On the back of declining international commodity prices (particularly, crude oil) and its consequent impact on risk assets in the Nigerian financial industry (the “Industry”), the Central Bank of Nigeria (“CBN”) recognised the need to proactively widen the space for the management of Eligible Assets1 through the establishment of private asset management companies (“PAMCs”). This led to the issuance of an ‘Exposure Draft’ of the Framework for Licensing, Regulation and Supervision of the Business of Private Asset Management Companies in Nigeria (the “Draft Framework”). 2
According to the Nigeria Deposit Insurance Corporation (“NDIC”), as at September 2017, the level of non-performing loans in Nigerian banks rose by fifty (50%) from N1.639 trillion in December 2016 to N2.42 trillion. The foregoing represents a 10.13 per cent to 15.18 per cent increase, well above the maximum regulatory limit of 5 per cent, in the nonperforming loans ratio of Nigerian banks3 . With such wide margin above the regulatory limit, it is clear the Assets Management Company of Nigeria (“AMCON”), which was established in 20104 with the prime objective of managing toxic assets in the wake of the global financial crisis, will be stretched beyond its limit to handle the growing portfolio of non-performing assets. This emphasises the need for a long-term initiative which efficiently spreads the task of managing risk assets across a number of CBN-licensed, albeit private financial institutions.
This paper, therefore, reopens the PAMC initiative by:
(i) highlighting the salient provisions of the Draft Framework; and
(ii) providing commentary and analysis of the salient provisions of the Draft Framework,
with a view to assisting the CBN in its bid to issue an attractive and holistic framework for PAMCs to participate in the Industry.
Overview of the Licensing, Regulation and Supervision of a PAMC
- Ownership and Board Composition of PAMCs
A PAMC is to be a privately owned limited liability company incorporated in Nigeria with its shareholders ranging from individuals, corporations and foreigners. They are to be licensed by the CBN as an Other Financial Institution (“OFI”) 5 . However, Nigerian banks, financial holding companies, OFIs and their subsidiaries are precluded from owning shares in a PAMC.
With respect to the board composition of PAMCs, the Draft Framework sets a maximum number of directors (including executive directors) on the board to seven (7). The minimum number of directors on the board is five (5) and at least one of them shall be an independent director.
Furthermore, the number of non-executive directors of a PAMC shall not be more than that of the executive directors at any point in time; and no board member or officer of a Nigerian bank, financial holding company and their subsidiaries shall serve on the board of a PAMC. Finally, no individual shall serve on the board of more than one (1) PAMC at a time.
- Licensing of a PAMC
For a company to be registered by the CBN as a PAMC, it is proposed that the company must be:
(a) an independent legal entity, with a focus on disposal, management and sale of Eligible Assets;
(b) privately owned in accordance with Companies and Allied Matters Act, Cap C20 LFN 2004;
(c) have ‘Asset Management Company’ as part of its name;
(d) have a well-defined process for disposal, management and sale of Eligible Assets; and
(e) must be regulated and supervised by the CBN as an OFI.
The license to operate as a PAMC is granted by the CBN pursuant to an application made in writing to the Governor of the CBN. The issuance of a PAMC license is in two stages, namely:
(i) Grant of an Approval-in-Principle
The proposed PAMC is required to pay an application fee of Five Hundred Thousand Naira (N500,000) (circa US$1,633.98), and provide evidence of a Ten Billion Naira (N10,000,000,000) (circa US$32,679,738.56) minimum paid up capital.
In addition, a business plan and feasibility study detailing the objectives, ownership structure and five (5) year financial projection; the resume of the shareholders; details of the proposed sources of equity; organizational structure; Bank Verification Number; Tax clearance and references for the proposed shareholders/directors, must also be submitted to the CBN.
(ii) Grant of Final License
The CBN shall issue a license to a PAMC, six (6) months after the grant of the approval-in-principle and after the PAMC has paid a licensing fee of Two Million Naira (N2,000,000) (circa US$6,535.94), met all the conditions stated in the Draft Framework and submits the certified true copy of the constitutional documents of the PAMC (certificate of incorporation, Form CAC 1.1 – application for registration of company, Form CAC7 particulars of directors, memorandum and articles of association, etc), enterprise risk management framework to the CBN.
Typically, a license is granted for an indefinite period and will be withdrawn if not utilised within six (6) months of being issued. It is important to note that the CBN is at liberty to impose conditions on a licensee as it deems fit. A license may also be revoked for failure to comply with regulations issued by CBN; exceeding the scope of powers granted to the PAMC; unauthorised cessation of operations for a continuous period of three (3) months or three (3) months during a continuous period of twelve (12) months; or on any grounds stipulated by the CBN.
- Permissible Activities of a PAMC
A licensed PAMC is permitted to:
(a) acquire Eligible Assets of Nigerian banks and OFIs;
(b) hold, manage, realise and dispose of Eligible Assets and underlying collaterals associated with the Eligible Assets acquired from Nigerian banks, OFIs and the NDIC in accordance with guidelines issued by CBN;
(c) acquire performing loans of Nigerian banks and OFIs, undertake debt factoring and subject to the Securities and Exchange Commission (“SEC”) approval, engage in asset securitization;
(d) purchase or sell other receivables of Nigerian banks and OFIs including their assets;
(e) provide consultancy and advisory services to Nigerian banks and OFIs for the purpose of restructuring receivables and other assets, including sale of such assets to third parties;
(f) subject to SEC and other regulatory approvals, issue or invest in securities;
(g) subject to CBN’s approval, own subsidiaries;
(h) purchase Eligible Assets from other PAMCs;
(i) sell Eligible Assets to other PAMCs; and
(j) any other activity approved by CBN.
- Prohibited Activities of a PAMC
A PAMC is prohibited from certain activities including; providing credit to customers, accepting deposits from customers, providing guarantee for loans, obtaining loans from banks and OFIs in Nigeria, issuance of securities to Nigerian banks and OFIs, provision of fund management services to third parties, engaging in “sale and buy-back” of Eligible Assets with Nigerian banks and OFIs.
- Creation of Security Interest
A PAMC can create a Security Interest6 by entering into a security agreement with (i) the bank or an OFI it intends to purchase Eligible Assets from, (ii) in the case of purchase of Eligible Assets of a bank in liquidation, a PAMC shall enter into a security agreement with the NDIC. A security agreement shall be effective and create a Security Interest as between the parties according its terms.
The Draft Framework also provides the requirements for the commencement of operations of a PAMC, qualification for the appointment to the position of a director and top management of a PAMC, supervision and reporting obligations and risk management framework (including liquidity, credit, operational, market, legal and compliance risks). Information on the foregoing, and more, can be found here.
Challenges under the Draft Framework
The CBN, in the Draft Framework, only stated that the pricing and transfer of assets must be transparent, reasonable and at arms-length. In our opinion, this is vague. This creates a big uncertainty to any person wishing to establish a PAMC as to the modalities, basis and techniques of valuing a non-performing loan asset. As valuation techniques may differ across financial institutions, the CBN should consider amending this provision of the Draft Framework to be consistent with extant/prevailing transfer pricing rules.
Another challenge a PAMC may face is in taking possession of and disposing of assets which are the subject of a non-performing loan. Under the AMCON Act, AMCON is allowed to transfer or assign assets without recourse to the provisions of any document, enactment or instrument restricting the disposal of such asset. The Draft Framework does not contemplate having the same provisions for a PAMC. There is no doubt that failure to include such a provision will create challenges for a PAMC in disposing underlying collaterals associated with Eligible Assets to potential buyers. For example, where the collateral involves real estate, the PAMC will be required to obtain the Governor’s consent in the state where the real estate is located before any transfer can be made. Obtaining Governor’s consent for transfer of real property can take anytime between six (6) months to two (2) years. It is recommended that, taking a cue from the AMCON Act, salient provisions be made to facilitate the operations of PAMCs as it relates to the management, transfer and disposal of collateral associated with Eligible Assets. This will not only aid the achievement of the overall objectives of having PAMCS, it will also serve as an incentive for companies to obtain a PAMC license.
A critical issue which the Draft Framework fails to address is that which stems from the provision that the source of financing for PAMC must not be from the Nigerian banking system and/or foreign subsidiaries of Nigerian banks. This provision is lauded as it prevents issues of conflict of interest on the part of PAMCs which they would otherwise have be exposed to if they obtain financing/funding from Nigerian banks or their foreign subsidiaries. However, the Draft Framework fails to address the foreign exchange issues that may arise in this regard. To the extent, the PAMCs will have to seek funding (which will obviously be in foreign currency) from offshore non-affiliated banks, the PAMCs may face challenges with obtaining foreign exchange for loan repayments in an already volatile and inefficient foreign exchange market in Nigeria. Perhaps the CBN may guarantee foreign exchange sources for the PAMCs for such loan repayments. The mechanics of how a certificate of capital importation will apply will have to be worked out. Another consideration may be for the CBN to provide hedging mechanisms for the PAMCs to protect against foreign exchange risks. Issues such as those highlighted remain unanswered.
In the same vein, the restricted market from which PAMCs may seek funding creates a monopoly such that they are left with limited options and this invariably affects the pricing of the loans. With knowledge that foreign banks are the major source of funding, the fear is that this may lead to more expensive loans. Perhaps, approaching multilateral agencies might be the best route for PAMCs.
Also, a PAMC will in addition to having a Ten Billion Naira (N10,000,000,000) paid up share capital, be subject to corporate tax laws and other tax laws applicable to the disposal of assets. There is no guarantee that assets from non-performing loans managed by a PAMC will be sold within at least two (2) years of obtaining those assets. Therefore, the PAMC may be “cash trapped” as long as those assets remain in its possession. More significantly, the assets may further depreciate in value. The inability of the PAMC to dispose of the assets will not deter the tax authorities from imposing tax on the already scarce capital of the PAMC. Under the AMCON Act, AMCON is exempted from paying Companies Income Tax, Stamp Duties and Capital Gains Tax. To make the PAMC initiative attractive, the National Investment Promotion Commission (“NIPC”) should providing tax incentives to PAMCs.
In light of current realities in the Industry, PAMCs are the way to go. AMCON has been playing too long in the space of acquiring the increasing non-performing loans of Nigerian banks and in view of recent NDIC statistics, AMCON may not have the capacity to manage and cure the effects of non-performing loans of Nigerian banks and OFIs in the Industry. Therefore, the need for the creation of PAMCs cannot be overemphasised.
However, to attract and encourage private sector participation in this space and achieve the objectives of the PAMC initiative7 , the CBN should consider revising the Draft Framework in line with the challenges identified above as well as other similar recommendations they might have received. If the final PAMC framework is issued along the lines of the Draft Framework, it may put more financial stress on the Industry rather than relieving it. We understand that some of our recommendations, to make the PAMC initiative attractive, may be beyond the regulatory purview of the CBN - such as allowing PAMCs dispose of assets without recourse to the provisions of any enactment restricting the disposal of such asset. In view of this, the CBN would need to act in conjunction with other agencies and parastatals regulating companies incorporated in Nigeria (for example, the Federal Inland Revenue Services and the NIPC) in coming up with incentives for the proposed PAMCs. The National Assembly is also enjoined to consider passing an Act that will enable the creation of PAMCs and provide similar incentives to PAMCs as provided in the AMCON Act.
We, therefore, trust that comments such as these and others are considered by the CBN in arriving at the final guidelines for PAMC and possibly push for an enactment of the National Assembly for the creation of PAMCs as we believe that the Draft Framework was issued to feel the pulse of the industry.