Tuesday, July 27, 2010

End Time For Banking Sector Crisis in Nigeria

End time for banking sector crisis

By Ayo Olesin,
Published: Tuesday, July 20, 2010
Nigeria Punch

At last, the much-awaited Asset Management Corporation of Nigeria bill has been signed into law setting the stage for the restoration of confidence in the nation’s financial system with trickle down effects on borrowers, the stock market and of course, banks’ balance sheets.

Key economic players have said that the AMCON should have come much sooner, given the huge impact of the “unintended consequences” of the Lamido Sanusi’s Tsunami that saw the exit of several bank chief executives last year and the virtual takeover of distressed banks by the Central Bank of Nigeria.

While the general consensus still is that the banking sector shake up was necessary to avert a wholesale collapse of the banking system, the unsavoury fallouts including the banking sector job losses and a credit freeze with severe impact on businesses could have been largely mitigated.

Nonetheless, the purchase of banks’ toxic assets following huge loan loss provisions – AMCON’s primary purpose - will amount to a breath of fresh air badly needed in our banking halls and expansion of money supply, but the huge cash infusion may not be immediate since the toxic asset will be exchanged for government bonds redeemable at the CBN repo window.

In any case, the banks do not appear to be short of cash, with deposit rates at an all time low. With the toxic assets cleared and risk of defaulting on statutory liquidity and capital adequacy ratios reduced, banks will able to increase lending and very importantly the capital market is likely to see a bull run going forward and investor confidence rises.

Both President Goodluck Jonathan and Sanusi expressed optimism that AMCOM will constitute the end phase of the resolution of the banking sector crises and usher in a new dawn in the banking sector.

However, the asset management company could face legal challenges arising from dispute over valuation of assets. This possibility Sanusi has acknowledged, and the way to go round this might be to buy the assets at premium relative to current prices, but ultimately, success of AMCON would lie in its management.

One hopes that the lessons learnt in the past 11 months will not be lost both on the regulators, which must address their deficiencies and the financial sector players, who must rise above mere profit motive in shaping their behaviour.

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