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.
This material content is developed to serve as a GUIDE for students to conduct academic research
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