Managing Systemic Delinquency of Financial Risk Assets:The AMC Model

The financial services industry plays a key role in any free market economy. The development of the industry and its derivate products and services is usually a function of the sophistication of the economy. The financial services industry in Nigeria is principally dominated in terms of total assets, by the commercial banks.

The banking industry itself is undergoing significant reforms following the consolidation of banks in 2005. Recent reform measures have been aimed at improving the quality of the risk assets portfolios and corporate governance. A key fall out of the 2005 banking consolidation exercise is the aggregation of delinquent risk asset portfolios of the merging institutions albeit unwittingly. The rush for size as a bandwagon strategy, mostly at the expense of quality inadvertently imposed a new parameter for success on the industry. This substitution made many of the banks more like “huge golden images with feet of clay”. It was just a matter of time before the clay feet would give way.

The initial thinking of the CBN during the consolidation exercise was to create an Asset Management Company (AMC). The AMC was expected to absorb the huge non performing portfolios embedded in the balance sheets of legacy banks. The portfolios bloated the balance sheets of successor institutions and eventually triggered liquidity pressures on the institutions.

Asset Factoring and Remedial Management

The underlying principle of the Asset Factoring and Remedial Management solution is the fact that any tangible or intangible item to which a value can be assigned can be discounted.

The concept of factoring and remedial management can be adapted as a solution platform for the delinquent and illiquid risk asset portfolios of the banks. The industry reality of asset quality position is that even the stable institutions have required liquidity from otherwise performing loans. As a result of the economic slowdown and the attendant credit and liquidity challenges, recalling funds from performing became a necessity.

Thus, an Asset Management mechanism becomes a rationale for factoring (at appropriate discounts) the illiquid exposures of both the troubled and stable banks. This option provides liquidity and relaxes the challenges of lending ratios imposed by bloated balance sheets. The factored debts can then be realized by the AMC over a longer time horizon with significant gains.


The global economic crisis has swung asset values downward. If assets were considered overvalued during the boom period, then these assets are likely to be undervalued in a downturn. This leads to a vicious cycle is that credit and liquidity pressures create a propensity to offload such positions. This, of course, runs contrary to the logic of not selling into a downturn. The repercussions of unrestrained sale of financial assets in a downward market may be as catastrophic as the unrestrained acquisition of the assets which precipitated the crisis in the first instance.

Consequently, it makes sense to warehouse these assets into an AMC structure while allowing the positive fundamentals of the market to be restored. By extension, the assets will gradually be restored to some semblance of their previous values.


The AMC is not a grave yard of toxic financial assets. It is more of a remedial structure and as such should factor or discount only financial assets which are rated to be recoverable in appreciable value.

The suggested eligible assets include:

  1. Capital market instruments such as bonds and stocks (excluding primary issues).
  2. Credit exposures on verified oil and gas transactions with good receivable structure.
  3. Legitimate Federal and State government exposures with verifiable and committed means of payment.
  4. Real Estate.

The bulk of current market exposures are embedded in these key categories.

However, since the AMC will be a going concern it will need to expand the scope of asset eligibility beyond those listed above once the current market distortions are resolved.

The typical process would run as outlined below:

  1. The assets undergo rigorous review as part of the qualifying process.
  2. Appropriate pricing (discount, factoring) models will be established for the assets.
  3. The AMC assumes ownership of these assets for cash. This serves both to cleanse the bank balance sheets (while injecting liquidity) and to reflect true profit statements.
  4. The institutions which will reflect the real value (income/loss) of the assets at disposal, instead of accrual or valuation.
  5. The AMC realizes the assets at a profit with appropriate timing.
  6. There may be variants of the cash-for–assets approach through a recourse factoring model for coupon. This will occur if the banks recognize the potential of the assets to recover better value than is being offered by the Factor i.e. the AMC.


  1. The bank has an option to obtain liquidity backed by real assets adjusted at appropriate value instead of the regulatory liquidity discount window of the CBN.
  2. The regulatory authorities are able to independently and more objectively ascertain the quality of the asset portfolios of banks. “If you can’t discount it for liquidity, it probably is not valuable or doesn’t exist”.
  3. The economy as a whole will respond faster to recovery. This is because the banking sector is the main financial inter-mediation mechanism in the economy. Resolving the asset diminution challenges of banks and the investing public will improve the flow of credit and liquidity in the system. The banks will be able to lend again without the concerns of currently distorted ratios.


In addition to the impact of the global economic downturn, the current crisis in the Nigerian banking industry is not unrelated to the unprecedented growth in money supply in the boom years from 1999 to 2007. The democratic attempt at fiscal federalism meant that more money was available to the Federal, State and Local governments. Unfortunately, most of liquidity in the system was not backed by commensurate growth in productivity. The effect was the emergence of speculative and overpriced assets and services in the economy including capital market stocks, real estate and wages.

The AMC will be a major tool in repricing assets and restoring normalcy to the process of risk asset creation by banks.

About Alex Okoh

Alex is the Managing Partner of Ashford & McGuire Consulting. His over 22 years experience in the banking industry has involved responsibilities in general management, leadership and organizational development. He has functioned in a variety of roles including corporate banking, operations and treasury, often leading projects and initiating and designing processes.


  1. Alex Ojukwu says

    Great work and great prospect to move our intermediation institutions to a more stable position while creating further wealth for all. Will like like to know the “TO DO’s”. I am however wondering what the effect of our low country credit rating and sovereign risk profile would have on this initiative. This is more particular to fund sourcing especially long term funds. This is on the understaning that being a private sector intitiative there would not be government guarrantee upon which bonds could be issued or reissued.
    Excellent Job Sir, what next?

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