THURSDAY, 22 JULY 2010 01:23 ONYINYE NWACHUKWUU  

 

For the next 10 years, beginning December 31, 2010, banks are to contribute 0.3 percent of their balance sheet worth to a sinking fund yet to be set up, as a way of supporting funding for the Asset Management Company of Nigeria (AMCON), which finally got the President’s assent on Monday.

 

A balance sheet refers to the statement of the asset, liabilities and capital of a business at a particular point in time, detailing the balance of income and expenditure over the preceding period. Banks unanimously took this decision at their meeting on Wednesday, as a way of contributing to the success of the company which they also endorsed as the best resolution strategy to their present crisis. The sinking fund will be invested in a zero coupon and serve as a standby pool to make up any funding shortfall from the model the Central Bank of Nigeria (CBN) has in place for the company.

 

As agreed, CBN will contribute N50 billion each year to the fund, while the Nigerian banking industry has created a model whereby they will make a total contribution to be capped at N1 trillion. The Nigerian Deposit Insurance Corporation (NDIC), from its dividend, will also contribute to the fund, bringing total contributions to a minimum of about N1.5 trillion. Bankers further agreed that the entire process be legislated in order to ensure sustainability for the next 10 years.

 

AMCON is expected to intervene in two ways through acquiring the non-performing loans in banks while receiving their underlying collateral. The second is to fill the remaining capital adequacy challenges. But since its initiation, there have been concerns on the funding strategy with fears that the financing impact could have negative effects on balance sheets.

 

“The purpose is to accumulate money to enable AMCON meet any shortfall in its activities so as to ensure that the economy goes on, and that the government does not put money into the industry”, Reginald Ihejiahi, managing director of Fidelity Bank, who addressed journalists on the outcome of the Bankers Committee meeting in Abuja, said.

 

Flanked by four other bank chiefs and Samuel Oni, director of banking supervision, CBN, Ihejiahi, disclosed that the Nigerian Deposit Insurance Corporation (NDIC) is planning to review the insurance premium it collects from each bank’s deposits annually, from one percent downwards. This, he noted, is the Corporation’s input to ensuring revival of the banking system. “Based on appeal, NDIC is also looking at reducing the premium every bank pays every year which is almost one percent of the value of its deposits as an insurance premium to the Corporation”, he said.

 

Aigboje Aig-Imokhuede, managing director of Access Bank, who also spoke at the briefing , said bankers took the far-reaching decision with the conviction that the industry’s present challenges will only be resolved through the resolution of the status of the troubled banks and the effectiveness of AMCON. Giving details of the decisions reached, he explained that “with the non-performing loans in the nine affected banks totalling about N2.2 trillion, it is believed that, based on the model that the CBN has built up, the recoveries from the loans and equities in those institutions will amount to something above N1.5 trillion. So the gap to be met in the event of a gap is about N800 billion.

 

“However, if you also bring in the fact that other banks, not just the affected ones, also have non-performing loans which are in a much better collateralized situation, a net resolution cost above N1 trillion is achievable. “What has been agreed is that over the next 10 years, contributions will be made to the sinking fund as follows: The CBN will contribute N50 billion a year, Nigeria’s banking industry has created a model whereby over the next 10 years , assuming certain growth rates, we will make contributions to be capped at a N1 trillion. “The NDIC itself, from its dividend, will also contribute to the fund. So, you are talking about a minimum of about N1.5 trillion versus a resolution of N2.2 trillion.

 

“The way it will work is that, as that resolution is established, then you go into the fund which pays the bills. Any surplus means that the banking industry may not foot a bill of N1 trillion, but will be returned to the banks pro rata. It is only after our fund has been exhausted that the Federal Government will be expected to pick a portion of that bill, which is highly unlikely.”

 

Explaining the imperatives of AMCON to Nigeria, Aig-Imokhuede explained that it will take care of a large number of deposits among the nine affected banks, which has been put at about N3.6 trillion for 10 million customers, as well as other inter-bank relationships they have with other banks, amounting to almost N1 trillion.

 

He said the banking industry is totally convinced that the most practical way of dealing with the present crisis is through the coming on stream of AMCON, a strategy which he noted other countries have adopted to resolve their own challenges.

 

Source:BusinessDay