Nigeria’s banking industry still under threat from non-performing loans – Bisi Akodu
Bisi Akodu, a Partner in the Corporate Commercial Group of Olisa Agbakoba Legal has said that the stability of Nigeria’s banking industry has been under threat posed by the huge amount of non-performing loans and may remain so if the financial sector is not remodeled to work more efficiently.
Akodu who made this disclosure at a roundtable discussion organised by the Risk Managers Association of Nigeria (RIMAN) in Victoria Island, Lagos, stated that non-performing loans in Nigerian banks are up to 12.82%, well exceeding N1 trillion and likely to rise.
“Despite AMCON’s mandate to purchase eligible bank assets from banks these toxic assets still impede the banks’ balance sheets and impact negatively on the economy
“The truth is that capital is scarce, the banks are overleveraged and unsalable assets carry too much risk.” Akodu added.
Akodu who reviewed the framework for private asset management companies at the event noted that regardless of the call for the establishment of Private Asset Management Companies (PAMCs), assets in most banks have remained stressed, exceeding 20 percent.
Referring to the draft legal framework draft for licensing, regulation and supervision of PAMCs, circulated by CBN recently circulated to all banks and other financial institutions, the OAL Partner noted that the major challenge for PAMCs will be both fiscal and legal.
“Legal constraints relate to laws dealing with the disposal of assets and transfer of title. The process of recovery through litigation is often cumbersome and can be fraught with legal technicalities, Akodu noted, stating further that the use PAMCs have been used in a few countries to stem the rise of NPAs, the crisis continues to afflict most banks especially those holding a high number of illiquid and difficult to sell assets.
According to her, an appraisal of certain provisions of the draft legislation will be necessary to permit PAMCs issue securities to banks and widen the framework for their capital requirements.
“My reasoning is that for PAMCs to be effective they must operate within a flexible framework. It is very unlikely that PAMCs will have better recovery tools than the banks so it is important to understand that they will need to be able to have the capital to purchase the EBAs and also be able to stay in business for the time it takes to recover the debt.
According to her, the purpose of PAMCs was to add value rather than provide more stress to our financial sector, it is critical, therefore, that PAMCs are adequately capitalized and also have access to capital to run their business efficiently and effectively.
Akodu further urged Risk Managers several of whom were present to develop strategies to manage risks. This, she said can be done by avoiding the risk, reducing the negative effect or probability of the risk or by transferring all or part of the risk to another party.
“The fact that CBN has come out with this draft proposal means that it is time for us to remodel our financial sector to work more efficiently. This will require a review of legal and regulatory framework, the passing of key legislation to support financial services such as factoring and invoicing. It is important that CBN recognizes other critical stakeholders such as SEC, NDIC, Credit Reporting Agencies, Legal practitioners and Accountants in further pursuit of this major project,” she said in closing.
On his part, Jude Monye the President of RIMAN while inaugurating the RIMAN work group urged members of the group to facilitate, review, participate and promote initiatives towards strengthening laws relating to credit administration, risk management and debt recovery within the Nigerian business environment and recommend necessary reforms.
“You are expected to undertake diagnostic study of the laws and harmonise initiatives relating to the financial services sector (FSS) towards adopting requisite reform and review of legal and regulatory frameworks,” Monye said.
Speaking to BusinessDay on the partnership between Olisa Agbakoba Legal (OAL) and RIMAN, the Secretary of the Work Group and OAL Partner, Victor Nwakasi stated that the relationship which started out as a service partnership had blossomed into a developmental initiative.
He said, “When they engaged us they discovered we had a lot of development law initiatives that would impact on what RIMAN was doing and what was initially a service partnership became an initiative for a stronger cause. Even when we ceased to work for them, the relationship continued on other levels.
“As members of RIMAN, we work extensively on credit reporting and I am delighted to inform you that the Credit Reporting Law which was recently passed by the national assembly was initiated between OAL and RIMAN as far back as 2006. While this progress may have taken a number of years we continue to pride ourselves as the number one law reform firm in Nigeria,” Nwakasi said.
Speaking on next steps for the RIMAN Work Group, he said “The engagement begins here and now. Here in this room are members of the financial service sector, risk managers, the media and several other stakeholders who are now aware of this specialized work group, so yes, the engagement has started.
“After this, the Work Group will hold its inaugural meeting and there, it will set out to enlarge its Terms Of Reference (TOR) and also streamline and harmonize initiatives and interests in the Financial Services Sector – look at what other special groups within the financial service sector are doing and harmonize objectives’
“Another key area is the issue of non-performing loans. There is need to facilitate the quick resolution and recovery of bad loans. To achieve all of these, we would like to partner with the media, policy makers, regulators and the relevant government agencies,” The OAL Partner said.
The Risk Managers Association of Nigeria (RIMAN), in conjunction with PAL Pensions and Olisa Agbakoba Legal, organised the risk round-table to inaugurate a Work-Group on Laws Relating to Credit and Risk Administration, Non-Performing Loans and related Issues in Nigeria, as well as discuss the new regulatory scenarios and industry trends of both the Regulators and Practitioners Perspectives. At the end of the event, participants examine the nexus between IFRS9 and risk management in the Nigerian financial sector.
The Work Group will amongst other things consider the workability of an association of Bank Lawyers and debt factoring in Nigeria in relation to relevant agencies. They would also facilitate and partner with other interested groups on the sensitization programs for judges and lawyers on the economic importance of credit administration especially non-performing loans and the need for efficient and quick resolution procedures.