AMCON will not cause moral hazard or fiscal risks contrary to IMF’s recommendation, the financial analyst said.
The International Monetary Fund, IMF, wrongly recommended that Nigeria should wind down AMCON operations in order to curb moral hazard and fiscal risks, Bismarck Rewane, a financial analyst and Managing Director of Financial Derivatives Company, a diversified financial institution, has said.
Last month, the IMF, through its Article IV Consultations (No. 13/36 of March 28, 2013), a tool the organisation uses to evaluate the effectiveness and context of a country’s economic policies and management in dealing with macro-economic stability and fostering growth, provided an early warning signal and pre-emptive moves to prevent economies from derailing and suffering from the consequences of exogenous and internal shocks. One of the pre-emptive moves the Fund laid out for Nigeria was to wind down the operation of AMCON to curb moral hazard and fiscal risks.
Mr. Rewane, however, disagreed with the IMF, saying the recommendation was not a step in the right direction.
“We (Financial Derivatives) disagree with the recommendation and thus the conclusion as it relates to Asset Management Corporation of Nigeria (AMCON),” he said.
The question of a moral hazard arises, when the cost of an alternative resolution option is less expensive to the system and the tax payer, Mr. Rewane said, adding that AMCON can only become a problem if the defaulting operators pay a less than punitive price which encourages deviant behaviour in the future.
He said the price at which AMCON is purchasing toxic assets is so punitive that no rationale banker or operator will sell assets to it except as a last resort. Aside from that, the stigma of being an AMCON client in the domestic and international business community is both a fiscal and social burden.
“Empirical evidence shows that the NPL’s of the banking system were as high as 35 per cent in 2009/10 and 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,” he said.
“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 minimized by the Banks agreeing to pay a levy for 10 years” he added.
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.
“The casualties of banking crisis have grown at a more astronomical rate than the growth of the economy and industry. This is in spite of the establishment of the Central Bank of Nigeria (CBN) and the Nigerian De-posit Insurance Corporation (NDIC). Also from an anthropological perspective, it would appear that the lessons of a poor credit culture and process have not been learnt or internalized by the operators. Every time there is a new financial crisis, it is always bigger than the past ones” he said.
The analyst said while the fear of a moral hazard may be real and must not be ignored, “to dismantle or demobilize significantly the institutional framework or the architecture needed to deal pre-emptively, containing or resolving crises is not advisable.”
He advised Nigeria to accept those recommendations of the IMF that are consistent with our national economic objectives and discuss or realign the others that are at variance with our long term goals. Failure to do this may prove to be expensive if recommendations are accepted without any modifications, Mr. Rewane said.
He said banks failures and financial crises are economic hazards and these crises are accompanied by worsening macroeconomic performance.
“A distressed banking sector will be a serious obstacle to economic activity and aggravate the effect of adverse shocks and will mean firms may be unable to obtain credit to deal with a period of low internal cash flow. In fact, lack of credit may force viable firms into bankruptcy. Similarly, lack of consumer credit may worsen declines in consumption and aggregate demand, aggravating unemployment,” Mr. Rewane held.
The IMF recommendation has continued to generate diverse views and reactions. Some share the same view, believing AMCON has begun to derail from its objectives, others say it should be given some time to achieve them.
The Managing Director/CEO of AMCON, Mustafa Chike-Obi, in an interview recently, said the continued existence of the Asset Management Corporation of Nigeria (AMCON) does not constitute a “moral hazard” or fiscal risk to the financial system, because the Central Bank of Nigeria (CBN) ensures that banks lend in a prudential manner. He added that the corporation will need at least seven years to complete its loan recovery activities.
Nigeria’s history of financial distress incidents date back to the 1950’s under the Colonial Government. The final and big one was the 2009 crisis, which coincided with the global asset bubble. The crisis of solvency liquidity and confidence affected approximately 40 per cent of the total banking system. The financial cost of the intervention is now in excess of N5trn aside shattered shareholder values.
AMCON, also known as the nation’s bad bank, was established to revive and stabilise Nigeria’s banking industry through the purchase of non-performing loans (NPLs) of the nation’s banking industry.
So far, reports reveal it has acquired over 10,000 NPLs worth N3.5 trillion (US$20 billion). Before its formation, NPLs ratio in the Nigerian banking industry was in excess of 35 per cent. As of December 31, 2011 the NPL ratio had fallen to 5 per cent, enabling the banks to focus on lending. In addition, AMCON injected fresh capital into eight Nigerian banks, five of which have entered into successful mergers. As a result of the recapitalization of banks, AMCON currently owns Mainstreet Bank, Enterprise Bank and Keystone Bank.