Reported comments from the MD of AMCON (Asset Management Company of Nigeria), Mr. Ahmed Kuru, over recent days suggest that the Federal Government backed institution is beyond repair.
AMCON was established in the dark days of the financial crisis as a “bad bank”, where all banks could unload their bad debts (non-performing loans or NPLs in bank speak) so that the weight of the debts that were not being repaid would not drag the banks under and, in a domino effect, drag the whole economy of Nigeria with them.
At the time, the concept of bad banks had worked in several countries and were seen as a bona fide solution to the issues facing Nigeria.
But this is Nigeria. Immediately it was established, AMCON was an easy target for corruption and Nigeria’s elite to either wipe the slate clean or make more money. Funded by, guess who? Yes, you the citizens.
So how does the AMCON money making machine work? It is a value exchange chain where everyone in the chain benefits, except those who fund it, tax payers and bank shareholders/depositors. The value exchange chain works like this;
- Banks overextend lending to an elite person or their relative. This loan is never repaid and everyone makes money from the loan including bank employees.
- The bank then declares the loan to be “non-performing”. Meaning it can be considered for “sale” to AMCON
- Bank declares the loan to AMCON at a higher value than it really is. It includes spurious interest and charges and potentially inflating the initial principal value. This is “value exchange” step 1. AMCON takes on the loan and pays the bank a higher value for the loan than it is really worth. The bank and/or its employees pocket money. (Incidentally, the elite borrower of the original loan may also make money here if they extort the bank by threatening to expose the deal).
- When AMCON takes on the loan they take the banks collateral that was used to secure the original loan as well (if it exists). The collateral assets are generally re-valued at this point. This is a crucial money making and value exchange step. The valuations are generally hugely inflated so that the original elite borrower can be absolved of a large proportion of their obligation. This is value exchange step 2 and allows many notable Nigerians to wipe the slate clean of debt, leaving AMCON still saddled with the payment it has made to the bank to “buy” the loan in the first place and a lot of over valued collateral assets still legally owned by the original borrower.
- In the final value chain step, AMCON can then sell the assets and make personal money as well as paying down some of the debt. Unfortunately, for AMCON personnel pockets as well as the AMCON bank account, this is often successfully blocked in court by the elite because as we all know, contract enforceability is a fluid concept in Nigeria. Another unfortunate problem for AMCON when it comes to selling the assets is that they were so hugely overvalued in the take on process that they can not sell the assets for anything near this take on value. This means that the sale can not be justified with any form of transparency and this fact alone has stymied more asset sales than any other reason (the rest are shrouded in mystery, just look at the recent sale of Keystone etc).
This value exchange launders the debt, makes personal million and billionaires and takes money from citizens and redistributes to the elite. It has also allowed banks with negligent and corrupt lending practices to kick the can of insolvency down the road by offloading “NPLs” to AMCON and pay for this slowly through funding AMCON annually.
So far so terrible.
But it gets worse. AMCON is now a failed institution with no hope of paying back the bondholders or the CBN who have pumped money in. Mr. Ahmed Kuru is putting himself in danger by recently declaring this and threatening to stop the money train rolling.
If AMCON’s technical insolvency is to be prevented from becoming actual insolvency, then either the government will have to bail it out (costing the citizens billions/trillions) or the elites assets will have to be sold in massive numbers in a slow market.
None of the above options are palatable to the Federal Government and its elite supporters. So an attempt will be made to put off the problem, let the dust settle for a few more years and hope that in the meantime the reputation of Nigeria’s financial position, contract enforceability and debt paper does not become so tarnished or laughable as to grind the system to a halt.
Make no mistake, the AMCON position is this grave and the knock-on impact for Nigeria’s economy and banks is equally serious.
This is why Mr. Kuru will be silenced and the institution left in peace for some years.
POSTSCRIPT: With AMCON taking on no further debt, the banks lending is slowly coming home to roost again with bad debt creating the Zombie banks Naira Insider has long been warning of.