The International Monetary Fund (IMF) had started a torrent of argument when it recommended the winding down of the Asset Management Corporation of Nigeria (AMCON) in its Article IV Consultation and swift reactions by Amcon and analysts have contradicted the IMF as they insisted that the bank be allowed to perform its given task and run its term. BUKOLA IDOWU looks at the issues in perspective.
Without doubt, Nigeria has been a point of reference in the way it handled its banking sector crisis as many other countries, including more advanced economies had taken after the Asset Management Corporation of Nigeria (Amcon) model to solve their own peculiar issues. Amcon established by law in July 2010 and commenced operations in November 2010, was designed to take the toxic assets off the balance sheets of the banks, such that banks in the country would be in a position to resume more lending.
It was created to be a key stabilising and re-vitalising tool established to revive the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy and has so far spent N5.6 trillion in acquiring non-performing loans from banks.
However, most resolution vehicles such as Amcon are supposed to be temporary mechanisms/institutions set up in times of financial stress to assist regulatory authorities manage the fallout because of the inherent moral hazard involved.
According to the International Monetary Fund (IMF), the country’s ability to successfully address and put under control its banking crisis is quite commendable and so “In light of this achievement, they (IMF Directors) recommended winding down the operations of the asset management company to curb moral hazard and fiscal risks.”
The Senior Resident Representative in Nigeria for the IMF, Mr. Scott Roggers, had noted that the board of the multilateral institution was pleased with the success so far recorded by the Assets Management Corporation of Nigeria (Amcon) and has never recommended ‘immediate closure’ of the corporation to the Federal Government of Nigeria.
?Rather, after its Executive Board concluded the 2012 Article 1V consultation, the board acknowledged the fact that the Nigerian government has done a good job in setting up Amcon, which soaked up toxic assets from the balance sheets of banks and restored stability to the banking system.
?To this end, he said, the IMF feels that since the major work of stabilising the industry has been achieved and in line with the initial Act setting up Amcon, the corporation may soon begin the process of winding down between 2013 to 2017 and “there is no controversy whatsoever between IMF and Amcon as insinuated in the report published on Monday.”
However, the Managing Director and Chief executive of Amcon, Mustapha Chike-Obi had noted that the bank is already in the process of slowing down its activities as a debt buying bank. According to him, Amcon had in the past six months stopped acquiring more non-performing loans (NPLs).
Chike-Obi had noted that Amcon needed 10 years to fully cleanse Nigeria’s financial system of toxic loans. The period, according to him, will be used to pursue the recovery of the N5 trillion bad loans from debtors and ensure the refinance of the corporation’s N1.7 trillion bonds, which were created by its acquisition of non-performing loans of banks.
He furthered that rather than an immediate liquidation of Amcon, the IMF actually wanted the process to end in seven years’ time, whereas the management was looking at 10 years from now.? The Amcon boss said the process for the winding down had already commenced in view of the success already recorded in its efforts to recover bad loans, which before now made up about half of all loans, but had since fallen to within the Central Bank of Nigeria’s target of five per cent.
Meanwhile, IMF Resident Representative said though Amcon is still in the process of recovering bad debts it acquired, it is unlikely that all the debts would be recovered, “and nobody does that. “We think that given the volume of the bad debts which are far below the actual amount declared by the banks as revealed by Amcon, it may take Amcon close to four years from now to recover a substantial part of the debts depending on the approach. “We have never raised any concern about N1.7 trillion investment.
“The said statement was a part of the Public Information Notices (PINs) after the executive board discussions of general policy matters, which were not officially forwarded to the Nigerian government. We have been working with Amcon from the beginning and we are pleased with the success it has achieved so far,” Roggers said.
Although the bank was expected to be tenured, that is to last for a period of 10 years in which it would have successfully cleaned out the banking crisis, the act that established it did not say if and when it should round up its activities. A Director of the CBN had last year revealed that the bank will not have its existence terminated by 2020 as the act establishing it initially envisaged.
Kemi Fatogbe, director of risk management, CBN had revealed at a meeting with risk managers that the 10-year lifespan for Amcon, which was in the original bill deliberated upon by the National Assembly in 2010, was removed during the reconciliation process between the House of Representatives and the Senate.
“The ten-year lifespan for Amcon is out. We are still working on an operating assumption for Amcon of between 10-15 years, but the corporation will not cease operations after that; it will remain to help ensure the financial system stability,” she had said.
This may not be far-fetched as Amcon in its 2011 financial report divides its business activities into three. The first is assets management which is the more pronounced aspect of its business. Amcon, according to the report is also into banking which “incorporates all baking activities relating to individuals (personal banking), private customer current accounts, deposits, investments saving products, custody, credit and debit cards, consumer loans and mortgages. Also includes activities rendered to corporate institutions such as financial instrument trading, structured financing, corporate leasing and merger and acquisition advice.”
Amcon also “incorporates other services rendered by Ascot Offshore Nigeria and includes the group’s investment in provision of construction and engineering services to the oil and gas and power industries in Nigeria.”
Meanwhile, analysts believe the statement by IMF was uncalled-for. According to the Head of African Markets at Standard Chartered Bank, Razia Khan, the thinking that there might be a material moral hazard arising from its activities is misplaced.
“In fact, the whole issue of moral hazard is curious in the context of the Nigeria banking sector cleanup, which was noted precisely for the actions initiated against debtors. Where else have details of debtors who failed to repay their loans been made public?
“The banking sector rescue in Nigeria was specifically designed with a view to protecting depositors – CEOs who committed crimes were held to account, and so were debtors who refused to repay.? There was little, if any, moral hazard involved. There are few grounds for believing that the nature of the cleanup would encourage bad behaviour in the future. No one got off lightly”, she explained.
In terms of the fiscal risks, she said “even though the final amount of Amcon debt exceeded initial August 2009 estimates of the cost of the banking sector cleanup by some way, a mechanism exists where banks – through the levy on their balance sheets – will contribute meaningfully to meeting these costs.
“Financial institutions benefit from the reduction in systemic risk in Nigeria, and they foot a significant proportion of the bill. For now, the emphasis is still on invigorating credit to the real economy. However, given our own projections for nominal GDP and balance sheet growth in Nigeria over the next decade – decade and a half, we do not see Amcon refinancing as posing a significant fiscal obligation for the sovereign.? These concerns are likely overdone.”
The chief executive officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, also disagreed with IMF, stating that there was no basis for such recommendation. The renowned analyst was of the opinion that since AMCON had barely operated for two years, it should be given the chance to succeed.
“IMF’s recommendation is absolutely unnecessary. There is no reason for that. Amcon is both a distress resolution vehicle as well as an institution set up to prevent systemic risks. You can ask Amcon to slow down its activities, which, to me, is what it is doing now,” he said.
Rewane explained that the question of a moral hazard arises, when the cost of an alternative resolution option is less expensive to the system and tax payer. It also becomes a problem if the defaulting operators pay a less than punitive price which encourages deviant behaviour in the future.
“The price at which Amcon is purchasing toxic assets is so punitive that no rational banker or operator will sell assets to it except as a last resort. In addition, the stigma of being an AMCON client in the domestic and international business community is both a fiscal and social burden, he noted adding that “the NPL’s of the banking system which were as high as 35 per cent in 2009/10 have now declined to 5 per cent. The Loan Deposit Ratios (LDRs) are also in a much better state together with the Capital Adequacy Ratios (CAR). The IMF review attested to these facts.
“Amcon had actually discontinued the purchase of toxic assets since December, 2012. In fact, there are instances of banks trying to repurchase the assets and collateral back from Amcon.” On the fiscal issue raised Bismarck said “empirical evidence shows that almost all bad banks have become profitable over a period of time. This is because the toxic assets are purchased at steep discounts and are sold back into the market after a recovery e.g. AIG and the TARP. Moreover, Nigerian Banks are bearing the funding costs of the exercise. Nigerian banks are paying 0.5 per cent of their total assets as a levy. The financial burden of the Treasury and taxpayer is minimised by the Banks agreeing to pay a levy for 10 years.
“The main fiscal burden therefore is the opportunity cost of the Government revenue deployed for distress resolution or avoidance which could have otherwise been used for infrastructure, welfare projects or investments”, he said. An analyst at FBN Capital, Olubunmi Asaolu raised concerns over what would be the outcome if Amcon is dissolved. “If Amcon is wound down, who will manage the asset that the corporation is sitting on…and manage it effectively to recoup the losses?
“Who will collect the Amcon levy which is an ingenious way to get the banks to foot part of the bill for resolving this mess? If you want to clean up the sector, you need a clean-up agent and one that will manage some of the bad assets, hence you need Amcon”, he stressed. On the “moral hazard” cited by the IMF, he noted that necessary measures needed to curtail banks from reckless lending that would lead to a bloated NPL portfolio are already in place.