The Meltdown of the Nigerian Capital Market: Causes and Consequences

By A.G. Olisaemeka

The current crash of the Nigerian Capital Market has been
unprecedented in its historic evolution since 1960 to date. Its market
capitalization has nose-dived from an all time high of N13.5 trillion
in March 2008 to less than N4.6 trillion by the second week of January
2009. Besides, the All-Share Index (a measure of the magnitude and
direction of general price movement) has also plummeted from about
66000 basis points to less than 22000 points in the same period. The
stock prices have experienced a free-for-all downward movement regime
with more than 60% of slightly above 300 quoted securities on constant
offer (supply exceeding demand) on a continuous basis. Consequently
many of the quoted stocks lack liquidity as their holders are trapped,
not being able to convert them to cash to meet their domestic and
other investment needs. On the other hand, fresh investors are
cautious of jumping into a vehicle that does not seem to have a brake
should they wish to disembark.

A number of factors have been blamed for this sorry state of affairs
and they include:

1. A Global Phenomenon
The present seeming collapse of the world economy has not excused that
of Nigeria. Many stock markets of countries, from USA to Britain, from
China to Japan, Russia, France and others are in serious trouble. The
world is indeed a global village and the interrelatedness of world
economies is very evident that any development in any part of the
world affects other parts as well. Consequently, the Nigerian capital
market is not insulated from this global malignant cancer.

2. Pull-Out of Various Foreign Investors
This is another factor believed to have contributed to the continuous
fall of the Nigerian stock market. Many foreign investors that already
have troubles in their home economies have pulled out of the Nigerian
stock market leading to dumping of shares beyond the ability of
domestic investors to contain. Supply of equities has, in consequence
of this, overwhelmed demand, leading to price fall. According to the Director-General of the NSE, Prof. Ndi Okereke-Onyiuke, "…available statistics shows purchase by foreign investors during 2008 to be in excess of N150.135 billion representing 6.3% of the aggregate turnover. This is a decline when compared with the N256 billion recorded in 2007. Concurrently, total sales during the year were in excess of N556.93 billion, culminating in a net outflow of about N406.8 billion."

3. Lack of Infrastructure and High Production Costs

The cost of doing business is high in Nigeria. Basic infrastructures
like good roads, power supply are lacking, leading to high cost of
doing business. Many quoted and unquoted companies like Dunlop Nigeria
Plc and Michelin Nigeria have closed down shops. Most of the textile
industries have also stopped production, leading to the crash of their
share prices. The shares of Dunlop Nigeria Plc that sold above N6 per
share a few months ago now trade below N0.6 per share. Evidently, high
production costs reduce profitability or increase loses which also
impact negatively on the share prices.


4. Impact of Commercial Banks
Following the forced capitalization of banks to a minimum of
N25billion, almost all banks utilized and accessed the capital market
to raise funds. Within two years plus, many of the banks besieged the
capital market more than once, falling over one another in raising
funds through mega offers in a single tranche. The banks competed to
suck every liquidity from the Nigerian financial system, thus
overheating it. Through enticing marketing strategies, the banks
succeeded in their various offers, but left the capital market place
bleeding and gasping for breath. The primary market seemed to
experience a boom while the secondary market was sucked dry as many
investors dumped their shares in the secondary market, in favour of
the primary market offers achieved through bewitching marketing
efforts of banks. A total of N2.2 trillion was raised through various public offers dominated by the banks in 2008. Much of this came through disposal of shares in the secondary market.


5. Avalanche of Private Placement Offers

A number of private companies did private placement of their shares at
lower prices while they sought or intended to seek quotation of their
shares at higher values on the Nigerian Stock Exchange, thus making
such private placements very attractive. This lured investors to
dispose or dump their shares in the secondary market, purchase the
private placements and dispose of same immediately after their listing
on the Stock Exchange at higher prices. The Nigerian capital market
thus became a battleground as private companies were falling on each
other through avalanche of offers. The regulating bodies were impotent
as the Investment and Securities Act, 2007, does not place private
companies under their control. A number of companies that did private
placements to suck liquidity from the Nigerian capital market,
include: Investment and Allied Plc, Globe Reinsurance Plc, Multiverse
Ltd, Swap Technologies Ltd, Starcomms Ltd, Equity Assurance Plc, Oasis
Assurance Plc, IHS Ltd, Indomie Nigeria Ltd, Tetrazzini Ltd, Food
Concepts Ltd, Geolfluids Ltd, Goldlink Insurance Ltd, Universal
Insurance Ltd, Chams Plc, Fidson Health Care Plc, Reltel Wireless Ltd,
MTN Ltd, etc. Thus so much liquidity was sucked from the Nigerian
capital market in favour of private placements of private companies,
many of which remain unquoted till date, leading to the crash of the
Nigerian capital market.
The Director-General of the Nigerian Stock Exchange, Prof. Ndi
Okereke-Onyiuke admitted this fact in her review of the performance of
the Nigerian capital market when she observed inter alia "…a
significant portion of funds that left the stock market for private
placement market are still locked-in as many of the issues have not
applied to the Nigerian Stock Exchange for listing…."




6. Banks Short-Term Orientation Imposed on Long-Term Capital Market

At a time, banks were financing about 65% of the Nigerian capital
market through margin facilities granted to investors and stock
broking firms. Many banks abandoned or sidelined their core operation
of providing credit to the real sector in favour of "playing" the
capital market for short-term speculative activities that seemed to
pay off up to March 2008 before the cancer that afflicted the market
set in. It is estimated that the total exposure of banks to the
capital market in terms of trapped funds is in excess of N1 trillion.
Thus, the capital market place became overheated with so much
speculative activities of banks that by the time the market caved in,
it became difficult for them to exit through the narrow door as there
were no mega investors to "check them out". The Nigerian capital
market was no longer seen as a market for long-term funds, but that of
a short one. The banks embarked on unguarded short term treasure hunting spree from the capital market as their speculative activities soon overheated the capital market.


7. Inability of the Federal Government to Plot a Bailout Option

There were blunt statements from the Federal Government that it
will not intervene directly in the capital market which it sees as a
purely private affair. The government lacked the wisdom to examine the
socio-economic implications and chain effects of a failed capital
market. It therefore became impotent of hatching a bailout plan for
its beleaguered capital market unlike the governments of USA, Britain,
France and so on, playing politics with such a sensitive issue
that borders on "life and death". Thus the government outright refusal
to intervene directly in the crashing stock market has depleted any
hope of a possible market rebound leading to further loss of
confidence among investors. This has sparked off supply of shares by
desperate investors who, having seen no hope in the horizon, wish to
cut their losses short by rushing to sell at any price.

8. Structural Deficiencies of the Nigerian Stock Market

There appears to be some inadequacies of the Nigerian capital market,
especially the absence of market makers. As at third week of January
2009, the Nigerian Securities and Exchange Commission (SEC) has
licensed five market makers, but the Nigerian Stock Exchange was yet
to also license them due to avoidable administrative bottlenecks.
Thus, there are no functional market makers that can provide exit
windows for investors who wish to check out.


9. Regulating Inconsistencies and Pronouncements

The apex regulator of the Nigerian stock market, the Securities and
Exchange Commission, prior to the crash of the market had alleged
publicly that stock market prices were being manipulated and it
announced that it was probing some quoted companies, such as Dunlop
Nig. Plc, Eternal Oil Plc, Capital Oil Plc, and so on. Following the
publication, investors became afraid that such statements coming from
the principal regulator evidenced the existence of unrealistic prices
of all stocks, thus provoking panic selling of stocks among investors.
This contributed to the crash of the market. Unfortunately till date,
not much has been heard of the outcome of the SEC investigation that
transmitted shockwaves down the spines of investors.

Opportunities of the Capital Market Meltdown
The current meltdown of the Nigerian capital market has provided
excellent opportunities for both local and foreign investors to grab
the shares at rock-bottom prices with the greed of a hungry lion.
There appears to be no better time to buy the shares in the Nigerian
capital market than now. The fundamentals of the Nigerian capital
market are still very strong- high earnings per share, high dividends
per share, high earning yields, high dividend yields, good bonuses and
low price earning ratios. With the complete internationalization of
the Nigerian capital market, foreign investors can acquire up to 100%
of Nigerian companies and exercise full control. It is believed that
the acquisition opportunities offered by the current capital market
meltdown in Nigeria can only come, but once-now! Corporate hawks
should be on the prowl now.

10. Pressure from Banks
Following the more than N1 trillion of banks’ funds tapped in the capital market, the banks have become violent on the borrowers of funds (investors and stock broking firms) used to acquire shares. Currently these banks have brought suicidal pressure to bear on these borrowers, compelling them to sell their shares at any price, just to have a moment of respite. This has further increased the supply of shares at ridiculous prices, leading to greater market crash.

Consequences of the Market Melt doom.

The meltdown of the Nigerian capital market characterized by the crash
of the market capitalization from a record high of N13.5 million in
early 2008 to less than N4.5 trillion in the corresponding period of
2009 has manifested the under listed cost and consequences.

1. Loss of confidence in the Nigeria economy, as many investors prefer
to convert their naira to foreign currencies, especially the dollar
and hold them through their domiciliary accounts. This has in part led
to worsening exchange rate against the naira.

2. Mega losses by investors in the capital market whose total losses
are not below 2/3 of their investment before the meltdown. In other words, investors now have less than one third of the value of their investments before the free-for-all fall.

3. Trillions of naira – what remains of the capitalization – tied down
in unsaleable stocks. Most of the securities are on serious offer – an
indication that there are no willing buyers to check out any investors
who wishes to do so. Here investors not only contend with their losses
to date, they also contend with a supply glut that they seem trapped
with the remaining securities in their sad possession.

4. Over exposure of investors and stock broking firms to banks. Before
the meltdown, banks engaged in lending frenzy through margin account.
Borrowers were required to contribute 30% to while the banks
contributed 70 and the entire 100%$ was used for stock speculation.
Currently the market meltdown has wiped out the investors 30%
contribution while …. Half of the banks 70% have also been wiped out.
Notwithstanding this scenarios, the banks are still calculating
interest ad on daily basis and posting to the debit of the borrowers
account investors and stock broking firms, thus to sting perpetual
liabilities on the borrowers which only Divine intervention can save
these borrower from the hangman – the banks.

5. The market meltdown has also led to credit crunch in the economy as
banks do not have enough to lend to the productive sector leading to
high interest rate. Given that interest rate – cost of find to
manufacturers is a very significant component of cost of production,
thus translates to higher prices of goods and services, leading to
inflation.

6. The meltdown has also led to the loss of confidence of banks and
other lenders on shares as collateral for loan facilities. Shares
which were before now readily accepted by banks as collateral are now
shunned by hem. The few of them that dare to touch them for this
purpose only do so with a hundred meter pole, at ridiculous discounts
as some of them seek up to 300% cover.

7. The market meltdown has led to loss of depositors funds with the
banks. It is estimated that banks are exposed to the capital market in
excess of N1 trillion through loss in the value of securities for
which margin facilities were granted investors in Nigeria. This has
significantly increased the quantum of banks non-performing assets –
Toxic assets.

8. The market meltdown has also induced massive withdrawal of foreign
investors from the Nigerian financial system, damping the remaining
source of hope for possible market recovery.

9. Loss of value of pension Asset. Following the passage of the
Pension Reform Act, 2004, pension assets are now privately managed.
Under the Act, every employer, whether in the private or in the public
sector is obligated to deduct 71/2% of every employees/emolument, then
add another 71/2% totaling 15%. This is remitted on monthly basis to
a pension asset custodian under the superintendence of a pension fund
administrator. The PFAs manage the pension assets by investing in a
variety of instruments including equities. The PFAs also maintain
retirement savings account for employees showing the monthly
deductions remitted on that I behalf a well as the profits or losses
arising from the investors. It is estimated that more than N2 Trillion
of pension assets has gone down the drain casting doubts on the
ability of PFAs to repay retirees their pension and gratuities.

10. Inability of stock broking firms to settle their clients for
securities sold. With the current meltdown, many stock broking firms
cannot discharge their obligation to their clients. Proceed of shares
sold by these stockbrokers for their clients are greedily seized by
the banks to whom the stock broking firms are owning billions of naira
through margin accounts. Incoming credits or debits arising from sale
of securities or purchase of securities can only be settled through
the appointed settlement banks. This gives the banks the opportunities
to absorb any incoming credits to service huge margin facilities
granted to stockbrokers. Thus many stock broking firms rejects sale
order as they know that the banks will seize the credits, leading them
to contend with their clients.

11. Loss of Confidence in the regulatory bodies.
There appears to be a loss of confidence on the regulatory bodies of
the Nigerian Stock Exchange as well as the Securities & Exchange
Commission whose regulatory impotence has been largely blamed for the
present woes of the capital market and whose principal officers
appears to have exhausted all they know and all they can offer to
change the fortunes of the market. Many market analysts believe that
they ought to have thrown in the towel instead of trying to stay put
and superintend the "funeral mass' of the market a they have noting
again to offer

12. On a positive note, the Nigerian Capital Market meltdown has
compelled investment diversification to their assets especially real
estate and government bonds. Investors now scamper for safety rather
than high returns at the expense of possible huge or near total losses
which equity investment symbolizes –where the investor either enjoys
too much or suffers too much.

The market meltdown: The Way out
Only physical injection of funds can change the direction of the
market. No amount of grammar from "this-ism" to 'that-ism" will avail.
With the present liquidity crunch and investors loss of confidence, it
is not reasonable to expect salvation from individual and
institutional investors. A strong government bail-out as obtains in
USA, Russia, Britain and Singapore, is the magic wand needed to be
waived in the four corners of the market. The issues of government
intervention should not be politicized. The Nigerian Capital Market is
not a southern affair. Already the effect of its meltdown may give
rise to the collapse of many banks whose hundreds of billions of naira
are trapped unless urgent government intervention is articulated and
hurriedly implemented.

~ A.G. Olisaemeka is a chartered stock broker and consultant on
financial matters on doing business in Nigeria. He is the
Author/Editor of Scientists Discover Hell: As Astronauts Find Heaven
distributed by Amazon.

N.B:
This report was commissioned by the Nigerians Report for the benefit of Nigeria and the rest of the world.

The Workable Bailout Option for the Nigerian Capital Market


By A.G. Olisaemeka

It goes without resentment that only physical injection of funds, which will shore up prices, can lift the capital market from its present very low depth. Responding to the financial meltdown afflicting every facet of business in Nigeria, the Presidential Steering Committee on the Global Economic Meltdown has proposed short, medium and long term palliative measures to address these concerns. The committee recently observed:

“What is being worked out is a package of incentives that will ginger production, increase the purchasing power of the ordinary man on the street, and help generate employment opportunities”
“In the medium and long term strategies, aside infrastructural development, the government is looking in the direction of agriculture, through commercial farming clusters and value chain, not only for food security, but for employment generation.”

While specific actions were to be taken in the areas of power and oil, it also noted that:

“While the economic outcome does not look promising given the price of oil, the President remains optimistic that Nigeria can seize the moment to redirect our economy and begin on the road to prosperity.”

It has warned that the palliative measures will not include a salary increase. The issue for determination at this juncture is whether these short, medium and long term palliative measures are sufficient to uplift the Nigerian capital market. One has no difficulty in coming to a conclusion of an emphatic “No!”
It is clearly understandable that the focal point of the committee is on the general economy encompassing power, oil and gas, agriculture, the money and capital markets and the emphasis is on increased production, employment generation, higher purchasing power, infrastructural development and food security.

It is one’s repeated conviction that although these measures are noble and promising, they do not provide urgent answers to the question of the Nigerian capital market meltdown. The answers they provide are both indirect and tangential to the needs of the capital market.

Only a direct government intervention, characterized by physical funds injection can salvage the descent of the Nigerian capital market.

This can be achieved through any of the following ways:

1. Government Bailout of Banks, Stockbrokers and Investors

Investors in the Nigerian capital market as at end of January have lost more than N9 trillion. Much of these funds came from banks that lent heavily to investors and stock broking firms. This has increased banks non-performing assets on one hand and has foisted the hangman’s noose on investors and stock broking firms who have now become “slaves” of banks. The Federal Government can intervene by acquiring these toxic assets at cost, paying off the banks. This will stem the tide of possible bank failures arising from their present capital market over-exposure. It will also relieve the investors and stock broking firms of high debt burden in which they are entrapped and made incapable of making further investments. The government can gradually dispose off these acquired shares in the distant future in a way that will not overheat the market.
This position will align with the statement credited to the Minister of State for Finance, Mr. Remi Babalola:
“…but if for instance, the regulator of the banking system came out to say this is the make up for each of the banks and this is the exposure they have, then we can agree. It is not only in the capital market, there is significant exposure in the downstream. There are so many areas that people might have recorded significant downside. What we need to do is to quantify all these and try to see how we can take it out and give them fresh air to continue their business.”
(The Punch, February 5, 2009. Page 15)

Indeed this fresh air, this relief, for banks, stock broking firms and investors is all we need to revive the capital market.

2. Direct Purchase of Shares by the Government on the Nigerian Stock Exchange

The Federal Government may also wish to utilize a Special Purpose Vehicle (SPV) or use the Ministry of Finance Incorporated to commence buying of shares on the Nigerian Stock Exchange (NSE). When these shares are purchased, they will serve twin purposes – being investment for the government which it can hold, earn returns and later resell on one hand and increase the demand segment of the capital market leading to market recovery, on the other hand, it is estimated that the sum of N800 billion will suffice as the chain effect will trigger other purchase mandates as investors confidence heightens, following the upward movement of both the market capitalization and the ALL-Share-Index.

Finally, the market seems to be gaining some points in both the index and capitalization, following the government announcement of palliative measures highlighted above. It is one’s opinion that this appearance of market recovery is only the natural reaction of investors to new information which cannot be sustained.
On 4th February, 2009, the All-Share-Index gained 2.2% to close at 22, 838.32 points and on the 5th February, 2009, it again gained 2.26% to close at 23, 356.03 points. The market capitalization also gained the same percentage movement to close at N5.108 trillion and N5.2 trillion respectively. This is a far cry of all-time high figures of about 66000 points for the Index and about N13.5 trillion for the capitalization less than a year ago.

The euphoria of this announcement of palliative measures that triggered the current bullish trend in the market is not expected to last for the next five working days unless physical capital injection of funds is articulated and implemented. The government should be in a hurry to do this if it wishes to save the capital market.

President Umaru Yar’Adua has directed the the CBN and Finance Ministry to liaise with other agencies and do more work on some short-term palliative measures being proposed so that they could be implemented soon.
Let physical injection of funds into the capital market be part of these measures if they must succeed in changing the direction of the capital market for good, otherwise the Nigerian Capital Market is still sitting on a keg of gunpowder.


CONCLUDED.

Brilliant post, especially brilliant reference material for research analysts

Good points. The impact of commercial banks in their quest to grab as many fund from the capital market as possible i think is the chief cause of the almost meltdown in the Nigerian capital market. The banks introduced a lot of sharp practices just to make thier financial statements look good.
I will not mention names here, but, hear this, a banker once approached me to buy their bank's share which i was sceptical about and told her i don't have money. To cut the long story short, she offered to help me get a loan from that same bank to buy their own shares. And they classed the loan as a consumer loan.
What a desperate move!!
Once Again, OP thanks for this wonderful post.

A.G. Olisaemeka, the author/editor of Scientists Discover Hell: As Astronauts Find Heaven, http://www.amazon.com/Scientists-Discover-Hell-Astronauts-Heaven/dp/1440429995has passed on to Glory on Thursday December 29, 2011.
The beloved wife broke the news to us this morning.

God knows best.

the general problems we are having in this country reflect in every aspect that make up the country, so, our problems in this country is developing more spider web-like hazard. As a scientist, what i would advise nigerians is to learn and make their WAY irrespective of their challenges and never to complain as it will not help them but only stop them from attaining their goal.
as for, i would never invest my money in Nigeria stock market for a long term prospect for those BIG COCKROACHES AND MOSQUITOES to manipulate
if you understand trading very well, you can trade the nigeria stocks and pull out when MR PROBLEM surface.

join free nigeria stock pick alert, a thread on nairaland

Thursday December 29, 2011, will be two years since A.G. Olisaemeka, the author of this study and author/editor of Scientists Discover Hell: As Astronauts Find Heaven, http://www.amazon.com/Scientists-Discover-Hell-Astronauts-Heaven/dp/1440429995 passed on to Glory.

We miss his genius and charity.

May God continue to comfort his bereaved beloved wife and wonderful children and entire family, friends and associates at the Nigerian Stock Exchange.

The banking sector in any country plays a fundamental role in increasing the level of economic activity. As intermediaries to both suppliers and users of funds banks are situated in a continuum that determines

http://www.scharticles.com/earnings-management-share-prices-nigerian-banking-industry/

the work was very good.


see more information.http://www.projectandresearchwork.com/86-2/

Due to globalization of financial markets throughout the world, entities in any country seeking to raise funds need not be limited to their domestic financial market. Nor are the investors in a country limited to the financial assets issued in their domestic market

it’s a product of a high quality project researched work. Follow the link bellow to access the complete work
Impact of Economic Liberalization on Nigerian Stock Exchange

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