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ASSET MANAGEMENT CORPORATION OF NIGERIA: THE CRITIQUE

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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

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 optimise 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.

1.  To  examine  the  Act  establishing  the  Asset  Management  Corporation  of

Nigeria in the light of with other existing Acts in Nigeria.

2.  To examine the rationale behind the contribution of public fund as a start-up capital for the Asset Management Corporation Nigeria.

3.  To examine what constitute eligible bank asset in line with Asset Management

Corporation of Nigeria classification of bank asset.

4.  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;

1.  Does  the  Act  establishing  the  Asset  Management  Corporation  of  Nigeria conflict with other existing Acts in Nigeria?

2.  What is rationale behind the contribution of public fund as a start-up capital for the Asset Management Corporation Nigeria?

3.  What   constitute   eligible   bank   asset   in   line   with   Asset   Management

Corporation of Nigeria classification of bank asset?

4.  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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