Banji Adenusi In February 2013, the Nigerian Securities and Exchange Commission (SEC) announced plans to introduce asset-backed securities to the capital market, primarily as a way to further deepen the market, and to provide long term financing for key areas of the economy such as agriculture, infrastructure, and mortgage markets. Despite the fact that the issuance of securitisations has slumped in recent years – world markets, especially the United States and Europe, are becoming more dependent on government support and central banks – it is a welcome development that will hold exciting prospects for investors, as it affords the opportunity to gain direct risk exposure to diversified sectors of the economy. From the standpoint of the originator, apart from the obvious advantage of diversification of funding sources and off-balance sheet accounting (in some instances), the biggest incentive for securitisation lies in the ability of the originator to transfer the risk of the recovery of the receivables to the investor. Given the uncertainty that trails structured finance products in most developed markets, especially the regulatory framework, it will be interesting to observe SEC's approach in the regulation of securitisations, and whether the major issues affecting its regulation in Europe and the United States will also be encountered in Nigeria. Essentially, the greater concern relates to risk retention, where in both the United States and Europe (under the Frank Dodd Act and the Basel II framework respectively) the requirement is to have the originator retain a material net economic interest of 5% loss on the transaction on an ongoing basis (known as the 5% first loss position), which will invariably lead to greater administrative and capital costs for originators, and a greater burden of due diligence on both investors and originators.
March 22, 2013
