ASSET MANAGEMENT CORPORATION OF NIGERIA: THE CRITIQUE
ABSTRACT
One of the most conclusive lesson of
economic theories over the past three centuries is that free markets,
when allowed to operate within the norms of fairness to all market
participants, lead to enhanced growth in the national economy. When
government fails in its role as a regulator, it creates the market noise
that may lead to market failures. Attempts to deal with these failures
in themselves sometimes deepen the problem. Sustained market failure
results in economic depressions, which are significant dislocations and
depletion in the national well being through losses in individual
wealth. In the aftermath of the global financial crisis that erupted in
2007 and 2008, several governments across the world adopted emergency
economic and financial measures to confront the massive financial
implosions that faced their national economies. Some of these measures
were put in place without thorough academic, legal, or policy analysis.
These fire brigade approaches to national emergencies seemed necessary
to avert national financial calamities, especially where some of the
leading economies of the world were prodding others to respond. In
Nigeria, rash monetary authority examination of the financial crisis
created uncoordinated responses that jig-sawed from indictment of nearly
half of the leading financial institutions in the country, forced bail
out of some of the institutions through infusion of public funds,
removal of financial institutions management teams, to the birth of
AMCON. However there have been criticisms leveled against the
establishment of AMCON, It is against this background that this work
examined and critiques the Asset Management Corporation Act of Nigeria
2010. Consistent with the above the study sought to; examine the Act
establishing the Asset Management Corporation of Nigeria in the light of
other existing Acts in Nigeria; examine the rationale behind the
contribution of public fund as a start-up capital for the Asset
Management Corporation Nigeria; examine what constitute eligible bank
asset in line with Asset Management Corporation of Nigeria
classification of bank asset; and examine what constitute debt in line
with Asset Management Corporation of Nigeria definition of
Non-performing loans. The research design adopted was the comparative
research design and the ex post facto research design to enable the
researcher makes use of secondary data. The findings from the research
revealed that the duty of AMCON as regard being a systemic regulatory
agency is in conflict with CBN, NDIC, EFCC and other existing laws put
in place to strengthen the financial sector of Nigeria; Asset Management
corporations in other jurisdictions have government funds as start-up
capital, thus the use of government fund in the establishment of AMCON
is not out of place; the Act did not give the banks, their shareholders
or directors a hearing as to the classification of eligible bank assets;
the Act definition of debt is vague, as regards classifications of debt
as performing, doubtful and non-performing which banks are required to
make provisions for. The study thus recommends that government should
encourage the development of a free market in Nigeria where market
forces are allowed to determine price and output. It is only in such an
atmosphere the long-run growth and development of the Nigerian economy
could be achieved and sustained.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
The banking system often dominates the
domestic financial system in most emerging markets (Fung, George, Hohl
and Ma, 2004) with enterprises and individuals relying heavily on banks
to provide financing and a vehicle through which to invest funds in the
form of deposits. As a result, the problems experienced in recent years
by many countries’ banking systems have had a more far-reaching effect
than they would have had the financial sector not been so concentrated
in banks. In some cases, most easily identified by a high level of
non-performing loans (NPLs), these banking problems have contributed to
major economic crises such as the Asian crisis that began in 1997,
threatening the stability of the entire financial system and the
economy. Therefore, the restructuring of the banking system and its
return to a sound financial condition has become a key step in the
overall revitalization programme for the economy and is instrumental in
the return of broader economic stability and growth (see, Fung, George,
Hohl and Ma, 2004) The dramatic impact of the recent financial crises
which erupted through the U.S.
Subprime housing market precipitated a
decline in the price of financial assets that were associated with
housing, in particular mortgage assets based on subprime loans that lost
value as the housing boom ended and the market underwent a dramatic
correction. Some institutions found themselves so exposed that they were
threatened with failure and some failed because they were unable to
raise the necessary capital as the value of their portfolios declined
triggered a global financial crises which affect most countries in the
world. By late summer of 2008, the potential ramifications of the
financial crisis ranged from the continued failure of financial
institutions to increased losses of individual savings and corporate
investments and further tightening of credit that would exacerbate the
emerging global economic slowdown that was beginning to take shape (see,
USGAO report, 2008). While broad financial restructuring is needed for
the long-term health of the banking system, there is also a need to
promptly deal with the banks which are often near failing or in fact
insolvent and their asset quality problems so that they can resume their
role as financial intermediaries. A resolution strategy that is often
recommended and used by governments is to establish a public asset
management company (AMC) that acquires, manages and disposes of impaired
bank assets (Fung, George, Hohl and Ma, 2004)
Asset management basically refers to
managing money for individuals through stocks, bonds and cash
equivalents etc. The asset management system sprang from maintenance
management systems and its aim is to optimize asset use and manage all
maintenance efforts involved in making the assets as confidential,
accurate and efficient as possible. The principles of asset management
apply equally to all physical assets such as infrastructure, property,
heritage, plant and equipment. The term “asset management company” (AMC)
in regard to toxic assets refers to any organisational unit created to
manage and recover financial assets acquired from troubled or failed
financial institutions. Such entities include asset workout departments
or units of banks, bank-owned subsidiaries or affiliated companies,
private companies, and government owned asset management agencies
(Agbakoba and Associates, 2010). The Asset Management Corporation of
Nigeria (AMCOM) came into being on July 19, 2010 as a body
conceptualized as a resolution mechanism to stimulate the recovery of
the financial system by acquiring non-performing loans from banks and
assisting them in improving their capital and liquidity (Muhammed,
2010). The Act establishing the Asset Management Corporation according
to section 5 has its object clause as to assists legible financial
institutions to efficiently dispose of eligible bank Assets in
accordance with the provisions of the Act, efficiently manage and depose
of eligible Bank Assets acquired by the corporation in accordance with
the provisions of the Act and obtain the best achievable financial
returns on eligible bank assets or other assets acquired by it in
pronounce of the provisions of the Act (see, Section 5, Subsection a, b
and c of the Act).
However there has been lots of criticism
of the Act especially the use of public funds in acquiring the toxic
assets of banks. Experts have questioned the failure of AMCON Act for
not making provision for total independence, at the beginning, from
government money. Analysts have also raised alarm that as time goes on,
AMCON may engage in favoritism in their purchase of toxic assets. They
postulate that the issue of favoritism will become severe if AMCON is
unable to raise enough money to fund the purchase of the entire assets
during its life time as a result of poor macroeconomic environment.
Future economic downturn may increase insurgence of bad loans in the
economy and reduce AMCON funds; therefore this may lead to a
rationalization of AMCON funds. This may put the Corporation in a
position to choose favorite among bad loans submitted by various banks
(see, Pan African Capital Limited report, 2011).
Other critique against the act are that
it is inconsistent with the requirements of the constitution of the
Federal Republic of Nigeria 1999 and the Fundamental Right provisions of
the 1999 constitution especially the right to fair hearing and the Act
according to critiques is repugnant to common sense and thus inhibiting
the spirit of free commercial enterprise on what is acceptable
classification of eligible bank assets by the corporation without an
opportunity by banks to be heard on the qualification of assets as
eligible bank assets (see Oyesina, 2010).
This research thus intends to critique
the act establishing AMCON Given the arguments for and against the Act,
based on the questions raised against the Act such as the classification
of eligible bank assets and what actually is the true definition of
debt.
1.2 Statement of Problem
According to Nwagbaraji (2010), the most
conclusive lesson of economic theories over the past three centuries is
that free markets, when allowed to operate within the norms of fairness
to all market participants, lead to enhanced growth in the national
economy. Economic growth is the time tested and universally accepted
understanding that individual and collective economic well being is
necessary to measure the welfare of a nation. In other words, our
economic strength is the sum totality of how our citizens have fared
economically. It is this economic strength that unequivocally positions a
country as a first, second, or third tiered power within the community
of nation states.
However, effective regulatory regimes
make private market participants to become socially responsible, i.e.
private businesses, participating in responsive free and competitive
markets, using their resources to engage in profit seeking without
deception and fraud. Efficient market economies are inherently stable
economies.
When government fails in its role as a
regulator, it creates the market noise that may lead to market failures.
Attempts to deal with these failures in themselves sometimes deepen the
problem. Sustained market failure results in economic depressions,
which are significant dislocations and depletion in the national well
being through losses in individual wealth.
In the aftermath of the global financial
crisis that erupted in 2007 and 2008, several governments across the
world adopted emergency economic and financial measures to confront the
massive financial implosions that faced their national economies.
Some of these measures were put in place
without thorough academic, legal, or policy analysis. These fire brigade
approaches to national emergencies seemed necessary to avert national
financial calamities, especially where some of the leading economies of
the world were prodding others to respond (see, Nwagbaraji, 2010).
In Nigeria, rash monetary authority
examination of the financial crisis created uncoordinated responses that
jig-sawed from indictment of nearly half of the leading financial
institutions in the country, forced bail out of some of the institutions
through infusion of public funds, removal of financial institutions
management teams, to the birth of AMCON (Oyesina, 2010).
However, as good as the intention of the
legislature could be on the said Act, it has been receiving several
critiques from different quarters of the country on the ground that the
Act is inconsistent and that it is targeted to achieve selfish end. In
view of the inconsistencies, the Act have been
criticized based on whether the entire provision of the Asset Management
Corporation of Nigeria Act 2010 is inconsistent with the requirement of
the Constitution of the Federal Republic of Nigeria, 1999 and the
Fundamental Rights provision of the 1999 Constitution especially the
right to fair hearing; whether the provisions requirements of the Act is
repugnant to common sense, inhibits the spirit of free and commercial
enterprise; whether the Act is such that will inhibit entrepreneurship,
business and commercial practice and whether its enactment is ultra
vires the powers of the National Assembly as being inconsistent with the
requirement of fair hearing as enshrined in the 1999 Constitution;
whether the Act in so far as it does not give banks or their
shareholders or directors the opportunity to be heard in the
deliberations of the Asset Management Corporation of Nigeria concerning
the banks.
On the part of shareholders of the
financial institutions they want criticized the Act as it does not give
the banks, their shareholders or directors a hearing as to the
classification of “eligible bank assets” and opined that the Act is in
so far as the sole determination of “eligible bank assets” of banks is
the Asset Management Corporation of Nigeria without opportunity to the
banks to be heard on the qualification of its asset as “eligible banks
assets” is not constitutional; also according the shareholders the Act
in so far as Asset Management Corporation of Nigeria will acquire the assets of a bank
without any input or hearing from the bank as to whether the asset of
the bank should be classified as “eligible bank asset” or whether the
asset is such that should be acquired by the Asset Management
Corporation of Nigeria is not unconstitutional thus, the Act in so far
as the banks do not have a say in the classification and acquisition of
the assets of the banks by the Asset Management Corporation of Nigeria
and the Act in so far does not require a representation from a bank as
to whether the asset of the bank should be classified as “eligible bank
asset” or the Asset Management Corporation of Nigeria should acquire the
asset of the bank as “eligible bank asset” is not unconstitutional and
lastly, the Act in so far as it defines “debt” to
mean performing loan and performing loan can be classified as “eligible
bank asset” is not illegal against the tenets of banking and commercial
practice, crude, primitive, absurd and repugnant to common sense.
It is against this background that this work will examine and critique the Asset Management Corporation Act of Nigeria 2010.
1.3 Objectives of the Study
Consistent with the above questions
raised above on the Asset Management Corporation Act of Nigeria 2010,
the following are the objectives of this study.
- To examine the Act establishing the Asset Management Corporation of Nigeria in the light of with other existing Acts in Nigeria.
- To examine the rationale behind the contribution of public fund as a start-up capital for the Asset Management Corporation Nigeria.
- To examine what constitute eligible bank asset in line with Asset Management Corporation of Nigeria classification of bank asset.
- To examine what constitute debt in line with Asset Management Corporation of Nigeria definition of Non-performing loans
1.4 Research Questions
As a result of the objectives above, the research questions for this research are;
- Does the Act establishing the Asset Management Corporation of Nigeria conflict with other existing Acts in Nigeria?
- What is rationale behind the contribution of public fund as a start-up capital for the Asset Management Corporation Nigeria?
- What constitute eligible bank asset in line with Asset Management Corporation of Nigeria classification of bank asset?
- What constitute debt in line with Asset Management Corporation of definition of non-performing loans?
1.5 Scope of the Research
As stated earlier, the Asset Management
Corporation of Nigeria (AMCOM) can into being on July 19, 2010
conceptualized as a resolution mechanism to stimulate the recovery of
the financial system by acquiring non-performing loans from banks and
assisting them in improving their capital and liquidity. Thus, the scope
of this research will cover the period that the Act was signed into law
in Nigeria till 2011.
However, emphasis will be made on
comparing the Act with existing Acts in Nigeria and also the activities
of AMCOM with similar Asset Management Corporation in the world.
1.6 Significance of the Study
It is hoped that this research will be significant to the following;
Financial Regulators
A systemic risk regulation agency is an
agency that monitors the entire market and alerts the public and policy
makers on market activities, either from the private or public sectors
that are inefficient or capable of leading to market failures. The reach
of a market-wide systemic risk agency or regulator is not industry
specific. It has broad oversight powers over the market and to be
effective, it must have the power to intervene authoritatively.
Therefore, this research will assist regulators such CBN in enforcing
regulation in the Nigerian financial system.
Investors/ Potential Investors
Investor and Potential investors are
owners of these financial institutions thus the research assist Investor
and Potential investors to understand what constitute eligible bank
assets and who determine what eligible bank assets.
1.7 Definition of Terms
The following terms will be defined in this research;
- Corporation: Means the Asset Management Corporation of Nigeria (AMCOM Act, 2010)
- Debt: Any credit facility, loan, risk asset, whether performing or non-performing including interest thereon (AMCOM Act, 2010)
- Eligible Bank Assets: Assets of eligible financial institutions specified by the governor as being eligible for acquisition by the corporation (AMCON Act, 2010)
- Eligible Financial Institution: A bank duly licensed by the Central Bank of Nigeria to carry on the business of banking in Nigeria under the Banks and Other Financial Institution Act.
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