The Meltdown of the Nigerian Capital Market: Causes and Consequences

The Nigerian Stock Exchange

The Meltdown of the Nigerian Capital Market: Causes and Consequences

By A.G. Olisaemeka

The current crash of the Nigerian Capital Market as 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 Nigerian Stock Exchange, 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 N25 billion, 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 costs 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% 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 scenario, the banks are still calculating interest 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 fund to manufacturers is a very significant component of cost of production, this 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 them. 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 employee’s 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 their behalf as well as the profits or losses arising from their investments. 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 owing 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 orders 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 appear 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 as they have nothing again to offer.

12. On a positive note, the Nigerian Capital Market meltdown has compelled investment diversification to other 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.

© Nigerians Report 2009.All rights reserved.

~ 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.