Nigeria: The Banker's Dilemma: Advancing Credit To The Power Sector Against Central Bank's Directive?

Last Updated: 25 April 2013
Article by Osaro Eghobamien SAN and Jennifer Omozuwa

In the wake of the Federal Government's resolve to invigorate the power sector in Nigeria, it has set in place a framework for the generation and distribution of energy in accordance with the implementation of the Electric Power Sector Reform Act (EPSRA), 2005. In furtherance of its objectives, the bid round for the generation as well as distribution companies was recently concluded by the Bureau of Public Enterprises with the emergence of a number of consortia as bid winners in a process that has largely been viewed to be in accordance with international best practice.

Quite naturally, the concerns of the winning companies, taking cognizance of the enormity of investments required in power projects must, amongst other things, including political and security issues, border on financing. In light of the reality that financing is critical, and given that for regulatory reasons the financing for these projects on behalf of any of the preferred bidders cannot be borne primarily by a single bank, there may be a need for companies to look towards a syndicate of banks as well as the Capital Market.

Regulatory authorities anticipating funding challenges and in an attempt to deepen the Capital Market, stipulated that financing will compulsorily have to be sourced partly through the Capital Market. In the event that the local Capital Market proves insufficient either because it is lacking in depth or sophistication, the power sector investors will simply go for cross listing (source for funds in the International Capital Market) thereby enhancing the Capital Market in other jurisdictions. To avert the loss that can arise from cross listing, to the developing Capital Market in Nigeria, it is imperative that adequate structures are put in place in preparation for the investments which will inevitably be channeled into the Power Sector.

Financing by the banks, and the ultimate off-load into the Capital Market should ordinarily not pose a problem. Once the collection of receivables from power retail is effectively managed, it can easily prove a dependable source for raising even more capital with the concept of securitization. This is particularly so as defaults in payment need not be enforced through a Court system that appears slow and inefficient. The system is likely to accommodate mostly pre-paid users leaving very little room for accumulated debt. Larger and more sophisticated consumers can simply be switched off should they fail to make payments for power consumption. These simple mechanisms of enforcement make investment in power extremely worthwhile provided appropriate pricing is in place.

Nonetheless, the recent announcement by the Central Bank of Nigeria (CBN), under the very watchful and able leadership of Mallam Sanusi Lamido Sanusi, that facilities ought not to be extended to certain named debtors presently indebted to AMCON (Asset Management Corporation of Nigeria), the Corporation that acquired the non-performing loans (NPL) from banks, introduces a new dimension and complexity.

Although the named debtors were originally indebted to deposit money banks, their debts were assigned to AMCON by virtue of an acquisition. This therefore made them extant debtors to AMCON. Also, given that the CBN and the Ministry of Finance are shareholders of AMCON, the debtors may be regarded, albeit loosely, as debtors of CBN and the Ministry of Finance. Partly for this reason, the threat by the CBN must be particularly worrisome to these debtors. More importantly, given the enormous powers of AMCON, a corporation that could possibly attach the asset of a debtor even if it was never offered as security for the existing debt, there is a need to consider in more detail the implications of this directive.

It is imperative to first consider the reason behind the directive. In more developed economies, bankruptcy and insolvency legislations serve as a major deterrent to debtors. There is the reasonable apprehension that a failure to perform obligations under financing agreements may result in the institution of insolvency or bankruptcy proceedings. The effect of such proceedings is that, persons who are declared bankrupt or Companies declared insolvent will not be legally permitted to apply for credit within a stipulated period. In Nigeria however, this is not the case as the bankruptcy laws remain obsolete; no one is ever declared bankrupt and no company is ever declared insolvent by a Court system that is slow and ponderous. Shareholders simply abandon a moribund Company, set up a new one and approach the banks for even bigger loans. Given these shortcomings in our legislations, it becomes easier to appreciate the CBN's display of frustration in assuming the role of a Court to effectively attach incidences of bankruptcy and insolvency to persons who were not otherwise so declared by the Court. While this directive may be reasonable, a thought must be spared for those who are genuinely contesting their debt with AMCON.

Interestingly, a number of the listed debtors form part of some of the consortia that have emerged as winners of the energy bids. The issue that then arises is, whether in spite of the CBN's advice, a bank may nonetheless proceed to fund a consortium having amongst its members, one or more of the debtors on the CBN's list. How may the CBN choose to enforce this directive?

The Central Bank of Nigeria is the statutorily appointed authority, regulating activities of banks. Amongst its regulatory activities is the method by which it treats loans (in the books of the bank) that have been given out by banks. A bank would ordinarily record the loans it extends to customers as its assets, since the bank expects to be repaid the principal loan and paid interest on the loan. These assets (loans) partly determine the worth of a bank. However, where the CBN is of the view that the loan remains outstanding beyond its tenure and there is a likelihood of default, it demands the bank to treat the asset in its books as diminished in value to the extent of the likely perceived default. Therefore, in the event that there is a perception that the loan will never be recovered, because it has been outstanding for a certain period it is depreciated to the tune of 100%. In other words, no value is credited to the bank. This automatically reduces the assets of the bank, which in turn affects its balance sheet through a reduction of its net worth thus affecting its ability to give or create new assets (further loans). All this has the ultimate effect of dipping the value of the bank's shares on the stock market. It may also have some impact on its regulatory Capital: that is, the amount of funds kept aside to support the business of the bank. This process of valuing the asset of the bank, making provisions for possible deficiencies in the quality of its assets is to give effect to the prudential guidelines. While there are set criteria by the CBN for making provisions against delinquent loans, this novel directive presently under scrutiny raises fundamental questions as to how assets created in defiance ought to be treated in the books of the bank by the regulator (CBN).

Given that a consortium would typically create a special purpose entity which would in its juristic capacity, source for funds for such projects, would a bank therefore be seen to have flouted the CBN's directive in the event that it decides to finance the special purpose entity which has emerged for the purpose of executing a power project?

Perhaps a way to address these concerns, may be for the CBN to require banks willing to take up the credit risk of a consortium having such challenges, to make provisions for such assets in its books on a dynamic basis, that is to say, on the basis of expected loss at the time of originating the facility as opposed to the conventional provisioning for assets on an incurred loss basis (i.e. on balance sheet dates). Traditionally, adequate provisioning is somewhat retrospective in that the quality of the asset is being assessed long after it has been given out. With the suggested approach however, the Bank is compelled to take a position about the loan from inception. This would enable the banks build up a buffer in their loan portfolio that could be utilized in the event of a failure by the consortium to meet its obligations under the financing agreement, without necessarily putting depositor's funds at risk. Undoubtedly this method of provisioning will make the loan far more expensive as the quality of the asset is doubtful from inception.

The Central Bank has taken a very bold step in issuing this directive, and what it seeks to achieve is well understood. However, it will have to be innovative in its enforcement since it does not appear to be backed by law. Introducing dynamic provisioning might just be one such step. It is important that the CBN is genuinely seen as maintaining financial integrity and stability and not perceived as the institution that scuttled the recovery of the Power Sector if it turns out that most consortia are unable to raise funds as a result of this directive. Either way, the failure of any bank to heed the directive might be most unwise with a Central Bank determined to actively utilize its powers and perhaps extend same if necessary.

Osaro Eghobamien SAN and Jennifer Omozuwa are both of the Banking and Finance Department of Perchstone & Graeys, a commercial law firm with offices in Lagos and Abuja.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions