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Investors lose N8.6trillion as banking reforms aggravates stock market decline

The Banking reforms implemented  in the second half of the year by   the Central Bank of Nigeria (CBN) aggravated the fall of equity prices on the Nigeria Stock Exchange(NSE) , with investors losing N8.6 trillion in shares’ values from March 2008 to date.

The CBN had, on August 14 and early October 2009, in its audit report conducted in all the 24 banks by  joint examiners from the Nigerian Insurance Deposit Corporation (NDIC), uncovered bad loans portfolio of over N3 trillion.

This sent shock waves to the stock market. The CBN injected a total of N620 billion in the affected banks.

The banks are Intercontinental Bank Plc , Union Bank of Nigeria Plc,  Oceanic Bank International Plc, Afribank Nigeria Plc, Finbank Plc, Spring Bank Plc, Bank PHB and Equitorial Trust Bank all of which had  their chief executive officers sacked, while the shares of seven listed  among the banks were placed on indefinite suspension to prevent investors apathy which could lead to another round of devaluation in stock prices in the market.

The Banking crisis has continued to impact on the stock market as investors’ confidence wanes  since banking stocks make up of at least 60 per cent of the entire market.

Specifically, the crash of the Nigerian stock market is unprecedented . The market capitalization which is a major stock marker gauge has nose-dived from an all time high of N13.5 trillion in March 2008 to less than N5 trillion by the end of trading on December 23, 2009.

Besides, the All-Share Index, another stock market performance indicator which measures the magnitude and direction of general price movement has plummeted from about 66000 basis points to less than 21000 points in the same period.

Invariably, the downward slide of the market capitalisation showed that investors have lost not less than N8.6 billion from a high of N13.5 trillion in March 2008.

The stock prices have experienced a free-for-all downward movement regime as 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.

The meltdown in stock prices, the worst recorded in the history of the 50 year old market earned the Nigerian Stock Exchange (NSE), the highest declines posting amongst other African exchanges in the first quarter of 2008 due to many factors which include :

Huge bad loans granted by banks to operators in the market which brought the value of stocks to all time low ; Withdrawal of foreign investors’ funds; Avalanche of Private Placement Offers; Regulating inconsistencies and pronouncements and  Structural deficiencies of the Nigerian capital market.

At the moment, fresh investors are cautious of entering into the market for fear of losing their investment as the market is yet to rebound even with the tight regulatory and monitoring machineries in the financial sector.

Before, the Banking reforms, the stock market did show sign of recovery as the  market recorded significant improvement between April and June 2009, with the All-share index rising from 19,814.92 points as at April 4, 2009 to close at 30,924.97 points as at June 2, 2009.

Meanwhile, a former past President of the Nigerian Stock Exchange (NSE), Mr. Goodie Ibru has said one of the problems with the Nigerian capital market is the banking crisis. Like most banking crises, it is about taking and managing risks badly. However, this banking crisis is also destroying confidence in our capital market.” he said

Commenting on the low perception of the Nigerian capital market , he lamented that the low perception has continued for so long because  government failed to act promptly to stem the tide.

His words: ‘ Owing to the general decline in the prices of equities quoted on The Exchange from March 2008, many investors are unwilling to patronize the market. This is sequel to the losses they suffered in their holdings which ranged from 20% in some stocks to as high as 90% in some others.

Consequently, not a few individual and institutional investors have already moved to money market instruments as alternatives to equity investment. The result is that today, the investors’ perception of the market is rather low.”

He stressed that issuers of securities, especially equities, have been shy to approach the market for new monies for fear of gross under-subscription of their offers noting that those who have raised funds by private placements with the promise of listing afterwards are afraid to list now because of the continuous downward trend in equities prices.

The crisis in the banking sector has further aggravated loss of  confidence in the stock market as retrenchment of staff continues. Not less than 5000 banks’ staff have been laid off in less than one month following directive from the apex bank (CBN).

The second quarter of 2009 in the Nigerian capital market was indeed very eventful, particularly when viewed against the background of the exit of the heads of the two foremost regulators of Nigerian financial system.

First it was Musa Al-Faki, Director-General of the Securities and Exchange Commission (SEC), who was believed to have been forced to resign about five months before the end of his first tenure of five years, which was due on October 26, 2009.

He was not even allowed the honour of bidding for a second term due to alleged  improper handling of a case of share price manipulation involving two foremost Nigerian business men Alhaji Aliko Dangote of Dangote Group and Femi Otedola, President, Zenon Oil & Gas, as well as chairman, chief executive officer of African Petroleum.

The second eventful thing that happened in the capital market was the controversial election of Alhaji Aliko Dangote as President of NSE. His election was contested in court by shareholders of quoted companies who claimed that it was improper to elect him for his involvement in share price manipulation of AP shares.

Dangote succeeded  Dr. Obafemi Otudeko, at the expiration of his three year tenure, and promised to reposition the stock exchange and capital market to become the leading stock market in Africa for capital formation driven by transparency, innovation, efficiency and liquidity.

“My tenure will be guided by five key focuses; transparency and improved governance for the market; improving the liquidity, turnover and size of the market; enhancing market in terms of efficiency by ensuring clearer and updated rules, processes and procedures; provision of world class infrastructure and technology for the market; and massive capacity building and rapid skill enhancement of the human resources of the Exchange and investor enlightenment,” Dangote said

In February also, the Securities and Exchange Commission (SEC) the apex authority of the capital market, received the report of the 15-member Adedotun Suleiman committee on the Review of Capital Market Structures and Processes.

The report noted that even if the meltdown in the Nigerian stock market indicators coincided with the global trend, nobody should be confused into thinking that the worldwide crisis was the lone cause.

 It thereafter identified seven other factors that contributed that helped to impact negatively on investor confidence like “ineffective market regulation and supervision; weak institutions and corporate governance; (and the) lack of regulatory pro-activity and cohesion.”

 Other inhibiting factors, the report identified included “unregulated margin financing; concerns about transparency; uncompetitive cost structures; (and) inefficient, cumbersome processes.”

 The  market was rattled by news of manipulations when AP  in a paid advertorial  accused Nova Finance & Securities Limited, acting for Dangote of manipulating its share price between February 11 and March 20, 2009 .

The SEC investigating committee heard from representatives of the various parties including AP, Nova Finance, Dangote and Afribank Registrars, and found Nova Finance, a stock broking firm, guilty of flouting several sections of the Investments & Securities Act (ISA) 2007.

The commission   suspended Nova for a  year from April 16, 2009 , in line with Section 38(4) of the ISA . Eugene Anenih, Nova’s CEO was “disqualified from being employed in any arm of the securities industry for a period of five years with effect from April 16, 2009 .”

Anenih was also been referred to the Economic & Financial Crimes Commission (EFCC) for further investigation and possible prosecution under section 115, among others.

One of the measures taken so far to salvage the capital market from total collapse was the approval of both SEC and NSE the introduction of market makers. Though, the scheme has not taken off due to some stringent regulatory requirement by the NSE.

Another measure is the approval of Asset Management Company (AMC), by the CBN as the last resort to take over the bad loans estimated at over N3 trillion in the financial system.

This may suffer a set back as Dealing members (Stockbrokers), are opposing the idea because it favours only the money market.

 The stockbrokers in different interviews have been kicking against the proposed entity because the apex bank did not make wide consultation before submitting the AMC bill to the National Assembly.

The bill on the AMC expected to buy up the toxic assets of banks that are causing liquidity problem in the financial system according to the Director of Banking Supervision, CBN, Mr. Samuel Oni, has already been submitted to the Presidency for onward delivery to the National Assembly.

He said the AMC will have N250 billion capital, to be owned 60 per cent by the CBN and 40 per cent by the Federal Ministry of Finance.

NSE Director General had advised stockbrokers to brace up to the challenges of the vagaries of the market and be prepared to take advantage of the AMC when it comes into operation.

Meanwhile, Chartered Institute of Stockbrokers (CIS), had last year suggested that toxic assets in the capital market be converted into a five-year capital notes re-discountable with the CBN and recognised as liquid assets.

They also said banks should make the rediscounted exposures to stockbrokers as line for trading only, backed by eligible securities that excludes the bank’s own stocks and the aggregate amounts so discounted by the CBN should be floated as a five-year FGN Bond and sold to the public. This, they said, would ensure that the impact is non-inflationary and not underwritten from the public treasury.

However, capital market analysts have said that physical injection of funds into the market will  change the direction as banks have refused to give out loans to buoy activity in the economy.


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