The global economy is still in turmoil. At the centre of it is debt that goes bad traceable back to US housing bubble burst of 2008 and the Greece insolvency which sparked a Euro debt crisis that still lingers. Already global debt levels are raising alarms, standing at $200 trillion (as of 2014) or nearly three times the size of the entire global economy. The question is: are we on the brink of another debt-fuelled economic meltdown?
The potential for disaster, however, is not on the level of debt per se but rather on whether there is default and how contagious such defaults would prove — indeed whether write-downs (reduction in value of asset) in one part of the world could cause losses in others. That’s what happened in the last two major debt crises referred earlier, which rippled through the global economy experts believed.
The world economy is supported by debt. This means that we are operating a debt-depend economy. In essence, therefore, debt in itself is not always a bad thing. The problem of debt arises when there is default. So the question is how do we avoid defaults, and if they eventually happen, how do we manage the crisis that follows? There is no one-size-fits-all answer to these questions. Every nation studies its economic peculiarities and adopts the best approach that will mitigate the potential for a catastrophe.
Since the 2008 financial meltdown there has been heightened vigilance over corporate governance and risk management as preventive measures. Similarly, there has been no shortage of measures adopted by different countries to address the aftermath of defaults. From quantitative easing (QE) adopted by US to zero interest adopted by Bank of England.
Nigeria, like other African countries (as will be highlighted), has had its own fair share of the impact of the 2008 financial meltdown on its banking sector. And we adopted some innovative measures to prevent systemic collapse of our banking system. Three prominent ones among them were bailout, bridge banking introduced by Nigeria Deposit Insurance Corporation (NDIC) and, perhaps the most significant of all, the establishment of Assets Management Corporation of Nigeria (AMCON) in 2010.
The bailout measures were not arbitrary. They were preceded by special audit by the Deposit Money Banks (DMBs) to ascertain the extent to which they were affected by the financial crisis that engulfed the world in 2008. The special audit report revealed that banks were afflicted by large volumes of non-performing loans (heavily exposed to Oil & Gas, Margin Lending), capital erosion, poor risk management, illiquidity and poor corporate governance practices, amongst others. It further revealed that ten (10) out of the 24 DMBs needed close supervisory monitoring. Eight (8) of them were in precarious financial conditions that required serious supervisory intervention. The supervisory authorities intervened in eight (8) of the banks in precarious financial condition by sacking their managements and appointing new ones. To complete the resolution of the situation of the 8 most affected banks, the CBN injected ₦620 billion into them as loan capital and liquidity support.
On the other hand, the bridge banking measures were adopted when it became clear that the three (3) banks (Afribank Plc, Spring Bank Pc and Bank PHB Plc) out of the 10 were found to be in grave financial condition in 2009 when they could not recapitalize, merge or find acquirers before a deadline. The NDIC adopted the bridge bank option because the three affected banks had attractive franchise and deterioration in their assets that would hamper their sale. It became necessary to protect depositors and to restore confidence in the system. It was important to ensure continuity of banking services; as outright liquidation would have had dire consequences on depositors and other stakeholders.
And AMCON was created to be a key stabilizing and re-vitalizing tool to revive the financial system. It went ahead to efficiently resolve the non-performing loans (NPL) assets of the banks in the Nigerian economy. Its objective include: assist eligible financial institutions to efficiently dispose of eligible bank assets; efficiently manage and dispose of eligible bank assets acquired by it; and obtain the best achievable financial returns on eligible bank assets or other assets acquired by it. So far AMCON has acquired a total of 12,537 NPLs from 22 banks—or what it technically calls Eligible Financial Institutions (EFIs).
One of the historical interventions by AMCON was the acquisition of the three (3) bridge banks (Keystone Bank, Mainstreet Bank and Enterprise Bank) from NDIC and the investment of the sum of ₦1.012 trillion (U$6.98 billion) into them as capital injection. AMCON also injected the sum of ₦1.379 trillion into five (5) of the intervened banks (Intercontinental, Oceanic, Finbank, ETB, Union) with a view to facilitating their merger and/or acquisition.
The positive impact of the intervention by AMCON was that it shored up the affected banks shareholders’ funds that were negative and made investment in the banks attractive to investors. Consequently Access Bank acquired Intercontinental; Ecobank acquired Oceanic; FCMB acquired Finbank; and Sterlling Bank acquired Equitorial Trust Banks..
Through AMCON, Nigeria is making the best out of the situation of banks’ Non Performing Loans (NPL), which are known as bad debts. At the driver’s seat of this all-important piece of innovation is a risk management expert of widely acknowledged repute. Ahmed Lawan Kuru. Ahmed played at the top echelon of Bank PHB as executive Director overseeing critical areas like Risk Management, Compliance, Commercial Banking, Northern Operations, Public Sector, Multilateral Agencies and the West Coast, East and Central Africa expansion programme of the bank. Before assuming his current position of MD/CEO at AMCON, Ahmed was the MD/CEO of Enterprise Bank Limited. He was also Executive Vice Chairman, Emeritus Capital Limited, a financial service firm with speciality in international business development focusing in sub-Saharan Africa. With all these considerable experiences in the banking and asset management companies Ahmed is a round peg in a round hole.
His plan to meet obligations of the AMCON consists of supporting businesses with a view to enhancing their productivity. More than that, it includes transforming their NPLs to RPLs (Re-performing loans). Doing this, Ahmed believes, will provide liquidity to the banks, which will help them meet their own obligations as well. Any failure in this scenario will have a trickle down adverse effect on the economy.
Lest we forget, the current wave of global debt crisis leaves no part of the world unaffected –neither the emerging markets in the BRICS zone nor the Western countries are immune. However, some are better protected than others. China and Russia, despite their strong economies, are beginning to snip the winds of the global debt crisis nonetheless. But they are better equipped to bail out any imprudent borrowers within their economies. China, for example, had $3.5 trillion dollars in foreign exchange as of last October. But others within the BRICS family are not so endowed. The Economist argued recently that Brazil’s corporate bond market had grown 12-fold since 2007. Its current account deficit means that it relies on foreign capital; because its political paralysis and fiscal inflexibility offer nothing to reassure investors.
The impact of the 2008 global financial meltdown belied the earlier predictions that, because of their weak integration with the rest of the global economy, African countries might not be affected by the crisis. But the reality was that, overall, Africa’s economic growth plummeted because of that world economic downturn. The International Monetary Fund (IMF) had predicted that growth in sub-Saharan Africa would come down to 1.5% in 2009, a figure that is far below the rate of population growth. Africa’s then largest economy, South Africa, entered into recession for the first time since 1992, due to a sharp decline in the key manufacturing and mining sectors following the meltdown.
So with another wave of debt-fuelled crisis threatening the world, the question is not when do we wind up AMCON, as being hinted in some quarters but how AMCON should be repositioned to continue to serve the country in a situation of debt-induced crisis that may not necessarily have its epicentre in Nigeria. For, as members of the global community, we cannot dodge from the swirling contagion caused by the debris of a global economic crisis.
BASHIR IBRAHIM HASSAN
