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New Fund To Bail Out Distressed Banks In The Pipeline

The Banks and Other Financial Institutions Act 2020 signed by President Muhammadu Buhari on Friday will create a new Fund to help distressed banks.

Under the new law, the Central Bank of Nigeria will invest N10billion  ($26.3 million) while the Nigerian Deposit Insurance Corporation (NDIC) will contribute N4 billion.

Commercial banks and other lenders will pay annually 10 basis points of their total assets into the fund. Banks will not be allowed to pay dividends if they fail to contribute, according to the law’s provisions.

The CBN will determine the start date of the new fund.

Nigeria set up Asset Management Corporation of Nigeria (AMCON) in 2010 to help stabilise the banking sector after a $4 billion bailout of eight lenders in 2009. Prior to that, distressed banks were left to fail while the NDIC stepped in to redeem deposits.

AMCON, due to be wound up in 2023, has acquired a total of N3.7 trillion in bad loans from 22 banks and has recovered more than N1 trillion. It owes N4 trillion to the CBN, its guarantor.

The new law grants more powers to the CBN in managing any crisis. The regulator can step in where a lender is unable to meet its obligation or becomes insolvent. It can transfer the assets of a failed lender to new purchasers.

It can also acquire shares in a distressed bank where the central bank has guaranteed it against failure and dispose of the equity at a later date, according to the new law.

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