Analysts raise moral questions over purchase of toxic assets by Asset Management Company




Fresh worries, bordering on the moral justification for expending tax payers’ funds on the controversial toxic assets of banks through the proposed Asset Management Company (AMC) may stall the take-off of the facility with questions being asked on the sourcing of funds.


Their concerns border on the fact that most of the bad loans are insider related ones, which they attributed to bad judgments of the operators, with the desire to make quick profits. Indeed, the lack of exact figure of the toxic assets variously put at about N2 trillion by some analysts, while the Central Bank of Nigeria (CBN) put it at N1 trillion has not helped matters. Consequently some analysts have expressed the need for restructuring the toxic assets, with the aim of purchasing the genuine ones.


Their argument is that bad judgments of industry operators, who were desperate to make quick profits through the controversial margin loans, should not be rewarded with public funds, whichever means CBN and finance ministry decide to fund the company. They argue that funding such projects with tax payers’ money raises some moral questions.


Olusegun Aganga finance minister, reportedly fired the first salvo, when he said last week in an interview that although he met the AMC on board, he has made observations on some areas he was not comfortable with. “For example, my concern was that if you are going to put money into it, wherever that money comes from, it is taxpayers’ money. I am the one that should account for taxpayers’ money. So, I have to make sure taxpayers get value for it and I am not taking that responsibility lightly. So, wherever I source the money, I have to look at it properly and ensure the interest of the Nigerian people, not just the banking sector.”


Bode Adediji, national president, National Institution of Surveyors and Valuers, said on Monday that the proposed AMC will not produce the desired results without the professional input of estate surveyors and valuers, adding, “to know how indebted these banks really are, we must know the underlining assets. The AMC will not succeed without engaging the services of estate surveyors.”


Giving an insight into the controversy, Johnson Chukwu,, managing director and chief executive officer of Cowry Asset Management Limited, evaluated it from two perspectives, but concluded that attempts at taking over margin loans created through insider dealings without funds disbursements, but book entries, would amount to wasting of public funds.


His words: “There are basically two strands of margin loans that have turned toxic as a result of the crash in stock prices. The first strand are those loans that were granted to genuine investors to invest in shares on the floor of the Nigeria stock market for which the investors made equity contributions as a condition to access the loans. The second strand involved instances where the bank created margin loans for insiders and used the proceeds of such loans to fund their capital raising with the hope that the shares when listed would appreciate and they would sell off a small portion of the shares and liquidate the loan while keeping the balance as their additional equity stake in the bank.


“Also unfortunately the prices of these banks’ stock crashed and the value of the shares is no longer sufficient to liquidate the loans. My suggested treatment for this strand of margin loans is that CBN should cancel the fictitious capital which was raised with such margin loans and the supporting loans so that the true capital base of such banks will be ascertained. Any attempt to take over these strands of loans will actually amount to wasting public funds. In these instances, the banks did not actually lose money as there were no fund disbursements to third parties. What took place were basically book entries.”


Razia Khan, regional head of research, African head of macro economics, Standard Chartered Bank, was of the opinion that justification for expending public funds depends on the purpose of the AMC, but added however that it should be adequately regulated.


“If it is to recapitalise or partially recapitalise banks, then it would have to buy the assets at a greater-than-market value. Is there a moral hazard involved in doing this? Absolutely. But that is precisely the reason why regulation then needs to be tightened.”




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