The Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) have proposed the creation of a successor body to the Asset Management Company of Nigeria (AMCON).
Established in July 2010 with an intended lifespan of ten years, AMCON was formulated as a Special Purpose Vehicle (SPV) authorised to acquire distressed banks’ non-performing loans (NPLs), thereby enabling the banks to get a clean slate and function more efficiently. The corporation was modelled on a similar Asset Management Company, Pengurusan Danaharta, established by the Malaysian Government to stabilise the Malaysian banking system in the wake of the 1998 Asian financial crisis. By December 2012, AMCON had acquired 90% of the bad debts in the Nigerian banking industry, averting a financial catastrophe.
The cost of bank bailouts
In recent years, Nigerian banks have again struggled with high NPLs as the oil price collapse and currency depreciation hit foreign currency debtors, most of which operate in the upstream Oil & Gas industry. Commercial banks in Nigeria have an average loan-book exposure of 30% to the sector. Between December 2015 and June 2016, industry average NPL ratio more than doubled from 5.3% to 11.7%, way above the CBN threshold of 5%. In its December 2016 report, Moody’s predicted that this ratio could hit 14% by the end of 2017, as further currency depreciation inflates the nominal value of dollar loans, making them harder to pay back. This deterioration in asset quality could pose a systematic risk to financial stability. A bailout may be necessary soon, but the AMCON method is unlikely to be reused considering it constitutes a huge strain on public finances.
AMCON’s funding derives from four principal sources: zero-coupon bonds guaranteed by the Federal Government (FG) valued at ₦3.4 trillion in 2014; a ₦10 billion equity fund provided by the FG; a ₦500 billion debenture provided by the CBN; a 0.5% levy on all commercial banks’ asset value. The existing funding structure is hugely costly, especially in a time of dwindling FG revenue. One mooted solution is a successor to AMCON – AMCON 2 which will be privately funded.
The AMCON attraction
Such a proposal has many challenges, the primary one being generating investor interest in the new institution. Prevailing economic conditions are unappealing, and the exchange rate peg discourages foreign investor participation in Nigerian markets. Furthermore, AMCON has struggled in terms of asset recovery. According to Fitch, roughly 56 percent of the total value of acquired loans has been recovered, with just four years left on AMCON's tenure. Meanwhile, the SPV has struggled to offload assets seized as collateral, such as its stake in assets of many domestic airlines. Thus, it would be especially challenging for the CBN and NDIC to convince any rational investor to invest in an underperforming venture that targets bad debt, especially in a period of heightened economic difficulty.
SPVs like AMCON, are expected to be terminated once their primary function is completed. Unlike other corporations, they do not exist in perpetuity. Pengurusan Danaharta ceased operations in mid-2005, two years short of its intended lifespan, after recovering over 90% of the value of acquired NPLs. Therefore, the plan to establish a follow-up body after six years of AMCON’s operation not only highlights the failure of the corporation and other regulators of the banking industry but also raises the question of the expected length of operation of the proposed successor body.
The greatest challenge lies in the nature of AMCON itself. Based on its enabling laws and model, AMCON was never designed to be a proper bank or profit-making entity. In fact, its operational model almost guarantees that it will make losses on its acquisitions as it buys bad debts at "fair prices". Critically, these liabilities must be priced high enough for the selling banks to receive a liquidity boost from divestment. Naturally, some NPLs are never recovered.
By inviting private investors who would expect a return on investment, it begs the question of whether AMCON 2 would be designed to be a profit making SPV, rather than one designed for the sole purpose of stabilising the banking sector. If the proposed AMCON 2 would also be non-profit like AMCON, the question then becomes how to attract private investors to such an entity. These are fundamental questions which the CBN and NDIC are yet to address.
A long road to AMCON 2
For a privately-funded AMCON 2 to work, it is imperative that the CBN and NDIC put into motion several measures to address these challenges. Investors will need to be convinced that the new vehicle will not be business as usual. The first move should be facilitating stable macroeconomic conditions. Lifting the restrictions which have led to the acute dollar shortage would be a step in the right direction.
Furthermore, the existing legal framework for corporate restructuring would need to be strengthened so as to protect creditor rights and attract investors to the new vehicle. This will allow the new company fully exercise its rights over defaulting banks and borrowers, thus safeguarding investor interest.
Crucially, the long-standing moral hazard problem must be addressed. Banks continue to grant dubious credit facilities, some of them insider-related, safe in the knowledge that regulators would rather provide a bailout than allow them to fail. This too-big-to-fail mentality no doubt contributed to the rising NPL levels in the sector.
The jury is still out on AMCON and the move to set up a successor may have some merit. But investor appetite is likely to be tepid and regulators need to navigate the tricky issues discussed here or risk further strain on public finances with another bank bailout.