Banks, CBN Plan N1.5trn Fund to Acquire Bad Debts


From James Emejo in Abuja, 07.22.2010 


Banks and the Central Bank of Nigeria (CBN) yesterday, in Abuja, unanimously agreed to contribute N1.5 trillion (about $10 billion) over the next 10 years to fund the newly established Asset Management Corporation of Nigeria (AMCON) set up to buy bad debts in the banking industry.


Under the initiative, which was approved at the Bankers’ Committee meeting,  the banking watchdog will provide N500 billion to the fund in support of AMCON, while banks will contribute the rest.
Also, as part of its contribution to the overall pool of what the banks  have decided to financially task themselves, the Nigeria Deposit Insurance Corporation  (NDIC) said it is currently looking at how to reduce the premium which the banking  industry currently pay to it.


Addressing journalists yesterday shortly after the Bankers’ Committee Meeting in  Abuja, Group Managing Director, Access Bank Plc, Mr. Aigboje Aig-Imoukhuede, said the  industry has chosen to contribute a Sinking Fund, which will take care of any net deficit that AMCON may assume. Banks are expected to commit 0.3 per cent of the value of their individual balance sheets to the AMCON for the next 10 years. This would enable the institution meet any shortfalls in its activities.


The money is expected to be pooled into a Sinking Fund and invested in Zero Coupon Bonds. The accumulation of funds would allow AMCON meet its obligation to the ailing banks, which are expected to resume lending.This initiative, however,  becomes effective from December 31, 2010.The Access Bank boss added that only in an extreme circumstance whereby the models that have been projected for the AMCON fall short of the  projections, will the Nigerian tax-payer have to bear the burden of AMCOM.


He also said that in no way will the burden of such commitment be borne by investors and depositors.“This step reduces the likelihood that a Nigerian bank will fail,” Aig-Imoukhuede said. “What AMCON does is give the financial system a new lease of life.”President Goodluck Jonathan on July 19 signed a bill establishing the company following last year’s debt crisis that threatened the industry with collapse. The bad loans were mainly from investors who borrowed to buy shares at a time of high prices and couldn’t repay the loans after share prices plunged.


The central bank sacked the chief executive officers of eight banks lenders for their handling of the crisis and provided N620 billion to bail out the industry. Total non-performing loans of the eight troubled lenders are estimated at N2.2 trillion, Aig-Imoukhuede said.About N1.5 trillion  may be recovered, leaving a gap to be met by AMCON, he said.Managing Director, Fidelity Bank Plc, Mr. Reginald Ihejiahi, described the  development as ‘massive’.


He said the measure is expected to spur the economy, de-risk the industry, improve the image of the financial sector among  the international community and reduce the cost of borrowing and engagements  with external parties in the Nigerian economy.He added that the agreements will be legislated “so that you can be assured that this  is what really would happen year on year for 10 years and it’s an important good news as well.Meanwhile, as part of its contribution to the overall pool of what the banks  have decided to task themselves financially, the NDIC is currently looking at how to reduce the premium which the banking  industry currently pay to it.


“So based on our appeal, the NDIC itself as part of its contribution to the  overall pool of what the banks are penalising themselves for, is looking at  reviewing the premium that the industry pays – and we are quite happy about that,”  said Ihejiahi.Speaking on the need to see that AMCON does not fail, the Access Bank boss said: “We know that there is a large number of deposits within the nine affected banks  totalling about N3.6 trillion for 10 million customers. We also know that these  banks have inter-bank relationships with other banks accounting to almost N1 trillion. We know that the issue of banking crisis in affected banks has led to a significant destruction of confidence in the Nigerian Stock Market, and we know that the unresolved issue of the affected banks has also affected confidence of the international market.”


The Access Bank boss said based on models that the CBN has  built up that the recoveries from those loans and equities in  those institutions will amount to about N1.5 trillion.He said up to date, total non-performing loan in Nigerian banking system is at  uncomfortable level in excess of 30 per cent, adding that this explains why analysts refer to the Nigerian banking industry as extremely high risk, irrespective of the fact that some of the banks have non performing loans levels that are lower than 10 or 5 per cent.


There was also good news for the agricultural sector. While commending the government for the ongoing reform in the power sector, which has encouraged lending to that sector, Managing Director, Unity Bank Plc,  Mr. Falalu Bello said the banking industry has agreed to offer a sort of bailout  for the agricultural sector but only if government will introduce the necessary  reforms that will guarantee safety of their investments.






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