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Setting Nigeria’s banking system right - for now and for the future

Interview - December 19, 2012
Following the global financial crisis of 2008, Nigeria’s banking system was on the verge of collapse, straining under the weight of bad loans. In some of the country´s banks, the ratio of Non-Performing Loans (NPL) to the total outstanding credits was as high as 60%

In order to save the banking system, the government created the Asset Management Corporation of Nigeria, whose brief was to acquire the NPL’s from the banks and provide them with injections of liquidity.  The effect has been to restore the banks’ capital adequacy ratios and, more importantly, to restore public faith in the country´s banking system, with the consequent effects on the economy as a whole. 

In an interview with World Report, Mustafa Chike-Obi, Managing Director and CEO of AMCON, talks about how it went about saving many of Nigeria’s banks from potential failure and allowed them to get back to the business of providing credit. He also discusses the “moral hazards” involved in rescuing banks that act irresponsibly.

A lot of key markets in the world have slowed down, and growth is hard to come by these days. However last year Nigeria’s economy had robust growth, above 7%, and it continues to expand. How do you think Nigeria can sustain this growth, given that it does have a huge dependence on oil and gas revenues?

Nigeria can sustain its growth, but several things need to be done, the most important of which is to have more stable power. It is very difficult for small and medium-size enterprises (SMEs), especially in manufacturing, to spend 40%-50% of their budget on power and security. Once we deal with the issue of power, you will see double-digit growth in Nigeria for the next 10 years. We do also need a tremendous amount of capital, and to attract that capital, we need to show the ability to deploy it in a productive manner. That will require skills acquisition, improved governance and management, and we should all aim for a low inflation rate so that interest rates come down to a sustainable level.

Do you agree with the current moves that are being made to control inflation in the market and restrict cash flow by the Central Bank of Nigeria? How is that affecting the real economy?

I am reluctant to talk about policy moves like that because I do not have all the information, but the Central Bank’s primary objective is price and exchange rate stability. To achieve that, as a heavy consumer nation like Nigeria, you have two possible courses of action. One is to watch the money supply by being tough on interest rates, or letting the exchange rate grow, which will have an immediate inflationary impact in Nigeria since we import so much, eventually reducing inflation and consumption for foreign goods. From where I am sitting, it is difficult to choose which is better, so I will leave it to the experts.

Since its inception, AMCON has acquired approximately 13,000 non-performing loans (NPLs). With a model that was built on previous models used in Malaysia, etc. Do you think AMCON was necessary to save the banking system? Sitting here now, do you believe it has been a successful programme?

It was necessary. The degree of potential bank failure compared to total banking assets in Nigeria was probably greater than most countries in the world. There was a good chance that up to 40% of banking assets could be compromised, so there was really no alternative but to rescue the financial system. The capitalist system that we run today demands a very safe and solid financial sector. As we are seeing in Europe, we did not have a choice but to rescue our banking system. The AMCON model, given all the other options and possibilities, seems to be the best. Nigerian banks are no longer in trouble. No depositor lost any funds. There was some effect on unemployment, but it was minimal compared to the total banking funds.

We are now in a situation where the banks are making profits, where they were on the margin two or three years ago. You have all the measures of safety for banks, which is very, very strong in Nigeria. There is good liquidity and profits, so I think that now the foundation for banking is extremely strong so it is time to start lending again. But this is a double edged sword. If people lend in a reckless fashion, you will have a problem. Now we want people to lend in a responsible way. I think that for what AMCON was created to do, it has done the first two or three steps very well. But we still have other steps to take. We need to recover those loans, minimise the costs of resolution over the 10-year period we are looking at, and be able to support industries and companies that need it. We will continue doing that, but so far, so good.

A lot of the clamour against an AMCON-style recovery is this idea that it creates a moral hazard and banks will never take care when lending or utilising funds. But you, along with CBN, have actually taken measures to ensure that this does not occur. How are you making sure that banks are waking up to their responsibilities?

The issue of moral hazard is always overstated. Before a bank sells any Non Performing Loan to anybody, the bank itself suffers a tremendous amount of pain. It has to take on some loss, and make attempts to recover the loan. The notion that the bank is going to make a loan, knowing that it is going to go bad, is fiction. Selling a bad loan to AMCON is not a pleasant experience that any bank would choose to make. It is unprofitable, time-consuming, and costly. The moral hazard comes from the debtors who borrow money, and whether they get an easy pass from AMCON. We aware of that, and we are certainly not giving anybody an easy pass. We will investigate, check, and make sure they pay what they owe. That is where the moral hazard can come in. But for that to happen, the banks have to be complicit. The banks have to make bad loans and then the debtor can default. But if the banks are doing their jobs well and making sure that they are making appropriate loans, then the moral hazard from debtors is minimised. Moral hazard is not as big a problem as people think it is.

One of the key challenges – not only for your own reputation, but for the institution – is the idea of transparency. Because there is so much interest in AMCON, how do you manage transparency?

AMCON is a very regulated company. There was a recent report by the capital markets that AMCON is unregulated, which is laughable. The AMCON Act specifies that AMCON be regulated and supervised by the CBN. We have gone through two CBN examinations so far, and they are very, very intrusive.
The act specified that AMCON should report every quarter to the Senate, House of Representatives, and Minister of Finance of Nigeria. The act also specifies that the Minister of Finance and Governor of the Central Bank can summon AMCON to report to them at any time on any issue they choose. Fourth, our Board of Directors is mandated by law to meet at least four times a year. The AMCON board members now include the Deputy Governor of the CBN, the Permanent Secretary of the Minister of Finance, the Director of the Securities & Exchange Commission (SEC), and the Managing Director of Nigeria Deposit Insurance Corporation (NDIC). These are people who watch what AMCON is doing at least nine times a year. Add Board Committee meetings to that, and we are constantly being watched and supervised.

Having said that, everything we do at AMCON is subject to processes. We are a process-driven institution. We have a process for everything; recruitment, buying NPLs, restructuring loans, and asset disposal. We have just finished appointing a financial advisor and the process was to advertise for the 44 possible advisors who responded to a committee who selected 11 out of that 44, subsequently we sent them a request for proposal (RFP). They submitted the RFPs, and all those evaluations were produced independently. I am extremely proud of the fact there has been no real scandal associated with AMCON in its existence of two years, in a country where scandals are rife, and where we have a large footprint and are continually in the spotlight. We hope our structure, processes, and governance systems keep up this performance level.

I have a genuine interest in the way you value your bad loan purchases. 1.8 trillion Naira was spent on eligible bank assets at mark down, and now you’re looking at a 31% potential knockdown on top. Can you tell us about your valuation process, how you go about it, and do you see this as a success story for the company, considering how much you have recovered at the moment?

The valuation has to be clear, and by law, must be published. For instance, we had a formula for buying the marginal loans, which we based on two things. Since these were mostly banks, we tried to approximate the value of the banks. The other way we looked at it was if you were buying a whole bunch of shares in a depressed market, you would move it on up, so we estimated a premium of between 40 and 60. So it was 60-day average price plus 60% premium. But the bulk of loans were backed by real collateral. So we used the average open market value, and the forced sale value of that real collateral, and the average of those two to value the loans. So if a loan had this building as collateral, and this building is worth 10 billion Naira open market value versus 8 billion Naira forced sale value, we would pay 9 billion Naira for it. Then of the loans about 10% are unsecured, 70% would be backed by collateral, and 20% would be marginal. So the formula is published. Now what we expect to recover is approximately 70%-80% of the true economic value of the loan. So far, we are recovering 120% of that price. But we know that it is easy in the beginning, when you can recover loans quickly. But as the process goes on, it becomes harder and harder.  

Would that be recouped to the equity holders? What happens on that end?

AMCON is not losing a lot of money because part of our mandate is to recapitalise banks. Since these banks have negative equity of about 2 trillion Naira, you expect that would be a lot to lose.
But what is unique about the AMCON model is that all the banks agreed to contribute monetarily to offset that 2 trillion for as long as it takes. In our modelling, it will take between 8 and 13 years. So the banks will contribute a percentage of their total assets for as long as it takes to recoup that.

So at the end of the day, AMCON will have fixed the bank´s capital problem and recouped all of this invested value.

Yes, and it will not cost the government a penny. It will take between 8 and 13 years until it is done, but the banks will keep paying.

The sinking fund contributions are something that investors are very interested in, as it makes AMCON bonds very attractive if these sinking funds are being reinvested.

As a matter of fact, these sinking funds today total about 754 billion. So we have the money and we are going to start investing it. The issue is that the trustees for the sinking fund are not appointed yet. But we hope that will happen within the next three months.

When the AMCON model was established, it did not look to help primary mortgage institutions (PMIs). Is there a reason behind that?

The AMCON Act says that AMCON cannot decide who to buy a loan from in the first place. Only the CBN can designate the eligible financial institutions, so there is not much we can do. They can very clearly say that we cannot buy loans from the downstream, and that is the end of it. PMIs cannot be designated eligible unless CBN state that their loans are. The Governor’s agreement is that they are not contributing to the sinking fund, and therefore, they should not benefit from AMCON.

You have been very active working in the international arena talking about AMCON bonds, generating interest and educating a lot of investors on what exactly AMCON is about. What sort of response did you get in the UK? Were you happy with it?

We went there to educate. We are not in a position to market any securities. So we had an event expecting about 40 people, but 85 of the top investors in Sub-Saharan Africa turned up. We were impressed, and the question is whether the interest in the AMCON story will translate into real investment in the fourth quarter of the year. We are going to start advertising quite strongly in the fourth quarter.

What are the advantages? Why should investors be interested in AMCON bonds?

Investors should be interested in AMCON bonds, which are the same as Federal Government bonds. The difference is that we are hoping, and putting things in place, to make AMCON bonds available and extremely liquid. If you are an investor in Nigeria, then AMCON bonds are where you’ll want to put your money.

You have also talked about the three bridging banks, you obviously have appointed your financial advisor, but I haven’t heard who it is.

It is Citibank and Renaissance Capital.

Obviously it is a complicated process, but when do you hope they will be resold?

We still have to value the banks, and then the advisors can come up with the best way to dispose of them. Given that, we are looking at a process of the next 3-6 months. So we are waiting to see what our advisors say, before we go ahead with that. They are the experts after all.

You are also an expert in your field, having achieved great success in the US, and returned to Nigeria to take on this challenge. How do you feel Nigeria is perceived on the international stage? 

Nigeria has had some bad publicity for a time, and we all have a lot of work to do on a daily basis to correct that bad publicity. We can often get frustrated because there is no regulation and you have to battle the notion that all Nigerians are corrupt. I remember when I was first looking for a job, and this consulting firm wanted to hire me very, very desperately. I remember asking the gentleman, “why would you want to hire a Nigerian with an accent as a consultant? Maybe some of your bigger clients will not want to listen to me.” He told me, “Yes, when you first walk into the room that is what they will think. But when they listen to what you have to say, not only will they overcome that bias, but they will become very enthusiastic.” I think we should keep doing the right thing, working hard, and the people who have the bias will eventually become converts.

Is this what motivates you at the moment?

Many things motivate me. Some of it is guilt. I was in the US for many years, and I want to work strongly to develop my country. I feel I could have contributed more, but I didn’t. I want to be someone who makes a difference every day.