SEC DG, Ms Arunma Oteh

Financial and capital market analysts last week reasoned that rather than heaping the blame of the crisis in the capital market on individuals and agencies as contained in the report of the House of Representatives ad hoc committee that probed the near collapse of the market, efforts should be geared towards improving investors’ confidence and raising the standard in the market, report Festus Akanbi and Goddy Egene

For an upward of four weeks now, the report of the House of Representatives ad hoc committee on the investigation into the near collapse of the Nigerian capital market has been given rave reviews in both print and electronic media.

Although the report was not laid on the floor of the house until July 17, a combination of the circumstances that led to the emergence of the committee namely; the bribery scandal that discredited the former committee headed by Herman  Hembe, the sweeping indictment of some key regulators  in the financial and capital markets over their alleged roles as well as the controversies generated by the report itself has compelled editors to assign pride of place to reports, analyses and opinions on the capital market probe.

The panel identified four reasons for the crisis in the capital market. These are: the manipulation of the market using delisted companies; regulatory failure of the financial regulators; sensitive banking reforms; investors’ ignorance, and uncoordinated shareholders’ relation with the Securities and Exchange Commission (SEC).

The committee noted that the Nigerian Stock Exchange (NSE) market capitalisation stood at N0.294 trillion by the end of 1999. By the end of 2003, it stood at N1.302 trillion; N1.93 trillion by year end of 2004; and N2.521trillion by end of 2005 fiscal year. In 2006, market capitalisation closed at N4.23 trillion; rose to N9.98 trillion in 2007, and opened with N9.98 trillion in 2008.
“It rose to N12.5 trillion within the first 60 days of 2008; and was N12.15 trillion by the end of March, and closed at N6.08 trillion by year end of December, 2008. It fell further by closing at N5trillion at the end of December 2009; N7.81trillion by the end of fiscal year 2010, and closed at N6.53 trillion by the end of 2011. As at March, 2012, the market capitalisation stood at N6.61 trillion, accounted for, mainly, by mergers and acquisitions in the banking sector.

However, informed analysts that reviewed the committee’s reports last week contended that although certain fundamental issues were raised in the report, some of the sweeping indictments pronounced on certain regulatory agencies could have been informed by the committee’s lack of deep knowledge in the workings of those organs of government.

Central Bank of Nigeria
In one breath, the committee claimed there was no harmonisation of monetary policy with fiscal policy, saying this affected capital market adversely. The committee noted that both the CBN and the fiscal authorities have become the source of primary liquidity injection. They also took a swipe at the apex bank for the manner it pursued the ongoing banking sector reforms especially the process of nationalisation of three of the rescued banks, among others. The CBN was also fingered for the absence of rules governing margin loans in the financial system, given the role of margin loans in the capital market crisis in Nigeria. The CBN was also criticised for failure to provide certain information demanded by the committee.

Nigeria Deposit Insurance Corporation
Instructively, the only issue where the name of the Nigeria Deposit Insurance Corporation came up was in the nationalisation of the three erstwhile rescued banks namely Afribank Nigeria Plc, now Mainstreet Bank Limited, Bank PHB Plc now Keystone Bank Limited and Spring Bank Plc now Enterprise Bank Limited. The report alleged that the process of nationalisation of these banks violated NDIC act and that it was fraught with potential forgery, unethical practices and abuse of office, among others.
As it turned out, the lion share of the blame for the near collapse of the capital market was heaped on Securities and Exchange Commission and understandably, the head of the commission, Arumah Oteh, was not spared.

Playing to the Gallery
Some finance experts who spoke with THISDAY last week admitted that the report indeed explained why it had been difficult for the nation’s capital market to fully recover from the crisis that engulfed it several years back.
However, there seemed to be a consensus on the fact that some of the conclusions reached by the ad hoc committee in its report were either informed by a deliberate attempt to settle scores after the gales of money-for-probe scandals rocking the National Assembly or that the conclusions were arrived at due to lack of understanding of the workings of the financial system.

Analysts, for instance, wanted to know how the recommendations in the report can actually return the market to the path of recovery considering the efforts concentrated on calls for a probe of regulatory officers of institutions like the CBN, NDIC, SEC, Asset Management Company of Nigeria (AMCON) and Corporate Affairs Commission, (CAC) as recommended by the committee. For instance, the report recommended that the CBN governor, his deputies and directors, and SEC DG along with her directors should be subjected to a code of conduct which has appropriate penalties for regulatory failures.

Managing Director, Financial Derivatives Company, Mr. Bismark Rewane, said if the quest of the House of Representatives committee was to redeem the nation’s capital market and to raise the market to the point where it will add values to investors, then how will the harvests of indictments of the various regulatory agencies achieve these?
Rewane said what should be paramount to the lawmakers and all the parties concerned is how to build shareholders’ confidence, saying this cannot be done by ridiculing people and agencies.
On the exception the committee took for the handling of the nationalisation of the three banks, where it faulted the role played by the NDIC, industry players said the committee merely jumped into hasty conclusion by thinking the process was put in place to shortchange the banks’ shareholders.

The Rot...
An industry analyst, Mr. Victor Adelakun, recalled the active roles played by the foreign portfolio managers in the Nigerian capital market. According to him, their entry into the capital market was welcome with funfair. “They in turn poured encomiums on our capital market operators and players for being one of the best in the world in terms of high yield based on the level of percentage of returns on investment. The foreign fund managers brought in about $15 billion into the Nigerian Stock Exchange (NSE) between 2005 and 2008. “Millions of Nigerians also sold their landed properties and even took loans from the banks in the form of margin lending to become emergency investors and shareholders in the capital market in order to partake in the perceived high returns on investment. “As soon as the foreign fund managers discovered that the Nigerian economy was not insulated from the vagaries of global economic meltdown, they hurriedly divested from our capital market, which exacerbated the ‘near collapse’ of the capital market,” Adelakun said.

He explained that the banking sector stock was the most active in the capital market as it was controlling 65% of the market share. It was therefore obvious that the fortunes or misfortunes of the capital market would rob off on the banking sector. The observed liquidity crisis witnessed by some banks in 2008 and 2009 informed the CBN in collaboration with the NDIC to embark on a special examination of all the 24 existing Deposit Money Banks (DMB) in Nigeria in July 2009, to ascertain their level of exposure to the capital market and its impact on liquidity, capital adequacy, asset quality and earnings.

As it turned out, 10 out of the 24 banks were in grave financial condition, out of which eight needed immediate prompt corrective actions. Consequently, NDIC in the discharge of its statutory role under Section 39 (i) of the NDIC Act 16 of 2006 and in consultation with the Federal Government, CBN and Ministry of Finance (MOF), adopted the Bridge Bank option to resolve the three failing banks.

The CBN, thereafter, in exercise of its powers under the BOFI Act 1991, as amended, revoked the operating licences of the three failing banks. The affected banks were handed over to NDIC for resolution.

The NDIC, in compliance with its enabling laws established the three bridge banks namely Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Limited which acquired the assets and assumed all liabilities of the defunct Afribank Plc, Bank PHB Plc and Spring Bank Plc, respectively. The actions were carried out under condition of utmost secrecy to ensure discretion and to avoid leakages which would have further exacerbated the precarious financial condition of the rescued banks and exposed the entire banking system to run.

A capital market operator who spoke with THISDAY last week said most of the pronouncements of the ad hoc committee showed that the panel was swayed by the pressure mounted by the various shareholders group that made presentations at its various sittings. According to the analysts, most of the shareholders that were crying wolf had actively supported chief executives of the failed banks when the atrocities were being committed, wondering why they had failed to promptly blow the whistle before the affected banks kissed the canvass.

“The milk is already spilled, let the shareholders go home and count their losses while the depositors go home and sleep soundly knowing that their deposits are being protected by the NDIC,” he said.
In a detailed report presented to the ad-hoc committee investigating the near collapse of the Capital Market, CBN Deputy Governor in charge of Financial System Stability, Kingsley Moghalu, explained how the global financial crisis affected the capital market.
On the impact of the global financial crisis and its contribution to the Nigerian capital market decline, he listed these factors:
•The decision by international fund managers and investors to exit the Nigerian market due to increased risk aversion and the need to shore up their home countries’ economies which had been heavily eroded in the wake of the global meltdown. The withdrawal of over $15 billion by foreign portfolio investors further exacerbated the crisis in the capital market.

• Perceived uncertainty in the economic environment, particularly arising from the crisis in the Niger Delta, engendered a “flight-to-safety” among the foreign investors
•Panic recall of margin and share loan facilities by banks, caused many investors to sell their stocks
•Foreign Trade Support lines earlier given to Nigerian banks were re¬negotiated downward thereby making them even more expensive in the interim.”

New Adhoc Committee...
The initial attempt of the House to probe into the troubles that plagued the nation’s capital market was pushed through an adhoc committee headed by Herman Hembe. However, the effort ended abruptly amidst corruption and money-for-probe allegations levelled against the committee by the embattled Director-General of Securities and Exchange Commission, Ms Arumah Oteh. Oteh had alleged, among other things, that Hembe as chairman of the committee probing her and the commission had no credibility, having demanded about N44 million from the SEC to organise the investigative hearing. With Hembe’s counter allegation that it was the SEC boss that offered to donate N30 million to his committee and with allegations flying right, left and centre, the leadership of the House, after series of emergency meetings, decided that Hembe should vacate his exalted position, a bitter pill that reportedly took time for Hembe to swallow. A new adhoc committee of eight members headed by Hon. Ibrahim El-Sudi was therefore constituted to push ahead with the probe.