Group-Decisions, Systemic Risk and Politics: The Case of Asset Management Corporation of Nigeria (AMCON); and the Malaysian and Indian Models of NPL-Resolution

Abstract

Asset Management Corporation Of Nigeria (AMCON) was created in 2010 by statute enacted by the Nigerian Federal Assembly (with the approval of The Nigerian President) even though there was evidence that similar “Asset Management Corporations” (AMCs) in other countries had only a 33% change of succeeding. Like many similar AMCs, AMCON’s main purpose was to acquire defaulted loans from Nigerian Banks, takeover troubles banks and infuse cash into both troubled borrowers and banks as a way of stabilizing the financial system. The article contributes to the literature by explaining the following, many of which have not been addressed at all or in detail in the literature: i) accounting disclosure, “Bank Opacity” and behavioral problems may contribute to increases in earnings management and systemic risk; ii) AMCON has failed in its purpose and its business model has increased systemic risk and caused other social and economic problems; iii) there may be a symbiotic relationship between the liquidity of Nigerian Banks’ shares/GDRs and institutionalized earnings management and corporate governance deficiencies on one hand, and AMCON’s activities; iv) the AMCON business model causes Inefficient Cross-Subsidization (among banks and industries), Valuation-losses, Distortion of Borrowers’ Willingness-To-Resolve and Moral Hazard, and has increased earnings management and systemic risk in the financial services industry in Nigeria; v) the interaction of industry-level, firm-level and institutional-level corporate governance factors can affect banks’ reactions to AMCON’s activities; vi) Contrary to established academic literature, the primary motive of corporate “Earnings Management” is not always manipulation of Net Income (EPS), but also is to change perceived corporate credit-risk, perceived asset-quality and expected growth; and to influence the sensitivity of managers to incentives (especially where incentives are not based primarily on accounting data) – hence the new terms “Asset Quality Management” and “Incentive-Effects Management” cover these activities. The article also proposes testable hypothesis and feasible solutions to problems caused by AMCON and the Corporate Governance deficiencies discussed herein.