Jonathan Signs 'Bad Bank' Bill Into Law

Nigeria's president on Monday signed into law legislation creating an asset management company to soak up bad bank loans and revive private sector lending in sub-Saharan Africa's second biggest economy.

Establishment of the Asset Management Corporation of Nigeria (AMCON) is considered vital to restoring confidence in the OPEC member's banking sector after last year's $4 billion bailout of nine weakly capitalised lenders.

"With the signing of the bill into law today by Mr President, it sets the stage for the resolution of the crisis in the banking sector," central bank Governor Lamido Sanusi told Reuters after attending a law signing ceremony.

Analysts said banking shares could find support in the near term once it becomes clear who will be managing the new corporation and how bad bank loans will be valued.

"Once we know the (details of AMCON) and know the people that are going to run the company, we are going to see a major surge in the equities market ... then the market will settle down again," said Bismarck Rewane, head of Lagos-based consultancy Financial Derivatives.

The central bank and finance ministry have set up a technical team to decide on the value of bad bank loans purchased in exchange for government bonds.

The new company is expected to begin operations by the end of September, a spokesman for the central bank said.

Under the new law, the toxic assets would be exchanged for seven-year bonds or other debt instruments issued by AMCON and guaranteed by the finance ministry. AMCON's value will be 10 billion naira ($66.7 million).

With bad loans off their books, the central bank hopes new investors will recapitalise the rescued lenders, resulting in more credit to the private sector in Africa's most populous country.

"AMCON will help ... restore confidence in Nigeria's capital markets and prevent continued job losses in the country's banking industry," said O. J. Abuah, special adviser to President Goodluck Jonathan.

But financial industry sources say it is unclear whether all of the troubled banks will find the capital injection they need.

The central bank warned last week that it would have no other option but to liquidate any of the rescued lenders unable to find fresh capital.