Last week we got news that the Asset Mangement Company (AMCO) has commenced operations. The announcement was welcomed from most quarters in the economy especially the banks and the stock market. This is because, AMCO is expected to buy up all the so called toxic loans held by the banks, thus freeing up their balance sheet and also increasing the value of the banks albeit on the short term.
Quite understandably, these toxic loans are also hampering efforts by the banks to create newer loans at a level expected to boost the economy. As such with AMCO taking the loans off their balance sheet, the banks can now resume lending and hence spur economic growth that has stuttered since the stock market crash. It is also expected that this will jump start the depressed equities market.
As expected, when their books look better they will resume lending again at the same double digit interest rates, shorter tenors and high banking charges. Measures seen as approiprate and unavoidable considering their “high” cost of funds. Cost such associated with epileptic power supply, bad roads, no water, no sewage, multiple taxes, few government incentives etc. Consequently, the new set of borrowers will continues pay for the huge cost of running these banks.
So, whilst Amcon is a laudable venture on it’s own, it’s basically set up to help the banks more than it is to help the poor man on the streets, at least on the face of it. What we really do need is an interest rate regime that is single digit and tenors that are long term, so small businesses can thrive. To achieve this however, the recent monetary policy initiatives of the CBN and buying the toxic loans may not be enough to achieve single digit lending. That’s why CBN Governor amidst criticism announced plants to partner with banks into owning their own power stations. All in an effort to try and bring down cost of doing business in the banking sector.
So while the AMCO maybe good for the banks, it’s trickle done effect on the economy may never be felt. Just as the banks strive to mitigate their huge cost with high interest rates, the small businesses and consumers are left with nowhere to go as their ability to pass on this cost is limited to the laws of demand and supply. They should hence realise that small businesses also operate in the same environment and therefore also need as much help, if not more. This is even moreso as without the small businesses the banks can not sustain growth and financial stability.
The government should focus more on infrastructural development and provision of essential services which is required of an economy that’s willing to grow at an annual percentage of at least 8% of GDP. Without this our goal of being a leading global economy by 2020 will only be a mirage. So even if the banks are off the hook it’s only temporary so long as these problems remain. Make no mistake, without an improvement in the infrastructure, a cheaper and longer debt structure and tax reforms another run on the banks will be inevitable.