership in all respects to ensure successful implementation. The plan

sets out some of the detailed risk metrics, job descriptions as well as financial sector

development framework which would be important in establishing a clear and consistentstrategic direction for the company.

The objective of the plan is three-fold

i) To articulate and present a sound technical basis to source the required recapitalised

equity of approximately Le10bn (USD2.5m at current exchange rates);

ii) To provide both existing and potential investors with full and convincing information

on the proposed re-organisation and operations of the company as well as its

inherent merits; and

iii) To establish the case for a viable and potentially profitable consumer financing

company that will contribute directly and meaningfully to the development of thenational financial architecture.






4. The Environment

4.1. The Business Environment

The business climate in Sierra Leone is currently moderately positive although there is still

immense room for improvement. The new GoSL which assumed power on 8th October 2007committed itself to strengthening and building on the foundations laid by the previous

government. The financial sector has received substantial legislative attention as the

government seeks to further the development of the sector. The government has signalled

its commitment towards the development of this sector by granting licenses to new

entrants. The Government is also aware that the current public sector inefficiencies (e.g.

bureaucracy and corruption) need to be addressed in order to improve private sector

performance.

The economy continues to enjoy positive rates of economic growth though this is likely to

reduce slightly in 2010 as part of the continuing response to global economic trends. Thedrop in receipts from international donors will increase the focus on the government

budget. This might force the government to adopt fiscal policies (higher taxation levels) that

might have a negative impact on businesses. Although the government cannot afford to

place extreme emphasis on short-term revenue generation, it is worth noting that reducing

the current budget deficit will help reduce the extremely high cost of debt finance (which is

also a problem for businesses in Sierra Leone).

The financial services sector has benefited from increased legal and regulatory action over

the last few years, although there is still immense room for improvement. The majority of

the laws had become outdated; hence the changes seen by the introduction of new rules(e.g. banking (Amendment) Act 2005, Companies Act 2009, Bankruptcy Act 2009, Payment

Systems Act 2009 and the Securities Act 2009) have been quite positive.

Even though the business environment remains challenging, there are significant advantages

to be gained by ‘first movers’ especially as there is now clear and wider understanding that

it is indeed private sector activity that will drive forward the economy of Sierra Leone.

4.2 Sector Developments and Prospects

There has been significant development in the financial services sector over the last couple

of years. The increased competitiveness (attributable to the large number of new entrants)has improved the quality and range of services offered to the market.

The banking sub sector dominates the financial sector with 14 commercial banks, 2

development banks, 6 community banks, and 1 Investment Bank and who are regulated by

the Bank of Sierra Leone (the central bank) whilst the Sierra Leone Insurance Commission

(SLICOM) regulates the insurance companies. In addition, the Association of Commercial

Banks (ACB) and the Sierra Leone Insurance Association (SLIA) are the two main industry

bodies in this space. The Insurance sector is also well established and continues to show

great promise (in terms of growth potential). There are currently 4 established entities and 3

relatively new market entrants. The insurance space is also made up of insurance brokersthat act on behalf of clients in their dealings with insurance companies.






The rest of the financial sector is made up of Microfinance Institutions (MFIs), Discount

houses, the National Social Security and Insurance Trust (NASSIT), The Sierra Leone Stock

Exchange, Private Equity funds, Foreign Exchange bureaus, the Informal Financial Sector,and the recently formed Home Finance Company (HFC Savings and Mortgages).

Though the financial sector has made some improvements it is still quite narrow. It lacks the

variety of adequately strengthened institutions required to deepen the financial system.

There are, for example, no specialist financial companies involved in leasing, hire purchase,

agricultural and rural finance.

The variety is even more important in the context of a substantially varied target market

which requires different forms and levels of financing. In terms of the level of financing, this

ranges from informal sector and local financing, to micro-financing and higher levelfinancing by commercial banks and similar entities.






5. Strategic Vision – Plans and Implementation

5.1. Strategic Alignment

The strategic alignment process is necessitated by a new mandate which focuses on the

provision of short to medium term household financing and which also demands a newvision, mission statement, and core values which should give organisational direction to the

company. Overall, the new strategic framework should provide for organisational direction

for action, the building blocks for organisational design as well as the basis for the

assessment of organisational performance.

5.1.1 Mandate, Vision and Mission Statements

The vision statement represents a vivid and idealised description of the desired

outcome and should engulf the broad mandate of the organisation. Furthermore, the

vision statement should be motivational, idealistic, compact and broadly verifiable.

5.1.2 Mission Statement

The mission statement describes the overall purpose of the organization indicating

the end goals (what it wants to achieve as an entity based on our mandates), process

goals, (means for achieving the end goals), target beneficiaries (households in Sierra

Leone) and the outcomes which should be verifiable, measureable and compact.

5.1.3 Core Values

The explicit statement on core values represents the core priorities in the

organisation’s culture.

Text Box 5.1 Consumer Finance and Leasing Company – New Vision, Mission and

Core Values

Vision Statement

A specialised financial services provider that will contribute to the socio-economic

development of Sierra Leone.

Mission Statement

Contributing to the deepening and development of the financial sector in Sierra Leone

through the provision of consumer and business financing for the benefit of Sierra

Leoneans and other enterprises.

Core Values: Integrity, Openness, Service, and Partnership

The mandate, vision, mission and core values define the direction of the company which is

very important in ensuring consistency of action and direction in achieving success and the

desired goals of the company. There must be a process of socialisation of the strategic

direction of the company which is important in ensuring cohesiveness and a team ethic.

5.2. Corporate Structure

5.2.1 Legal Entity

The current legal status is a public limited company where the shares are held by

individuals associated with the company at inception. In view of the nature of the

business, the company may choose to raise additional finance at various stages to






support its growth strategy and this would be more easily achieved with a public

limited company status with a stock market listing. Even though the stock market

remains in an embryonic stage, there are marketing advantages to be gained from

this association. Additionally, the listing will also create an exit route for investors.

5.2.2 Organisational Structure

Organisational structures are often organised around themes; be they inputs,

outputs, geographical areas, tasks, stage of growth as well as possibly, the business

and service environment. In view of the foregoing, the proposed organisational

structure is based on functional outputs and tasks.

Figure 5.1 Consumer Finance and Leasing Company - Organisational Structure

The organisational structure proposed is relatively flat with clear lines of

responsibility and a narrow span of control. Given the likely nature and volume of transactions, the proposed structure is also cost effective and not likely to lead to the

organisational drift often associated with a wide span of control.

5.3 Project Implementation & Management

5.3.1 Management Team

The Board plans to move quickly to put in place long term management of the

company after the completion of first stage of the fundraising exercise. The

management will now take primary responsibility for the implementation of this

business plan.

Internal Audit Chief Executive Officer

Board of Directors

Manager

Marketing & Business

Development

Manager

Loan Operations Manager

Finance

Lending Unit

Portfolio Management

Manager

Support Services

Administration

Human Resources

Management Info Sys






5.3.2 Legal Advisers

Basma and Macaulay, Main Motor Road, Brookfields, Freetown

Basma and Macaulay is one of the foremost law firms in Sierra Leone specialising in

corporate and civil law. www.basmaandmacaulay.com

5.3.3 Business Consultants

B&C Services Consulting, Sanders Street, Freetown

Messrs B&C Services Consulting is a chartered accounting and business consulting

firm providing services to public and private entities, both locally and internationally.

5.4 Strategic Sponsors and Partners

Strategically, the company must develop partnership with

a) At least three banks with substantial branch footprint;

b) Two insurance companies to insure the goods acquired. The market survey has alreadyestablished the positive perception of banks in terms of trustworthiness which can be

leveraged to provide a better service than is often associated with banks.

c) Approved service providers including retailers and wholesalers – from whom potential

customers would acquire goods and

Strategic Partners

a) Sierra Leone Commercial Bank Limited (SLCB) was established by the Government of

Sierra Leone in 1973 and is currently the largest bank in Sierra Leone in terms of deposits

and branches (11).

b) Rokel Commercial Bank Limited (RCB), formerly Barclays Bank Plc, is the second largest

commercial bank in Sierra Leone in terms of deposits. It is majority-owned by the

Government of Sierra Leone (51%) with the remainder owned by private investors and

the staff.

c) Union Trust Bank Limited (UTB) was established some 15 years ago and remains the only

indigenous privately owned commercial bank in Sierra Leone with 9 branches and

numerous outlets. The bank remains the primary agent for Western Union and has

recently benefitted from external investment by the Soros Foundation based in New

York.

d) Aureol Insurance Company (AIC) Limited is the largest insurance company in Sierra

Leone with revenues of around USD2.5m in 2009. The company continues to maintain a

strong partnership with reinsurance companies in Africa and Europe.

e) Reliance Insurance Trust Corporation Limited (RITCORP) is the second largest insurance

company in Sierra Leone with total revenue of about USD 2 million. The company is also

privately-owned and, like the Aureol Insurance Company Limited, continues to be a

leading player in the development of the insurance sector in the sub region.

5.5 Operational Strategy

The delivery of the service demands an operational strategy which is adequately aligned not

least to the results of the nationwide market research conducted. Given that poor service






has been identified by potential customers as one of the key reasons for seeking other

sources of household finance in preference to existing service providers, excellence and

ease of service delivery remains one of the key factors that would determine the success of

the company. This must inform the development of the operational strategy.

There are certain basic features of service delivery which must include the following:

Delivery Channels – the service delivery channels will include the branches and outlets of

the 2 partner banks, branches of partner insurance companies as well as the main office

in Freetown. These branches and outlets will provide application forms as well as

receive them together with the application fee. In certain circumstances, the staff may

be required to give advice.

In addition, the company will offer a customer service facility by telephone and internet.

The company will also provide a standardised document which could help inform

potential customers of the nature of the products in trying to decide on the preferredoption.

Figure 5.2 Service Work Flow for Hire Purchase and Leasing Applications

Figure 5.2 presents the service workflow which aims to shorten the number of days between

application and disbursement of funds. It is our aim that this should be no more than 4

days. Part of that process involves HFC being able to make decisions on the insurance

component as well without immediate recourse to the insurance company. It is also the

case that the application provided to the applicant should be adequately comprehensive to

avoid repeat visits and queries. In future, decisions could be made at the initial contact

points when the risk metrics have been incorporated into the software application.

Banks, Insurance

Companies and

HFC Office

HP and Leasing

Application & Insurance

Forms, Information

Sheets, List of approved

service roviders

APPLICANTS

1

2

Identifies item(s)

with approved

service providers

and submit

completed forms

with application fee

HFC Office for

Assessment of

both applications

3

4

Decision Notice to

applicant through

intermediary

Complete internal

process (including

forms to insurance

company) and

disburse funds

5

SERVICE PROVIDER

INSURANCE

COMPANY

6

7Makes regular repayments to

HFC via bank process and

disburse funds and contact

Customer Services






6. Financial Projections and Funding Requirements

6.1 Financial Projections

The financial projections show that the company will become profitable by second year of operations provided that there is sufficient capital. The projections anticipate substantial

revenue growth over time starting with about USD 400,000 in Year 1 and doubling by 2014.

A substantial amount of capital is required given the nature of the business and our estimate

of the capital requirement is Le10 billion (about USD 2.5m, at current exchange rates) which

is incorporated into the financial projections contained in the business plan.

2014 2013 2012 2011 2010

Total Revenue (Le, m) 3,646 3,063 2,673 2,013 1,541

Operating Costs 2,553 2,368 2,128 1,858 1,684

Operating profit / (loss) (Le, m) 1,093 695 544 245 (143)

Net Cashflow (Le, m) ( 450) ( 240) ( 790) (1,100) (4,300)

High revenue growth and minimal expenditure growth results in an upward profitability

trend over the forecast horizon.

6.2. Funding Requirements

6.2.1 Equity Capital

The company seeks equity capital of USD 2.5 million (at current exchange rates) to support

the commencement of operations. It is to be used to fund the core leasing and hire

purchase business. New Local investors have been invited to subscribe to the equity of the

company. The company is seeking to raise additional capital of about USD2.5m at Le 40,000

per shares as indicated in Table 6.1.

Table 6.1 Existing and Proposed Share Structure

No. of shares in

issue

Value of shares

(Le)

Value of shares

(USD)1

(approximately)

Existing 127,525 1,275,250,000 317,000

Proposed Issue

(at Le40,000 per share)

250,000 10,000,000,000 2,500,000

Total after new issue 377,525 11,275,250,000 2,817,000

Beyond 2010, calls for capital could be met through a further issue of shares on the Sierra

Leone Stock Exchange.

1At current exchange rates






6.2.2 Debt financing

Debt financing via an overdraft facility of around USD 400,000 is required to support

the company given that the equity capital contributions are assumed to be met overa 3-year period. The local bank shareholders in Sierra Leone have provisionally

agreed to provide this financing. This facility will be secured by the property asset of

the company which is currently valued in excess of USD 1 million.

6.2.3 Line of Credit

An open ‘Line of Credit’ to support higher levels of business than is currently and

conservatively estimated is also requested. Our forecasts and projections are based

on fairly conservative terms and arrangements need to be made in the event that

the business out-turn exceeds the current estimates.

6.3. Collateral Offered

It has already been indicated that the company has property assets, conservatively

estimated at USD 1 million.






7. Implementation Timeframe

Given the proposed commencement date of 1st

June 2010, the company anticipates being

able to complete the preparatory work by that time. 8. Company Summary

No. Company Summary Details/Description

1 Name Consumer Finance and Leasing Company Limited

2 Location (Head Office) Freetown, Sierra Leone

3 Legal Domicile Republic of Sierra Leone

4 Legal form/structure Company limited by shares

5 Country focus Republic of Sierra Leone

6 Sector Consumer Finance and Leasing

7 Current Business Focus (i) Provision of mortgage finance to individuals but this hasbeen reviewed and the new focus is on leasing and hire

purchase.

8 Ownership structure Public Liability Company with shares held by a diverse group

of individuals

9 Key Contacts i) Chairman & Board

ii) Consultants – Messrs B&C Services Consulting

10 Stage of development Stagnant Business

11 Governance Structure &

Board of Directors

The Board of Directors are responsible for the overall

governance of the company and its membership includes:

James Sanpha Koroma, (Chairman) - no direct

shareholding (Emile Carr 500 shares via Leone Consulting

Hon Brima Conteh – 100 shares

Ms. Adama Wurie – 500 shares

Managing Director, Sierra Leone Commercial Bank

Limited (10,000)

Mr. Francis Matturi, representing Sierratel Pension Fund

(20,000) shares

12 Financial Audit Status Last audit conducted for the financial year ended 2005

13 Key issues Raising Capital

i) The need to refocus the business on less capital intensive

areas and the board are proposing that the company shouldnow focus on consumer leasing and hire purchase financing.

Governance and Management Structure

ii) To further strengthen the governance structure through

the establishment of appropriate systems and processes

Recruitment

iii) To recruit the executive management team to lead the

operational management of the business.

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