The Asset Management Company of Nigeria (AMCON) may have emerged as a tangential issue in the nation’s banking industry.
Currently, it awaits presidential assent having passed through the National Assembly.It is expected that when it comes on board, all the banks will be expected to run gainfully without the baggage of toxic assets.Speaking on the development, a finance analyst, John Okonta said that it is gratifying that even as at now banks are already delaying profits, pointing out that with the coming on board of AMCON, the trend would still continue.However, he stressed that right now, the management of the CBN must ensure that the banks are well managed to avoid the pit fall of the past.
The Central Bank of Nigeria (CBN) had thrown in everything in the process of establishment of the Asset Management Company of Nigeria.The AMC when established will take over the toxic asset (non-performing loans) in the banking industry and allow the banks to run on a clean slate.
To this effect, the CBN had mandated all deposit money banks in the country to furnish it with information on their classified facilities.
In a memo to all banks titled, “Report on classified facilities” and signed by Samuel Oni, CBN’s Director of Banking Supervision, the apex bank stated that, “In continuation of efforts to strengthen the banking system, the Central Bank of Nigeria has resolved to address, on a holistic basis, the issue of delinquent facilities in the banking system, especially the exposure of banks to the capital market.In this regard, preparatory to the establishment of the Asset Management Company of Nigeria, it has become expedient to obtain information from all Deposit Money Banks on their classified facilities.
According to the CBN, “Specifically, the information required will cover details of collateral obtained for classified loans, securities owned by subsidiaries in respect of proprietary positions, investments and crystallised underwriting investments and bank’s securities held in respect of proprietary positions, investment and crystallised underwriting investments.”Instructively, the Governor of the CBN, Sanusi Lamido Sanusi, spoke about the establishment of the AMC in June this year while speaking on possible measures to adopt in handling banks’ toxic asset.
In his words, “ the setting up of the AMC is one of the options on the table. The only thing is the AMC, even if set up, would only take off assets after the owners have taken the hit. We are not going to take on assets at cost. They have got to be written down on the books of banks.”He had stressed that, “ what banks need to understand is that banking is a business,” pointing out that, “When the stock market was going up, some banks took the risk and made a lot of money from the stock market. If it goes down they take the losses. As somebody one said, you cannot privatise your profits and socialise your losses. That is for me, a minimum. They’ve got to make their losses and then we do everything we can to make sure they don’t go under.”
Meanwhile, a source in the apex bank told The Guardian that with some of the banks’ managing directors found wanting removed from office, coupled with the 100 per cent provision by all banks for bad or doubtful loans in their books, the time is ripe for the setting up of the AMC.However, he lamented that in as much as the CBN and Nigerian Deposit Insurance Corporation (NDIC) would want to see the speedy setting up of the AMC, its formation has been stalled at the level of the National Assembly level because an Act of parliament is needed for its establishment.
Meanwhile, recently in Kaduna, former Managing Director and Chief Executive Officer of the NDIC, Ganiyu Ogunleye, said the penchant among Nigerians to obtain credit without making serious effort to pay back may frustrate the positive impact that the AMC is supposed to have on the economy."Delinquent credit contributes to liquidation of banks. The corporation had come across debtors who would prefer to engage solicitors that could protract cases in court for many years rather than make effort to resolve their debt obligations. Bank debtors with such mindset constitute a threat to efficacy of the proposed Asset Management Company."
He, therefore, called for the overhaul of the creditor right legislation in Nigeria in order to give creditors more powers to enforce payments by debtors."If people do not see the importance of paying debts, it questions the relevance of an asset management company. The NDIC needs to be empowered in the process of debt recovery," he said.The CBN proposed the setting up of an asset management company to buy up the toxic asset of banks and take it off their books in order to improve liquidity in the system. The take-off of the AMC is subject to the approval of the National Assembly.
The setting up of an AMC, which formed part of the 14-point agenda of the CBN consolidation exercise in 2004, is yet to take off after more than five years after it was proposed. The relevance has become imminent following the recent injection of N620 billion into nine banks due to insufficient capital and has become imperative due to the current financial turmoil, which has seen many banks carrying huge non-performing loans of over N1 trillion in their books.The Guardian recently revealed that the bill for the establishment of the Asset Management Company of Nigeria when assented to by the president would have the input of the World Bank.
A source at the apex bank informed that the World Bank contributed, especially in the technical areas of the company, in order to make it a huge success.The spokesman for the CBN, Mohammed Abdulahi, in a telephone chat with The Guardian, revealed that the CBN has been collaborating with the World Bank in all its (CBN) capacity building programmes.Said he: “Our collaboration with the World Bank is not limited to only AMCON but also other CBN capacity building programmes.”
The World Bank Board of Executive Directors it would be recalled, recently approved a US$500 million Development Policy Credit to support Nigeria’s economic reforms in the financial sector and public financial management. The credit is in response to the current global financial crisis.
“The loan is intended to provide budgetary support to the Federal Government of Nigeria to partially off-set the fiscal impact of the crisis as well as maintain its current economic reform path in the financial sector, fiscal policy and financial management, and governance,” said Michael Fuchs, lead financial economist and task team leader.This assistance package builds on strong government ownership of a medium-term reform programme, which consolidates the successful record of economic management and reforms since 2001, while putting emphasis on cushioning the damaging impacts of the financial crisis on the poorest of the poor.
Commenting on the assistance, Country Director for Nigeria, Onno Ruhl said, “The benefits to be derived from the programme include maintaining confidence and stability in the financial system, strengthening the banking system, supporting reforms spearheaded by the Central Bank of Nigeria, as well as supporting the government’s fiscal and financial management, including the objectives of the 2009 budget that focuses on maintaining fiscal stability while raising government investment spending to accelerate non-oil growth.”The operation involved extensive consultations with a wide array of government agencies and other donors.
Earlier on, the hint on the World Bank’s likely involvement in the establishment of the AMCON was dropped by the bank’s Senior Economist, Finance and Private Sector Development, Ismail Radwan, in a telephone chat with The Guardian.According to him, the World Bank assistance can come in form of helping out with funding, technical assistance or both, provided the Central Bank of Nigeria request for them.He described the plan to establish AMCON as a step in the right direction, adding that, “this is why the World Bank is eager for the project to succeed in Nigeria.”
Throwing more light on how AMCON operates in countries of the world, he explained, “first they issue government notes, give it to banks, then take the toxic asset in turn with discount, then sell it off within two to three years, make profit and redeem the papers.”He stressed that, unless enough liquidity is injected into the banking sector, it will be impossible for banks to start lending to customer.This is even as it was gathered at the weekend that the CBN is working out an arrangement whereby banks can transfer their bad loans into AMCON in exchange for certain considerations that can be in form of government bonds.
Also, the terms of the transfer of bad loans will depend on various factors, including perceived fair value of bad loans, risk-sharing arrangement between AMCON and the bank, the CBN source said.He revealed that, that is one of the reasons why the apex bank is pushing for banks to recognise losses up front that would require agreement between banks on asset transfer values, different asset quality, policies by different banks and operational issues to transfer asset with a view for a new platform.
The Asset Management Corporation of Nigeria Bill, which proposes a company to buy the toxic assets of some ailing commercial banks in the country, is ready for President Goodluck Jonathan’s assent as the House of Representatives passed the harmonised version of the bill. And a day after the Senate performed a similar ritual; the House also voted and adopted the harmonised report.The AMCON Bill is expected to buy the toxic debt of banks and free up their books and encourage lending. The company will start with a minimum of N20 billion capital.