With effect from January 2011, the Central Bank of Nigeria (CBN) is to invest N500 billion in Asset Management Corporation of Nigeria (AMCON) for a decade as the apex bank put the total deposits of the failed banks in the country at N3.6 trillion.
The CBN made the declaration at the 2010, Risk Managers Association of Nigeria Conference in Lagos. The AMCON bill was passed in June this year following its harmonisation by the House of Representatives, its adoption by the Senate and signed into law by the President in July 19.
The affected banks according to CBN also pulled N0.9 trillion interbank impacts liquidity in the banking system. The CBN and Ministry of Finance spearheaded the establishment of the AMCON to purchase non-performing loans from Nigerian deposit money banks and recapitalise the affected banks.
Delivering a lecture titled ‘an overview of Asset Management Corporation of Nigeria,’ Kemi Fatogbe, director of Risk Management Department of CBN explained that with the negative impact of last year banking crisis, the affected banks have N3.6 trillion deposits, between eight to ten customers and 50,000 staff.
“A cap of one trillion naira would be set as bank contributions over the period of the fund. CBN would set aside N50billion annually over a 10-year period as its contribution to the fund. A cap of N500billion would be set for CBN contributions.
“Without AMCON, the only option available to Government is to liquidate the banks through the National Deposit Insurance Corporation," The CBN director said. AMCON will be at liberty to maintain a portfolio of assets beyond listed equity in accordance with parameters set by the CBN such that it maximises its ability to finance AMCON bond obligations.”
“Bank contributions would be set at 30bps of their total assets as at 31st December each year. Contributions would be made into a separately dedicated Sinking Fund account. Monies from the fund will primarily be invested in Federal Government securities. All income will be re-invested back into the fund. Any further shortfalls on the redeeming AMCON bonds over and above the N1.5trillion would be met by the Federal Government .Surpluses would be distributed on a pro-rata basis to the contributing banks,” added Fatogbe.
She said participating banks will indemnify AMCON against losses arising from invalid collateral and the bank will be obliged to repurchase the tainted collateral in such an event adding that AMCON will engage third party service providers, including loan recovery specialists (including originating banks), asset managers and collateral.
Fatogbe said “since the onset of the financial crisis in 2007, governments have attempted to stabilize their financial sectors and stimulate their economies through equity injections, guarantees on debt issuances and debt injections via government bonds.”
“In addition, a number of governments across the world have successfully established Asset Management Companies to acquire risky assets from banks to help strengthen Balance Sheets and stimulate lending and confidence.”
The apex bank warned that failure to resolve the banking crisis will lead to: “complete loss of value to Shareholders continued shut down of credit markets, more job losses negative impact on Nigeria’s credit rating and risk rating, as a result of banks’ negative shareholders’ funds destruction of confidence in the stock market.”