AMCON AS TIME-BOMB
BY: LES LEBA
One of the conclusions reached by the House of Representatives Ad hoc Committee on the Capital Market was the shrill alarm that the Asset Management Corporation, AMCON, was a time bomb waiting to explode. Consequently, this week’s article is a brief overview of AMCON, the ‘toxic’ bank.
AMCON was created by the Central Bank to soak up toxic debts and avert the adverse collateral of loss of depositors’ funds and instability in the banking subsector, to thereby avoid the threat of collapse of the subsector. It was also expected that banks would be positioned to meet the low-cost funding requirements of the real sector, particularly the Small and Medium Enterprises, SMEs.
To the extent, therefore, that, so far, no bank went under and no depositor has lost any kobo, it may be suggested that AMCON has achieved part of its set objectives.
To the extent, however, that the SMEs (which are the major drivers of employment in any economy) still remain comatose, and to the extent also that lending rates remain above 20% (a level that is unsupportive of growth for both commercial and industrial enterprises), we may also say that AMCON has failed. Besides, some analysts would argue that the apparent partial success of bank rescue may be overstated; such analysts may identify increasing level of inflation and rising unemployment as the price Nigerians have had to pay just to save the ‘bacon’ of some people from getting burnt. Therefore, we may, safely conclude that the failure of the real sector far outweighs the gains of saving the banks, especially when these banks turn out as leeches on the economy.
However, it was also worrisome that AMCON appeared to have been stampeded to pay for those toxic debts before it even considered the need for proper valuation of the acquired assets; the way things currently stand, we are aware AMCON has only lately begun ascertaining the real values of the toxic assets acquired almost three years thereafter.
Considering the widespread corruption and level of impunity and insider trading in the banking subsector, Nigerians will not be surprised if it is revealed that AMCON may have grossly overpaid (rather than underpaid) for the redemption of the ‘toxic’ debts.
Indeed, in addition to raising issues with the modus operandi of AMCON, the House Committee also questioned the rationale for the different methods adopted for loans valuation and expressed its disappointment that CEO of AMCON, Mustapha Chike Obi, could not defend the modalities.
Incidentally, the House Committee equally observed that the source of AMCON’s funding was far from transparent! Nigerians do not seem to recognize that net product of AMCON’s redemption efforts would be deepening the scourge of excess liquidity with the distressing reality of so much more money chasing less goods and services in the domestic market.
Some analysts would recognise AMCON’s N3tn or so cash injection as extra-budgetary expenditure; in other words, since AMCON’s cash injection was never accommodated in any federal budget at any time, AMCON’s spending must therefore, be, by definition, an unconstitutional extra-budgetary expenditure, which inevitably increases budget deficits and debt service costs!! Instructively, debt service charges have risen from around N200bn to over N500bn in the 2012 budget.
Indeed, AMCON may have saved some banks from going under, but the cost of doing so is the collateral of double-digit inflation rate, high cost of borrowing (which inevitably crowds out the real sector), increasing debt accumulation, rising debt service charges, a weaker naira, and ultimately a prostrate economy that has become immune to the inappropriate selective bailout packages of government.
Notwithstanding, AMCON has not yet been able to distinctly articulate its strategy for sustaining its operations; for example, the House Committee noted that “as at date, AMCON claims to have issued bonds worth N4.5tn, but only about N1.7tn is guaranteed by the Federal Government. The real challenge of AMCON bonds is the bonds' ability of being converted into liquid cash. A good number of the AMCON series bonds have yet to be registered at the Central Securities Clearing System (CSCS).” The Committee is of the opinion that, “the analysis of the potentiality of the bonds were based on wrong premise which tends to mislead investors because, AMCON bonds which should mature in three years may now mature in seven years, making the maturity to run into a total of ten years” .
Some analysts may have advised that AMCON’s cash injections should have been better recognized as equities in the rescued banks; although this arrangement may not have had considerable impact on restraining inflation, it would have presented a better exit strategy for AMCON’s incursion in the banking subsector. However, the apparent CBN reflex action in creating AMCON may have been avoided if the apex bank conducted its regulatory and supervisory functions with more sense of responsibility and discipline.
SAVE THE NAIRA, SAVE NIGERIANS!!