The president, last week, signed the bill setting up the Asset Management Corporation of Nigeria (AMCON) into law, thereby kick-starting the process of ensuring stability in the financial system. With a budget of N1.35 trillion (US$9.00 billion), AMCON is set up to absorb the banking system’s toxic assets.
According to the law setting up AMCON, the corporation is expected to issue bonds to the affected banks in exchange for their non performing loans. This is to help clean up the balance sheet of these banks and enable them resume lending to economic agents on a large scale. At present, banks only lend to a few large companies which are considered low or zero risk. This leaves the preponderance of fund users, especially manufacturers, and small and medium scale enterprises, disadvantaged, with the result that productivity in the economy is constrained. Declining economic activities have also led to rising unemployment with its negative social impact.
The belief is that the expected resumption in lending, following the creation of AMCON, will inject fresh capital into the real sector and support new investments and lead to job creation. The assent by the President of the AMCON bill is therefore welcome.
It is however pertinent that the Central Bank of Nigeria (CBN) should release guidelines for the operation of the corporation. There is also the need to set up the company and the structures to get on with the work. This will enable stakeholders like banks, corporate asset managers, stockbrokers and investors to position themselves for possible spinoffs from the activities of AMCON. This will also hasten work on the initiative and ensure that the economic burden of the impaired assets in the banks and the resultant debt overhang in the economy are dealt with.
We expect that the stock market will get the needed boost from the resultant liquidity in the economy. This will remove the dumping trend currently experienced in the stock market; each time the market firms up prices, profit takers offload to harness capital appreciation.
The fear of some market participants that the flow of AMCON bond will crowd out Federal Government of Nigeria (FGN) Bonds and cause knock-on problems for other asset classes like equities should be addressed. There are speculations as to whether only cashless swaps (AMCON bonds for non-performing loans (NPLs) will be in place, or a combination of this and conventional bond issues for cash. While the former may not put a strain on the bond market, the latter has the capacity to make AMCON bonds compete with FGN bonds; this should be sorted out in preparing the guidelines. The guidelines are also expected to answer the question of whether the relevant banks can sell their NPLs for tradable AMCON bonds for cash, to enhance liquidity. Another important question waiting for an answer is: Will AMCON purchase the NPLs at a price that will reflect the fully discounted (post-provision) value? Also, the total value of non-performing loans is put at N2.2 trillion while the budget of AMCON is N1.5 trillion. What happens to the outstanding NPLs?
To assuage the shareholders who have instituted law suits against the apex bank, AMCON should ensure that shareholders recover part of their loses, and also assist in reducing the debt burden which is depressing the stock market at the moment. We share the view that allowing them to profit from AMCON activities could help to pacify them.