Pitfalls of money lending(DIGISTAR Corp Bhd)

DIGISTAR Corp Bhd is taking the plunge into money lending business.

Last week it announced the approval of a conditional money-lending licence being granted to its wholly-owned subsidiary. The licence is subject to Digistar fulfilling certain conditions within the next three months.

For a company whose core business has been anchored on providing IT systems and solutions for a variety of industries ranging from property development to construction and communications, it is a big diversification.

Digistar expects the licence to contribute positively towards its bottom line in its financial year ending Sept 30, 2015.

This does not come as a surprise. Money lending has always been a lucrative business, especially when the economy is growing and banks become prudent. Business owners normally seek the help of money lending firms for short-term financing until they put in place a longer term financial arrangement.

For money lending, the principal requirement is that the company undertaking the job needs capital. Another important aspect is the security has to be in place and debt collection has to be efficient.

Digistar is not the only listed company that has diversified into money lending. There are several others and it is normally tied to companies that have extra cash and nowhere to put them.

The Hap Seng group is an example of having its own finance operations that has been a key contributor to its bottom line.

In the 1990s, Magnum Bhd, the number forecasting operator used to have a money lending subsidiary in Hong Kong. The parent company in Kuala Lumpur used to extend loans to the Hong Kong subsidiary for its money lending operations.

But the problem was the Hong Kong subsidiary incurred a high rate of default and a large sum of money was not recoverable.

Only post 1999, under new management did the operations in Hong Kong close down. The funds extended were never recovered.

While money lending has its benefits like what the Hap Seng group is enjoying, there is also the other side of the story that Digistar has to be aware of.