THE IMPACT OF GLOBAL FINANCIAL CRISIS ON THE

NIGERIAN CAPITAL MARKET

BY

OKPO EMMANUEL OGBONNAYA

PG/MBA/2007/DL/1532

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA,

ENUGU CAMPUS

OCT. 2009

i

THE IMPACT OF GLOBAL FINANCIAL CRISIS ON THE

NIGERIAN CAPITAL MARKET

BY

OKPO EMMANUEL OGBONNAYA

PG/MBA/2007/DL/1532

Being a project presented to the Department of Banking and Finance,

Faculty of Business Administration, University of Nigeria, Enugu Campus,

In partial fulfillment of the requirement for the award of Master of Business

Administration (MBA) Degree in Banking and Finance

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA,

ENUGU CAMPUS

OCT. 2009

ii

CERTIFICATION

I, certify that this project work as carried out by Okpo Emmanuel Ogbonnaya of the

Department of Banking & Finance, University of Nigeria Nsukka, Enugu Campus, is an

embodiment of original work and has not been submitted in part or full to this university or

any higher institution of learning.

Student’s Signature …………………………………………………………………….

Student’s Name …………………………………………………………………………

Student’s Registration Number ………………………………………………………..

iii

APPROVAL

The project work as carried out by Okpo Emmanuel Ogbonnaya. Reg. No.

PG/MBA/2007/DL/1532 of Department of Banking & Finance, Faculty of Business

Administration , University of Nigeria, Enugu Campus is hereby approved.

Supervisor’s Signature & Date ………………………………………………………..

Supervisor’s Name ……………………………………………………………………..

HOD’s Sigature & Date ……………………………………………………………….

HOD’S Name …………………………………………………………………………..

External Examiner’s Signature & Date ………………………………………………

External Examiner’s Name ……………………………………………………………

iv

DEDICATION

This project work is dedicated to

God Almighty for His Blessing,

Guidance, Mercies over me.

v

ACKNOWLEDGEMENTS

This research work will hardly be complete if I fail to put on record those who functioned as

the Engine Room and motivators.

Firstly, my gratitude does to God Almighty (the fountain of Knowledge) who saw me

through all the rigours and the ordeals of this exercise. I will always appreciate Him more.

My appreciation goes to my parents, Sir & Lady Benjamin Okoji Okpo for laying a solid

academic foundation for me and who also worked tirelessly to see me through in all my

academic endeavours.

Mention must also be made of my siblings- Mary, Evelyn and Esther, and my best friend

and wife, Ifeyinwa Emmanuel Okpo. Their encouragement/support was tremendous.

My gratitude to large extent equally goes to Mr. Chuke Nwude, the Head of Department,

my project adviser and supervisor who by all standards remained a source of inspiration.

His scholarly advice, opinion and immense supportive role led to the effective completion

of this research work.

I would also like to thank my colleagues most especially Joachim (of MBA Finance) for

their understanding and support and to all who contributed in one way or the other but

because of space their names could not be mentioned.

vi

ABSTRACT

The objective of this study is to examine the impact of global financial crisis on the

Nigerian Capital Market particular to stockbrokers and investors on Nigerian Stock

Exchange, Lagos Branch. The data for the study were collected through primary and

secondary sources of data namely: Textbooks, Journals, Internet, past works relating to the

study and questionnaire. The data were analyzed and presented using tables; simple

percentage and the hypothesis were tested using Chi-Square method of data analysis.

The findings shows that: Manipulation of share prices has significant effect on the Nigerian

Capital Market crash; insider trading /dealing is a significant factor in destroying investors’

confidence in the Nigerian Capital Market; there is a significant relationship between the

global economic meltdown and the crisis in the Nigerian Stock Exchange during the study

period.

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TABLE OF CONTENTS

PAGE

Title i

Title page ii

Certification iii

Approval iv

Dedication v

Acknowledgments vi

Abstract vii

Table of Content viii

CHAPTER ONE – INTRODUCTION

1.1 Background of Study 1

1.2 Statement of the Problem 5

1.3 Objective of the Study 5

1.4 Research of Questions 6

1.5 Statement of Hypothesis 6

1.6 Scope of the Study 7

1.7 Significance of the Study 7

1.8 Limitations of Study 7

1.9 Definition of terms 8

CHAPTER TWO – LITERATURE REVIEW

2.1 Introduction 9

2.2 The Nigerian Capital Market 10

2.3 Regulation of the Capital Market 11

2.4 The concept of financial crisis 12

2.5 Causes of the Global Financial Crisis 13

2.6 The Impact of the Global Financial Crisis on the Nigerian Economy 15

2.7 The Meltdown of the Nigerian Capital Market 17

2.8 Capital Market Reforms 25

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CHAPTER THREE – RESEARCH METHODOLOGY

3.0 Introduction 28

3.1 Research Design 28

3.2 Source of Data 29

3.2.1 Primary Source 29

3.2.2 Secondary Source 29

3.3 Population of the Study 29

3.4 Design & Administration of Questionaire 29

3.5 Sample Size Determination 30

3.6 Sampling Technique 31

3.7 Restatement of Hypothesis 31

3.8 Method of Data Analysis 31

3.9 Statistical Procedure 32

3.10 Validity and Reliability of Instruments 33

CHAPTER FOUR – DATA PRESENTATION AND ANALYSIS

4.1 Introduction 34

4.2 Presentation of Data & Analysis of Data 34

4.3 Test of Hypothesis 41

4.3.1 Test of Hypothesis 1 42

4.3.2 Test of Hypothesis 2 43

4.3.3 Test of Hypothesis 3 44

CHAPTER FIVE–SUMMARY OF FINDINGS, CONCLUSION &RECOMMENDATIONS

5.1 Summary of findings 50

5.2 Conclusions 51

5.3 Recommendations 52

BIBLIOGRAPHY 54

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The current global economic meltdown which started in late 2007 was as a result of a

liquidity shortfall in the United States banking system. The immediate cause or trigger of

the current crisis was the bursting of the United States housing bubble which peaked in

approximately 2005–2006. Already-rising default rates on "subprime" and adjustable rate

mortgages (ARM) began to increase quickly thereafter. An increase in loan packaging,

marketing and incentives such as easy initial terms, and a long-term trend of rising housing

prices had encouraged borrowers to take on difficult mortgages in the belief they would be

able to quickly refinance at more favorable terms. However, once interest rates began to rise

and housing prices started to drop moderately in 2006–2007 in many parts of the U.S.,

refinancing became more difficult. Defaults and foreclosure activity increased dramatically

as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest

rates reset higher.

Low interest rates and large inflows of foreign funds created easy credit conditions for a

number of years prior to the crisis, fueling a housing construction boom and encouraging

debt-financed consumption. The combination of easy credit and money inflow contributed

to the United States housing bubble. Loans of various types (e.g., mortgage, credit card, and

auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of

the housing and credit booms, the number of financial agreements called mortgage-backed

securities (MBS) and collateralized debt obligations (CDO), which derived their value from

mortgage payments and housing prices, greatly increased. Such financial innovation

enabled institutions and investors around the world to invest in the U.S. housing market.

1

As housing prices declined, major global financial institutions that had borrowed and

invested heavily in subprime MBS reported significant losses. Falling prices also resulted in

homes worth less than the mortgage loan, providing a financial incentive to enter

foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U.S. continues

to drain wealth from consumers and erodes the financial strength of banking institutions.

Defaults and losses on other loan types also increased significantly as the crisis expanded

from the housing market to other parts of the economy. Total losses are estimated in the

trillions of U.S. dollars globally.

While the housing and credit bubbles built, a series of factors caused the financial system to

both expand and become increasingly fragile, a process called financialisation.

Policymakers did not recognize the increasingly important role played by financial

institutions such as investment banks and hedge funds, also known as the shadow banking

system. Some experts believe these institutions had become as important as commercial

(depository) banks in providing credit to the U.S. economy, but they were not subject to the

same regulations. These institutions as well as certain regulated banks had also assumed

significant debt burdens while providing the loans described above and did not have a

financial cushion sufficient to absorb large loan defaults or MBS losses. These losses

impacted the ability of financial institutions to lend, slowing economic activity. Concerns

regarding the stability of key financial institutions drove central banks to provide funds to

encourage lending and restore faith in the commercial paper markets, which are integral to

funding business operations. Governments also bailed out key financial institutions and

implemented economic stimulus programs, assuming significant additional financial

commitments.

Financial booms and busts are not a new phenomenon. What is disquieting about the current

meltdown is that it is in the nature of a seismic tremor of earth-shaking proportions.

2

Within a few months, some of the biggest financial giants have gone belly-up, while several

more were in serious trouble. How indeed are the mighty fallen! Bear Stearns, AIG, Fannie

Mae and Freddie Mac, Lehman Brothers and Merill Lynch.

The automobile giants are virtually on their deathbeds while a good number of industrials

are surviving only by the skin of their teeth. A rather prosperous central European nation,

Iceland, has virtually sued for bankruptcy, resorting to an IMF standby arrangement - the

first since the British 'humiliation' of 1967.

The contagion has spread to Europe, Japan, Asia, Africa and Latin America. An estimated

US$1.7 trillion in bailout funds has already been committed by OECD countries, but we are

yet to see the end of the tunnel, not to talk of any light in it. According to a recent report, the

world stands in need of a staggering US$4 trillion to fully resolve this crisis.

In Nigeria, the former CBN Governor Professor Chukwuma Soludo was credited as saying

that Nigeria was not going to be affected by the Global economic recession. After much

dithering, the Federal Government decided to take some steps towards insulating the

nation’s economy against the effects of the global economic recession. President Umaru

Yar’Adua, acknowledged that the impact of the crisis was already taking its toll on the

economy and set up a new economic team to monitor the crisis and advise the government

accordingly. The team, with the President himself as chairman, will assess the impact of the

global economic crisis on the country, recommend appropriate macro-economic policy

responses and identify other practical measures aimed at shoring up investors’ confidence.

The Committee’s other responsibilities are to examine other related issues such as

unemployment and make recommendations on any other matters or actions required to

forestall adverse consequences of the global economic meltdown on the nation.

Many Nigerian households invested in the Global Depository receipts (GDRs) operated by

some Nigerian banks. Indeed the value of these GDRs has fallen to an abysmally

unacceptable level since the first quarter of 2008 when the global Stock Market was hit by

tumbling prices and dwindling investor confidence.

3

The situation is so bad that some of the GDRs purchased at $11.20 have fallen to an all-time

low of $3.50. Back home, in Nigeria, the stock market is in shambles, with all efforts put

forward by the Nigerian Stock Exchange (NSE) producing no substantial results.

The global financial crisis has resulted in foreign portfolio investment withdrawals from the

Nigerian Capital Market in order to service financial obligations. A total financial inflow to

Nigeria between 2007 and 2008 increased by 21%, but is estimated to have reduced by

38.6% between 2008 and 2009.

Nigeria's own stock market index is the Nigerian Stock Exchange's All-Share Index (NSE-

ASI, or simply ASI), and currently provides a composite picture of the financial health of

233 listed equities. Starting with an index value of 100 in 1984, with increased listings and

financial activity, it attained a value of 57,990 at the end of year 2007. It started the year

2008 at 58,580 (with a market capitalization of N10.284 trillion), and went on to achieve its

highest value ever of 66,371 on March 5, 2008,with a market capitalization of about

N12.640 trillion.

However, ever since that high, the ASI has inexorably declined, exhibiting a secular bear

posture since July 17, 2008 when, at ASI=52,910, the index fell below 20% of its all-time

high, and has continued to fall, closing on October 22, 2008 at 42,207 (a 36.4% loss from

the high within just seven months, and a year-to-date decline of 27.9%), The decline

continued into 2009 and was 25,065 as at October 26, 2010, with a market capitalization of

N6.141 trillion. In terms of capital decline, the Nigerian capital market has since the March

5, 2008 lost to date about N6.5 trillion, or about 52%.

I doubt if there is any reasonable Nigerian who did not jump on the bandwagon in the crazy

days of share boom. Even petty traders and other low-income earners saw stocks as the new

way to financial freedom. Some invested all their life savings and end of service benefits.

How wrong they were; because less than one year after the bonanza started prices crashed

throwing them into the cesspit of hopelessness and indebtedness.

4

1.2 STATEMENT OF PROBLEMS

The Nigerian stock market is in shambles. It earned the unenviable accolade as one of “the

world’s worst performing stock market in 2008, after losing N5.4trn in market capitalization

and 54 percent in the All share index” just a year after it had emerged as the world’s best

performing stock market in 2007 with a return of 74.9 percent.

Investors have lost confidence in the Nigerian capital market. There are some individuals

and institutions that are worried and wary of losing even more than they have already lost.

Many individuals are swearing to never have anything to do with the stock market again

once they are able to “comfortably” bail out. It has become difficult for companies to raise

fresh fund through the capital market. It is believed that the supervisory body (SEC) is not

performing its oversight function effectively.

However, there have been reports that some of the causes of the collapse of the capital

market were as a result of the nefarious act perpetrated by the market regulatory body as

well as the market players. Some of these unprofessional conducts of these market actors

ranges from price-fixing and overvaluation of shares to manipulation of initial public offers.

These corrupt practices of the market actors and the eventual global economic meltdown

bounced heavily on the capital market and impacted negatively on the market and the

economy in general.

This study therefore seeks to find the impact of the global financial crisis on the Nigerian

capital market as well as on the economy.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the impact of the global financial crisis on

the Nigerian capital market. Other specific objectives include:

i) To determine the impact of share prices manipulation on the Nigerian capital

market

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ii) To examine the effects of insider trading on investor’s confidence in the Nigerian

capital market.

iii) To determine if there is a significant relationship between the global economic

meltdown and the crises in the Nigeria Stock Exchange.

1.4 RESEARCH QUESTIONS

To achieve the foregoing objectives, the following research questions are posed:

i) Is there any relationship between share prices manipulation and the Nigerian

capital market crash?

ii) To what extent does insider trading affects investor’s confidence in the Nigerian

capital market?

iii) Is there any significant relationship between the global economic meltdown and

the crises in the Nigeria Stock Exchange?

1.5 STATEMENT OF HYPOTHESES

A review of literature shows that there are other explanations for the crash in the Nigeria

stock market beyond the global financial meltdown. Also, studies have shown that the

supervising body is not performing its oversight functions effectively. In addition, Nigeria is

gradually being integrated into the global economy and hence not insulated from

happenings in the global economy.

Therefore, the following hypotheses formulated to guide this study .

Ho1: Manipulation of share prices does not significantly affect the Nigerian capital market

crash

Ho2: Insider trading is not a significant factor in destroying investor’s confidence in the

Nigerian capital market.

6

Ho3: There is no significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange.

1.6 SCOPE OF THE STUDY

The global financial meltdown is believed to have impacted various sectors of the Nigerian

economy ranging from the Government, Banking, Insurance, Shipping, and Manufacturing

industries etc. It is a very vast topic. For a proper research to be conducted and to be

effective, this project will limit it findings and investigations on the impact of the global

financial meltdown on the Nigeria’s capital market.

1.7 SIGNIFICANCE OF THE STUDY

The importance of the capital market to any economy (developed or emerging) cannot be

overemphasized. It has been discovered that there is a direct linkage between the capital

market of a nation and its economic growth (Olowookere and Osunubi, 2007; Kalu, 2009;

Nwachukwu, 2009).

It is a noted fact that for any meaningful economic transformation of a country to take place,

her capital market must be effectively active. It has also been an identified fact that

economic strength of any nation is measured according to how active her capital market is/

or performing its supposed functions.

1.8 LIMITATIONS OF THE STUDY

This research work was carried out alongside with other academic work in the school. This

study encountered some constraints as there were initial difficulties in gathering some

relevant materials and information.

Time equally took its toll as there was a time for the completion of the study.

Notwithstanding all these constraints, the research was successfully carried out and met the

entire requiring standard.

7

This study will therefore be useful in the following areas.

i) This study will be of a significant interest to government and the Securities and

Exchange Commission as they are aware of the problem confronting the Central

Bank Nigeria and remedies to grappling these problems.

ii) The study will also be significant to institutional operators of the market

especially the Nigeria Stock Exchange (SEC) as the study provides detail causes

of the problem and ways to correct the existing abnormalities.

iii) The study will also be beneficial to researchers who want to go into further

research in this area as it will serve as a good reference material

iv) This study will be of interest to investors who have been at the receiving end of

the financial economic crises as this study will enlighten them on the causes of

the problem and the efforts of SEC in protecting their investments.

1.9 DEFINITIONS OF KEY CONCEPTS

CAPITAL MARKET: is a market for securities (debt or equity), where business

enterprises (companies) and governments can raise long-term funds

STOCK MARKET OR EQUITY MARKET: is a public (a loose network of economic

transactions, not a physical facility or discrete) entity for the trading of company stock

(shares) and derivatives at an agreed price; these are securities listed on a stock exchange as

well as those only traded privately.

FINANCIAL MELTDOWN: A situation in which the supply of money is outpaced by the

demand for money. This means that liquidity is quickly evaporated because available

money is withdrawn from banks (called a run), forcing banks either to sell other investments

to make up for the shortfall or to collapse.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Introduction

The shambolic nature of the Nigerian capital market has been as a result of the crash which

the market experienced largely due to the effect of the global financial crisis at the end of

the first quarter of 2008. Several authors have defined the financial crisis in various ways.

The CBN defined it as a situation where financial institutions or assets suddenly lose a large

part of their value. Eichengreen and Portes (1987) defined it “as a sharp change in asset

prices that leads to distress among financial markets participants” (cited in Sanusi, 2010)

highlighted the lack of clarity between sharp and moderate price changes or the distinction

between severe financial distresses from financial pressure. The crisis can be in form of a

banking crisis, speculative bubble, international financial crisis and economic crisis. The

financial crisis destabilized the global financial system and led to a major economic crisis in

2008.

Antecedents show the first financial crisis to be the Great Depression of 1929-1933. The

recent financial crisis which originated in the US was preceded by over a hundred episodes

of financial crises (CBN, 2009). It is pertinent to note that 75 per cent of these crises had

either been caused by the capital market or had affected the capital market, for example,

Black Monday (1987) and the Asian Financial Crisis (1990).

Following the reforms carried out between 2003 and 2008 in the Nigerian banking sector,

the capital market deepened and public awareness and involvement increased significantly.

This development indicates that the interrelationship between the CBN and capital market

cannot be understated.

As a segment of the financial system, the Nigerian capital market has evolved with the

growth of the Nigerian economy. The market has been predominantly equities-driven with

the banking sector making up an important proportion of total market capitalization.

9

Prior to 2008, the market enjoyed a decade of unprecedented growth, driven principally by

the banking sector reform. Market Capitalization (MC) rose by 318.3 per cent, from N2.90

trillion in December 2005 to N12.13 trillion in March 2008, while the All-Share Index

(ASI) also rose by 161.6 per cent with the index rising from 24,085.8 in December 2005 to

63,016.56 in March 2008 (NSE, 2008). The Securities and Exchange Commission (SEC

which was established by the SEC Decree 29 of 1988) is the apex regulatory agency for the

Nigerian capital market. The Commission has evolved over the years with its current

enabling law being the Investment and Securities Act (ISA) 45 of 1999. The Commission is

charged with the dual role of developing and regulating the market. On the other hand, the

Nigerian Stock Exchange (NSE) is an organization with oversight function on the

professional activities of its members, that is, stockbrokers who trade on its floors and is

required to provide periodic report of its activities to the SEC.

The state of the Nigerian capital market is largely affected by the state of the banking sector,

hence the need to discuss the banking sector reforms which the CBN has undertaken

following the global and financial crisis which began in 2007. The reforms undertaken by

the CBN has aided that undertaken by the other regulatory bodies.

CONCEPTUAL ISSUES

2. 2 The Nigerian Capital Market

The capital market is a market for raising funds by organizations and sale of securities. It is

the main source of long-term funds to finance investment. Major studies have identified that

viable projects have collapsed due to the mismatch of funds utilized. The capital market

which is an arrangement that facilitates the mobilization and allocation of medium and long-

term funds through the issuance and trading of financial instruments affords projects with

long gestation period an avenue to raise appropriate long term funds. The capital market

which is a segment of the financial markets facilitates the raising of long term capital

through equities and bonds. Equities represent ownership in a company which issued them

while bonds are debt instruments with the principal and interest usually payable to the

holder at pre-specific periods.

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The primary market segment is for raising funds through the issuance of new securities

while the secondary market segment provides facilities for trading in already issued

securities. As the major source of appropriate long-term funds, the capital market is

obviously crucial to any nation’s economic development. Specifically, the capital market

facilitates economic growth by, among other things, mobilizing savings from numerous

economic units such as governments, individuals and institutional investors for users such

as governments and the private sector. It also improves the efficiency of capital allocation

through a competitive pricing mechanism.

2.3 Regulation of the Capital Market

2.3.1 Securities and Exchange Commission (SEC)

The Securities and Exchange Commission is the apex regulatory agency for the Nigerian

capital market. It was established by the SEC Decree 29 of 1988. However, the Commission

has evolved over the years with its current enabling law being the Investment and Securities

Act (ISA) 45 of 1999. The Commission is charged with the dual role of developing and

regulating the capital market. In fulfilling its developmental role in the market, SEC has

embarked on a number of effective measures such as enhancement of its regulatory

oversight, thus, building the foundation for investors‟ confidence in the Nigerian capital

market.

The commission is saddled with the responsibility to protect investors in the market and to

minimize the risk of becoming victims of any malpractice. In line with this objective the

Commission has adopted innovative measures to ensure that malpractices are

prevented/minimized. In achieving this, the Commission utilizes the following: registration,

surveillance, investigation, enforcement and rule making.

2.3.2 Nigerian Stock Exchange (NSE)

The Nigerian Stock Exchange (NSE) has oversight function on the professional activities of

its members, that is, stockbrokers who trade on its floors. The NSE is also required to

provide periodic report of its activities to the Securities and Exchange Commission.

11

The Nigerian Stock Exchange in its effort to improve the capital market has undertaken a

number of market development activities including re-engineering of investigation

planning, bond trading platform, extension of trading hours, communication plan and

introduction of Bond trading platform.

2.4 The concept of financial crisis

The term financial crisis is applied broadly to a variety of situations in which some

financial institutions or assets suddenly lose a large part of their value. In the 19th and early

20th

centuries, many financial crises were associated with banking panics, and many

recessions coincided with these panics. Other situations that are often called financial crises

include stock market crashes and the bursting of other financial bubbles, currency crises,

and sovereign defaults (Kindleberger and Aliber, 2005, Laeven and Valencia, 2008).

Some economic theories that explained financial crises includes the World systems theory

which explained the dangers and perils, which leading industrial nations will be facing (and

are now facing) at the end of the long economic cycle, which began after the oil crisis of

1973. While Coordination games, a mathematical approach to modelling financial crises

have emphasized that there is often positive feedback between market participants' decisions

(Krugman, 2008). Positive feedback implies that there may be dramatic changes in asset

values in response to small changes in economic fundamentals, Minsky’s theorised that

financial fragility is a typical feature of any capitalist economy and financial fragility levels

move together with the business cycle, but the Herding and Learning models explained

that asset purchases by a few agents encourage others to buy too, not because the true value

of the asset increases when many buy (which is called "strategic complementarity"), but

because investors come to believe the true asset value is high when they observe others

buying (Avery and Zemsky, 1998, Chari and Kehoe, 2004, Cipriani and Guarino, 2008).

12

2.5 Causes of the Global financial Crisis

The reasons for this crisis are varied and complex, but largely it can be attributed to a

number of factors in both the housing and credit markets, which developed over an

extended period of time. Some of these include: the inability of homeowner to make their

mortgage payments, poor judgement by the borrower and/or lender, speculation and

overbuilding during the boom period, risky mortgage products, high personal and corporate

debt levels, financial innovation that distributed and concealed default risks, central bank

policies, and regulation (Stiglitz, 2008).

Avgouleas (2008) enumerated the causes of the crisis as: breakdown in underwriting

standards for subprime mortgages; flaws in credit rating agencies’ assessments of subprime

Residential Mortgage Backed Securities (RMBS) and other complex structured credit

products especially Collaterized Debt Obligations (CDOs) and other Asset-Backed

Securities (ABS); risk management weaknesses at some large at US and European financial

institutions; and regulatory policies, including capital and disclosure requirements that

failed to mitigate risk management weaknesses.

Taking the views of the various commentators into consideration, the current financial crisis

is caused by the followings;

Firstly, Liberalisation of Global Financial Regulations is one reason for the crisis. The

regulatory model adopted by banks in the US emerged as a result of liberalisation of

banking business in the early 1990s and international consensus reached within the Basle

Committee of Banking Supervision as regards the acceptable model of prudential

supervision of banking institution (Scott, 2008 in Abubakar, 2008). This liberalisation

facilitates the global abolition of restrictions on capital flow in the 1990s and caused the

operation of international investment funds to be largely unregulated.

13

Another cause is the Boom and Bust in the housing market. A combination of low interest

rates and large inflows of foreign funds help create easy credit conditions for many years

leading up to the crisis. Due to low interest rates and large inflow of foreign fund, subprime

lending/borrowing for investment became very attractive in both US and the UK. Since the

demand for housing was rapidly rising in the US, most investors and homeowners took

mortgaged loans and invested in housings. The overall US home ownership rate increased

from 64% in 1994 (about where it was since 1980) to peak in 2004 with an all-time high of

69.2%.

Furthermore, Speculations is also one of the causes of the crisis. Traditionally, homes were

not treated as investment like stocks, but this behaviour changed during the housing boom

as it attracted speculative buyers. This makes speculation in real estate a contributing factor.

During 2006, 22% of homes purchased (1.65 million units) were for investment purposes –

it means that nearly 40% of home purchases were not primary residences (wikipedia, 2008).

This speculative buying makes housing prices to fall drastically.

New Financial Architecture (NFA) – according to Crotty (2008) NFA is “a globally

integrated system of giant bank conglomerates and the so-called ‘shadow banking system’

of investment banks, hedge funds and bank-created Special Investment Vehicles.” This

makes excessive risk to build up in giant banks during the boom; and the NFA generated

high leverage and high systemic risk, with channels of contagion that transmitted problems

in the US subprime mortgage market around the world.

Poor credit rating - due to securitization practices, credit rating agencies have the tendency

to assign investment-grade rating to Mortgage-Backed Securities (MBS), and this makes

loans with high default rate to originate, packaged and transferred to others. Quoting

Black’s Law Dictionary (7th ed.) in Wikipedia (2008), “securitization is a structured finance

process in which assets, receivables or financial instruments are acquired, classified into

pools, and offered as collateral for third-party investment.”

14

High-risk loans - There appears to be widespread agreement that periods of rapid credit

growth tend to be accompanied by loosening lending standards (Dell’Arriccia, Igan and

Laeven, 2008). For instance, in a speech delivered before the Independent Community

Bankers of America on 7 March 2001, the then Federal Reserve chairman, Alan Greenspan,

pointed to ‘an unfortunate tendency’ among bankers to lend aggressively at the peak of a

cycle and argued that most bad loans were made through this aggressive type of lending

(IMF, 2008). Without considering high risk borrowers, lenders give ‘Ninja loans’ - high-risk

loans to those with No income, No job, and no Assets. They also give home loans to

immigrants that are undocumented (Wikipedia, 2008).

Government policies - some critics believed that the crisis was fuelled by US government

mortgage policies which encouraged trends towards issuing risky loans. For instance,

Fannie

Mae Corporation eases credit requirements on loans and this encourages banks to extend

home mortgages to people that do not have good enough credit rating.

2.6 The Impact of the Global Financial Crisis on the Nigerian Economy

The effect of the financial crisis that began in the United States of America (USA) on

emerging markets was wide-ranging and was both internally and externally induced

(Nijathaworn, 2010). The initial financial crisis had affected mainly the US and Europe.

However, due to the connectivity of the financial system also known as the „contagion

effect‟, most economies were affected. The impact of the crisis started to show by mid-

2007 with the fall of major stock market prices. The crisis entered a new phase with the

collapse of Lehman Brothers in September 2009 and spread across economic sectors in

advanced, emerging and developing economies, Nigerian inclusive.

Avgouleas (2008) enumerated the causes of the crisis as: breakdown in underwriting

standards for subprime mortgages; flaws in credit rating agencies‟ assessments of subprime

Residential Mortgage Backed Securities (RMBS) and other complex structured credit

products especially Collaterized Debt Obligations (CDOs) and other Asset-Backed

Securities (ABS); risk management weaknesses at some large US and European financial

15

institutions; and regulatory policies, including capital and disclosure requirements that

failed to mitigate risk management weaknesses. According to Adamu (2009), the causes of

the crisis can be summarized as liberalization of global financial regulation, Boom and Bust

of the housing market, speculations, new financial architecture, poor credit rating, high risk

loans and government policies.

Most scholars have argued that the crisis was not without warning, the housing boom

witnessed in the

United States and lack of coherent regulation highlighted the flaws in the system. Most

proponents argued that any form of strong regulation would stifle innovation and with the

growth of small businesses in the US and Europe, this was discouraged. Banks and financial

institutions repackaged these debts with other risk debts and sold them to worldwide

investors creating financial instruments called Collateralized Debt Obligations (CDO).

These financial innovations of the market termed financial derivatives also known as

Mortgage-Backed Securities (MBS), which derived their value from mortgage loans, spread

the risk to financial institutions and investors around the world.

Research shows that major banks and financial institutions borrowed and invested heavily

in MBS and reported losses of approximately US$2.8 trillion as at October 2008 (Adedipe,

2009). The credit derivatives compounded the effects mainly in the capital markets

(property and stock markets) (Ibid, 2009). The effects of the crisis on major stock markets

indicated losses as at end December 2008. The crisis led to the demise of large banking

institutions, large size conglomerates and small businesses with governments, in even the

wealthiest nations, providing rescue packages to bailout their financial systems. The impact

of the crisis is still currently felt with countries such as Greece and Ireland seeking rescue

packages. Like other African countries, the Nigerian economy was initially perceived to

have been isolated from the financial crisis. The total share of stock market capitalization

stood at only 1.81 per cent of the global market (CBN, 2009). However, the effects began to

show by end-March 2008 with the crash in the capital market and some banks having

expanded their businesses outside the shores of Nigeria, the contagion effect of the crisis hit

the Nigerian economy.

16

Based on the nature of the Nigerian economy, the financial crisis had an impact on the

foreign exchange market. This was attributed to the disinvestment and repatriation of capital

and dividends by foreign investors thereby intensifying the demand for foreign currencies.

This further led to a depletion of the external reserves. The implication for the Nigerian

economy was borne by the various sectors of the economy. Firstly, the Nigerian stock

market witnessed a continuous drop in the All-Share Index and volume of traded securities.

Secondly, the banking sub-sector was affected by a credit contraction as most foreign banks

reduced their credit lines, exchange rate exposure, and the continuous decline in the NSE

eroded their profitability. Thirdly, the decline in the revenue receipts by the three tiers of

government, leading to a contraction in the fiscal sector. The contraction of the fiscal sector

led to a crowding-out of the private sector credit, which in turn affected the real sector.

Based on the assessment conducted by the Ministerial Conference on Financial Crisis

(2008), the financial sector had been in receipt of US$15.73 billion in portfolio flows in

2007 alone (cited in Sere-Ejembi, 2008). With the emergence of the global financial crisis,

foreign investors began to withdraw holdings in the capital market which in turn led to

capital flight. The withdrawals of portfolio holdings, given the size of the market, led to

significant volatility and to a sharp decline in stock prices across the Nigerian stock market.

Prior to the crisis, stock prices had appreciated though without correlation with any market

fundamentals. Between 2002 and 2008, the Nigerian stock market capitalization rose to

peak at N12.6 trillion on March, 2008. The boom led to an investment rush by all classes of

society. Bank customers took out loans to invest in stocks of their banks. The withdrawal of

funds by the foreign investors led to the huge decline of most stock prices as supply

exceeded demand. The market capitalization was worth only N4.5 trillion in March 2009.

2.7 The Meltdown of the Nigerian Capital Market: Causes and Consequences

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

17

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

18

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,

19

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, 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.

20

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.

9. 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

21

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 un-saleable 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

22

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.

23

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.

24

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.

2.8 Capital Market Reforms

In performing its developmental role, the Securities and Exchange Commission undertook a

number of reform activities. Fixed income is a key investment class for institutional

investors such as pension funds and insurance companies due to its near certainty of

income. It is a major source of financing infrastructural and industrial development and

hence critical to economic development. In recognition of the important role of the fixed

income market the Commission is working with various stakeholders to further develop the

Bond markets to enable it compete with international fixed income markets. As part of its

reforms, the

Commission has introduced rules to guide book building and shelf registration which are

expected to enhance market operators ability to raise fixed income while giving investors

confidence.

In addition, investors’ confidence plays significant role in encouraging participation in any

capital market. Consequently, it is imperative that any reform of the capital market must

ensure that market operators are perceived to be transparent by investors. Therefore,

meaningful reform of the capital market must include addressing corporate governance of

entities and players in the market. In recognition of this fact the Commission, included a

review of the 2003 Corporate Governance Code in its capital market reform in order to

address weaknesses in current practices and strengthen governance and disclosure by public

companies.

25

The draft of the new Corporate Governance Codes which is based on internationally

accepted standards has been provided to the public and will soon be released. The adoption

of International Financial Reporting Standards (IFRS) by listed companies and regulated

entities is expected to improve the quality of financial reporting in the country and give

further credibility to the reports. Publicly listed companies and significant interest entities

such as banks are required to adopt IFRS in reporting their financials by January 2012.

Furthermore, high transaction costs act as a deterrent to organizations who may otherwise

seek to raise funds and inhibit the growth of the capital market. Consequently, the

Commission instituted a 40% downward review of fees and commissions charged. This

action made the market more attractive to participants. As part of an effort to encourage

market operators to contribute to the growth of the real sector, the minimum paid-up capital

was reviewed upwards. Also, in line with the ongoing reform of the Nigerian capital market,

the then Abuja Stock Exchange was converted into a Securities and Commodity Exchange.

A commodity exchange facilitates trade in commodities, as opposed to shares and bonds.

The Abuja Securities and Commodities Exchange (ASCE) eventually commenced operation

on 25th July, 2006, trading manually in six (6) selected grains. They include sorghum,

maize, cowpea, Soya beans, sesame seeds and millets. The Commission is actively

encouraging an institutional market with retail investors participating through Collective

Investment Schemes (CIS). This is to protect retail investors, who have been identified by

the Commission of lacking the ability to engage in direct investment in the capital market.

Nigeria currently has 40 CIS with a majority of them being specialized and able to provide

for specialized appetites of investors. The existing CIS provided specialized vehicles that

invests in bonds, equity, balanced (combination of various capital market instruments),

guaranteed (fixed income), money market, Islamic and Real Estate Investment Trusts

(REITs). In order to protect retail investors who have shown an increased interest in mutual

funds, the Commission has increased its surveillance funds managers and trustees of these

schemes.

26

Human resources have been identified as the most valuable assets within any organization.

The Commission in recognition of this fact and seeking to enhance the capacity of market

operators is reviewing the programs offered by its training institute, the Nigerian Capital

Markets Institute with a view to enhancing the quality of programs. This is expected to

ensure that capacity within the industry develops along with the complexity of the capital

market product offerings.

27

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This chapter discusses the research methodology of the study under the following

sub-headings:

3.1 Research design

3.2 Sources data

3.3 Study population

3.4 Sample and sampling procedure

3.5 Research instruments

3.6 Validity and reliability of the instruments

3.7 Procedure for the study

3.8 Method of data analysis

3.1 Research design

The study will adopt ex-post-facto type of survey research design in gathering the required

data. Kellinger (1970) defines ex-post-facto-research as that in which independent variable

or variables have already occurred and in which the researcher starts with the observation of

a dependent variable or variables. That is, the researcher is thus examining retrospectively

the effects of a naturally occurring event or a subsequent outcome with a view to

establishing a causal link between them. In this study, using Kerllinger’s view point, it is

assumed that the productivity (independent variable) of academic lecturers is assured

(certain) if the dependent variables (of motivation, environment and demography) are

properly monitored controlled and moderated.

28

3.2 SOURCES OF DATA

For this research to be effective and successful, information about the topic must be

available and at the same time reliable. However, during the course of data collection, facts

both past and present were taken into cognizance. A combination of desk research and oral

interview methods were employed in obtaining information from the stockbrokers and

investors selected for the study. Data source were classified into primary and secondary.

3.2.1 Primary Sources: Primary data, which are first hand information obtained directly

from respondent (through questionnaire), were gathered for this research work to gain an

insight into the research topic. Personal interviews were equally carried out especially with

officials of the banks under study. Expert opinions on the subject matter were also gathered

through oral interviews.

3.2.2. Secondary Sources: The secondary data for the study was extracted from the

following sources: textbooks, business journal, newspapers, internet, annual reports and

accounts of the Nigerian Stock Exchange and past works relating to the subject topic.

3.3 POPULATION OF THE STUDY

A population is made up of all conceivable elements subjects or observation relating to a

particular phenomenon of interest to the research subject. The population of the study is

made up of all the institutions and investors in the Nigerian Stock Exchange. The sample of

the study is the stock brokers and investors at the Nigerian Stock Exchange, Lagos.

3.4 DESIGN AND ADMINISTRATION OF QUESTIONAIRE

Taken into cognizance of the difference in assimilation of various respondents, the

questionnaire was designed in a very simple way to ensure ease of answers. Also, some of

the questions were designed in such a way that gave room for the respondents to answer in

the affirmatives, “Yes, No or No Idea”.

29

3.5 SAMPLE SIZE DETERMINATION

In determining the sample size, two factors were put into consideration.

a) The larger the sample size, the more adequate, qualitative and precise will be the

information given about the population logically.

b) Above a certain size, extra information is given by increasing the size.

Given the above factors, the researcher was of the opinion that a sample size need only be

large enough to reasonably represent the population. In view of this, 50 persons were

initially used for a pilot study. The need for pilot programme was to determine the

willingness of the respondents in attending to the questionnaire. The effect was that (39)

thirty nine out of the 50 were willing to respond while 11 were unwilling, thus given in

percentage as follows:

39 X 100

50 1 = 83%, while 17% declined

In determining the sample size therefore, the formula as given in Asika (1991:59) will be

adapted at 5% confidence level.

Thus, Ns = Z2 x p xq

e2

Where

Ns = Sample size

Z = Constant value (1.0462)

p = positive response

q = negative response

e2 = Tolerable error

Therefore, Ns = (1.0462)2 x 0.83 x 0.17

(0.05)2 = 60

30

3.6 SAMPLING TECHNIQUE

The researcher adopted the random sampling technique in order to avoid bias. The

population however, shows that a good number of those who have a stake in the Nigerian

Stock Exchange were virtually present for valid conclusion purpose of this work.

3.7 RESTATEMENT OF HYPOTHESIS

Ho1: Manipulation of share prices does not significantly affect the Nigerian capital market

crash

Hi1: Manipulation of share prices has significant affect on the Nigerian capital market crash

Ho2: Insider trading is not a significant factor in destroying investor’s confidence in the

Nigerian capital market.

Hi2: Insider trading is a significant factor in destroying investor’s confidence in the Nigerian

capital market.

Ho3: There is no significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange.

Ho3: There is a significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange.

3.8 METHOD OF DATA ANALYSIS

The collected data were analyzed in tables and percentages, while the hypotheses were

tested using the chi square technique. It’s thus applied as follows:

= (O-e)2

e

Where,

= Chi square calculated

O = Observed frequency

e = Expected frequency

Source: (Ayanwu, 2000)

31

Consequently, a significant level of 5% was applied while the degree of freedom was

ascertained by:

d.f = (m-1)(n-1)

Where,

d.f = degree of freedom

m = number of rows

n = number of columns

3.9 STATISTICAL PROCEDURE

The following steps are used in testing of hypothesis with the chi-square distribution

technique.

Statement of the null hypothesis

Statement of the alpha () and the level of significance (0.05)

State of the formula

Computational result of x2 using this formula

RT x RC

GT

Where: RT = Row Total, RC = Row Column Total, GT = Grand Total

Source: (Ayanwu, 2000)

32

Statement of Decision Rule.

If c > t, reject Ho and accept Hi

If c < t, accept Ho and reject Hi

Where

=chi-square calculated value and =chi-square table value.

3.10 Validity and reliability of instruments

The purpose of validation is to determine the extent to which the instruments measure what

they are expected to measure (Nworgu, 1991). The instrument had gone through face

validity check by the researcher’s supervisor. Their criticisms on the instruments and the

conceptual model have helped to improve the work so far.

Moreover, the advice of statisticians and system analysts were sought to improve the face

validity of the instrument. Content validity was also enshrined through the conduct of a trial

test (pilot study) which was conducted in two private institution of higher learning.

Reliability of Instrument:

Chi-square test can be defined as a goodness of fit test used to determine whether a

significant different exit between an observed (or actual) number of object, subject or

responses. Falling in each category and expected number based on the null hypothesis. Chi-

square is the best analytical tool used in social sciences since the research deals with human

beings and their actions.

Since human beings are involved in this research, the most reliable statistical method of

analysis as the chi-square which is used to test the hypotheses.

33

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

Suffice it to say that this study will be meaningless without this important chapter, which

deals with a critical appraisal of the data collected for the purpose of this research work. In

this chapter, the data collected are analyzed and interpreted for valid conclusion purpose of

this work. Recall also that in the first chapter of this study, three hypotheses were

formulated in the null format. However, in this chapter, both the null and alternative

hypotheses shall be considered using the Chi-square analysis as earlier stated.

4.2 PRESENTATION AND ANALYSIS OF DATA:

Presentation of data: the responses of the sample surveyed from the questionnaire used,

and trust of observation made from this study are summarized in tables as we progress.

Data Analysis: This refers to the segregation of data into parts with relevant comments and

best of judgments. In other words, it means breaking down and putting in order, the

qualitative information gathered through the research exercise. It also involves comparing

and contrasting the events, patterns and relationships. As earlier stated in chapter three, the

data collected for this study are carefully analyzed in simple percentage and tables, while

chi – square statistical technique was used to test the hypotheses. The following are the

questions and responses in the questionnaire.

Table 4.1: Responses as to the sex of respondents

Sex Responses Percentage

Male 36 60

Female 24 40

Total 60 100%

Source: Field Survey, 2012

34

From table 4.1 above, 24 respondents representing 40% were female, while 36 representing

60% were male. It’s obvious here that greater percentage of the respondents were male.

Table 4.2: Responses as to marital status

Marital Status Responses Percentage

Single 13 21.67

Married 47 78.33

Total 60 100%

Source: field survey, 2012

From table 4.2 above, 20 respondents representing 21.67% were single, while 47

representing 78.33% were married.

Table 4.3: Respondent’s answers as to their highest educational qualification

Qualification Responses Percentage

SSCE - -

Degree 34 56.67

Post Graduate 26 43.3

Total 60 100%

Source: field survey, 2012

Table 4.4:Responses on whether the global financial crisis impacted negative on the

Nigerian capital market.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 55 91.67

No 5 8.33

Total 60 100

Source: Field survey, 2012

From the above responses, 91.67% of the respondents say that the global financial crises

impacted negative on the Nigerian capital market while 8.33% hold a contrary opinion.

35

Table 4.5:Respondents’ answers on whether there is any relationship between share prices

manipulation and the Nigerian capital market crash.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 52 86.67

No 8 13.33

Total 60 100

Source: Field survey, 2012.

Based on the information above, 52 of the respondents representing 86.67% were of the

opinion that there is a any relationship between share prices manipulation and the Nigerian

capital market crash while 8 (13.33%) of the respondents hold contrary view.

Table 4.6: Respondents’ answers whether insider trading/dealings affects investor’s

confidence in the Nigerian capital market.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 44 73.33

No 16 26.67

Total 60 100

Source: Field survey, 2012

From the above data, 44 (73.33%) of the respondents believed that insider trading affects

investor’s confidence in the Nigerian capital market while 31 representing 13.33%

responded on the contrary.

Table 4.7: Respondents’ answers on whether the incessant initial public offers by

commercial banks prior to 2008 overheated the Nigerian financial system thereby causing

negative effects on the market.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 52 86.66

No 6 10

No idea 2 3.33

Total 60 100

Source: Field survey, 2012

36

Based on the above 86.66% of the respondents said that the incessant initial public offers by

commercial banks prior t0 2008, overheated the Nigerian financial system thereby causing

negative effects on the market, 10% says no while 3.33% maintained that they had no idea.

Table 4.8: Respondents answer on whether there is any significant relationship between the

global economic meltdown and the crises in the Nigeria Stock Exchange.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 50 83.33

No 10 16.67

Total 60 100

Source: Field survey, 2012

From the above data, 50 (83.33%) of the respondents were of view that there any significant

relationship between the global economic meltdown and the crises in the Nigeria Stock

Exchange, while 10 (16.67%) declined.

Table 4.9: Respondents’ answers on whether the Structural Deficiencies of the Nigerian

Stock Market contribute to the price crash experienced at the Exchange.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 60 100

No - -

No idea - -

Total 60 100

Source: Field survey, 2012

From the above information, all of the respondents were of the view that the Structural

Deficiencies of the Nigerian Stock Market contribute to the price crash experienced at the

Exchange.

37

Table 4.10:Respondents’ answers on whether Regulating Inconsistencies and

Pronouncements play significant role in destabilizing investor’s confidence in the market.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 49 81.67

No 11 18.33

Total 60 100

Source: Field survey, 2012

The table above reveals that 81.67% of the respondents were of the opinion that Regulating

Inconsistencies and Pronouncements play significant role in destabilizing investor’s

confidence in the market while 18.33% had a different view.

Table 4.11:Respondents’ answers on whether the meltdown led to the loss of confidence of

banks and other lenders on shares as collateral for loan facilities.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 39 65

No 15 25

No idea 6 10

Total 60 100

Source: Field survey, 2012

From the above information, 39 (65%) of the respondents believed that the meltdown led to

the loss of confidence of banks and other lenders on shares as collateral for loan facilities,

15 (25%) said no while 6 (10%) maintained that they had no idea.

38

Table 4.12: Respondents’ answers on whether margin trading and speculation by

stockbrokers has a significant in destroying the market prices.

VARIABLE DISTRIBUTION PERCENTAGE

Yes 51 85

No 9 15

Total 60 100

Source: Field survey, 2012

Table 4-12 above, reveals that 51 (85%) of the respondents were of the opinion that margin

trading and speculation by stockbrokers has a significant in destroying the market prices

while 9(15%) hold a contrary view.

Table 4.13: Responses on whether the Pull-Out of various Foreign Investors from the

Nigeria capital market contributed to the price crash at market.

VARIABLE DISTRIBUTION PERCENTAGE

Yes 57 95

No 3 5

Total 60 100

Source: Field survey, 2012

From the above information, 95% of the respondents believed that the Pull-Out of Various

Foreign Investors from the Nigeria capital market contribute to the price crash at market

while 5% hold a different view.

Table 4.14: Respondents answer if the crash at the Nigerian stock Exchange was partly

caused by ineffective regulation and supervision by the Securities and Exchange

Commission.

VARIABLE DISTRIBUTION PERCENTAGE

Yes 60 100

No - -

Total 60 100

Source: Field survey, 2011

39

From the above data, all of the respondents were of the opinion that the crash at the

Nigerian stock Exchange was partly caused by ineffective regulation and supervision by the

Securities and Exchange Commission.

Table 4.15: Respondents answer on whether the Nigerian Stock Exchange (NSE) has failed

in its oversight function on the professional activities of its members, that is, stockbrokers.

VARIABLE DISTRIBUTION PERCENTAGE

Yes 53 88.33

No 7 11.67

Total 60 100

Source: Field survey, 2011

From the information above, 88.33% of the respondents said that the Nigerian Stock

Exchange (NSE) has failed in its oversight function on the professional activities of its

members, that is, stockbrokers while 11.67% declined.

Table 4.16:Respondents’ answers on whether the reforms in the capital market as well as in

the banking sector help to restore the confidence of investors in the market.

CATEGORY DISTRIBUTION PERCENTAGE

Yes 60 100

No - -

No idea - -

Total 60 100

Source: Field survey, 2012

From the above information, all of the respondents were of the view that the reforms in the

capital market as well as in the banking sector help to restore the confidence of investors in

the market.

40

4.3 TEST OF HYPOTHESES

Predominantly, before testing these hypotheses, it’s very important to note that:

a) The greater the value of the calculated chi-square, the lower the chance of its

occurrence.

b) The probability of chi-square of any given figure depends upon the number of

degrees of freedom.

In consideration of the above, the chi-square computation method is thus shown below.

Expected frequency (E) = R X C

G

Where:

R = Total on each row

C = Total on each column

G = Grand total

In other words,

Expected value = Row total x Column total

Grand total

While, Xc2 = ∑(0 – E)

2

E

Degree of freedom (d.f) = (m-1)(n-1)

Where,

m = number of columns

n = number of rows

Decision Rule

If Xc2 > Xt

2, reject Ho and accept H1

If Xc2 < Xt

2, accept Ho and reject H1

41

Where,

Xc2 => Chi-square calculated

Xt2 => Critical value or Chi-square tabulated

4.3.1 TEST OF HYPOTHESIS ONE

Ho1: Manipulation of share prices does not significantly affect the Nigerian capital market

crash

Hi1: Manipulation of share prices has significant affect on the Nigerian capital market crash

Table 4.17: Observed frequency table

CATEGORY DISTRIBUTION PERCENTAGE

Yes 52 86.67

No 8 13.33

Total 60 100

Source: Extracted from table 4.5

Table 4.18: Contingency table

Variable Oi Ei Oi – Ei (Oi – Ei)

2

(Oi – Ei)2

Ei

Yes 52 30 22 484 16.13

No 8 30 -22 484 16.13

Total = 2 60 32.26

Xc2 = 32.26, while Critical value = 3.841

42

Decision:

From the chi-square computed above, it is observed that the computed value of Xc2 is

greater than the critical or table value at d.f = 1, thus, we accept the alternative hypothesis,

which says that Manipulation of share prices has significant affect on the Nigerian capital

market crash.

4.3.2 TEST OF HYPOTHESIS TWO

Ho2: Insider trading is not a significant factor in destroying investor’s confidence in the

Nigerian capital market.

Hi2: Insider trading is a significant factor in destroying investor’s confidence in the Nigerian

capital market.

Table 4.19 Observed Frequency

CATEGORY DISTRIBUTION PERCENTAGE

Yes 44 73.33

No 16 26.67

Total 60 100

Source: Extracted from, 4.6

Table 4.20: Contingency table

Variable Oi Ei Oi – Ei (Oi – Ei)

2

(Oi – Ei)2

Ei

Yes 44 30 14 196 6.53

No 16 30 -14 196 6.53

Total = 2 60 Xc2

13.06

Xt2

=3.841

43

Decision

Based on the computed value of Xc2 = 13.06 and the table value of 3.841 at d.f = 1, we

reject the null hypothesis and accept the alternative hypothesis which says insider

trading/dealings is a significant factor in destroying investor’s confidence in the Nigerian

capital market.

4.3.3 TEST OF HYPOTHESIS 3

Ho3: There is no significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange.

Ho3: There is a significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange.

Table 4.20: Observed frequency

CATEGORY DISTRIBUTION PERCENTAGE

Yes 50 83.33

No 10 16.67

Total 60 100

Source: Extracted from Table 4.8

Table 4.21: Contingency table

Variable Oi Ei Oi – Ei (Oi – Ei)

2

(Oi – Ei)2

Ei

Yes 50 30 20 400 13.33

No 10 30 -20 400 13.33

Total = 2 26.66

Decision

Based on the computed value of Xc2 = 26.66 and the table value of 3.841 at d.f = 1, we

reject the null hypothesis and accept the alternative hypothesis which says there is a

significant relationship between the global economic meltdown and the crises in the Nigeria

Stock Exchange.

44

EXTERNAL EVIDENCES TO SUPPORT THE FINDINGS OF THE HYPOTHESIS

Aftermath of Meltdown, SEC, NSE Move against Market Manipulation

The year ended December 31, 2009, will be remembered in the Nigerian capital market for

several events that reach a climax after beginning during the previous year.

One that readily comes to mind is the sack of executive managements of eight of Nigeria’s

24 banks for recklessness in the administration of their institutions, thereby putting

depositors’ funds at risk.

Before then, many watchers of events on the Nigerian Stock Exchange (NSE) had

questioned the glaring manipulation of share prices on the trading floor, especially by the

banks. Continued and often uninterrupted growth in share price over period spanning

several weeks, at a time, became a sign that the particular company was coming to raise

fresh capital from the market. There were very few quoted companies that did not engage in

the unholy act to enable the management and their professional advisers fix a desired price

for their shares when coming for an offer.

There was the case of an old generation bank whose shares were purchased at N2, which

rose N15 within weeks, before being placed on technical suspension to enable the

management raise fresh funds during its botched recapitalisation exercise. Today, the stock

is valued at less than 200 kobo, which means those who bought at its peak may have to wait

till almost eternity for it to return to that level. The price of another rose to N300 before its

offer, which came at N275, it dropped to about N30 per share before its recent gains.

It is not as if the capital market’s primary regulator, the Securities & Exchange

Commission (SEC), and the Nigerian Stock Exchange (a self regulatory organisation) have

not always known. At least, not after the bitter feud between former bosom friends, Aliko

Dangote and Femi Otedola, chairman, African Petroleum and also President of Zenon

Petroleum.

45

Otedola had accused Dangote, who is chairman of two companies quoted on the NSE

(Dangote Sugar Refinery and Dangote Flour Mills), of manipulating the share price of AP

downward from N293.00 to N54.00 at the time in collaboration with Eugene Anenih, a

stockbroker and his Nova Finance & Investment Limited. An investigation by the SEC

found no proof that Mr. Dangote was directly involved in the shares manipulation, though it

found that Nova used "manipulative and deceptive devices and contrivances in its

transactions on AP shares." Nova reportedly crossed the shares of AP 30 times in eight

days, resulting in 160,000 shareholders of AP losing over ₦240 billion. The brokerage was

suspended from the exchange for a year and its chief barred for five years. But more

importantly, the insiders holding millions of AP shares were able to maintain the illusion of

buoyancy and prevent banks from calling in their margin loans. It was only after the market

had lost over 75 percent of its value after 11 months that these loans turned tragically sour.

The share price of several banks were also discovered at the time to be highly over-priced as

depositors’ funds were used to prop them up, painting a picture that all was well with them,

using oftentimes their in-house capital market subsidiaries and willing stock broking firms.

The banks, for most part, gave margin facilities to these brokers and investors to buy their

shares, in addition to those of others, resulting in a situation where the brokers became

heavily over-exposed to the banks, as was seen in the number of stockbrokerage firms listed

among debtors to banks in the country. One stockbroker, using various companies and

cronies, according to the list published by the Central Bank of Nigeria (CBN), owed the

banks about N122 billion.

It was, therefore, not surprising to some that following the revelation on the banking crisis

by the combination of the CBN and the Nigeria Deposit Insurance Corporation (NDIC),

working in concert with the Economic & Financial Crimes Commission, stockbrokers and

investors indebted to the banks have had to sell the shares to cover up their positions.

46

With these and more in mind and mindful of the need to reposition the market for growth

and development, making it a safe haven for returns hungry investors, Prof. Ndi Okereke-

Onyiuke, director-general of the NSE, had while reviewing “market performance in 2009

and the outlook for 2010,” assured that measures have been put in place to check future

price manipulations.

“Nobody can manipulate market price again. The system will not allow it, it would be

discovered immediately”, she stressed.

Such fraudulent transactions, she said, will not settle, as the exchange is currently using

automated surveillance, instead of manual.

This, she continued, was achieved “with the help of Progenics Incorporated, Canada. The

NSE was able to stop price movement within the last five minutes of (any) trading session,”

Okereke-Onyiuke said.

The decision to freeze price movement in the last five minutes of trading, explained a

source close to the market, followed the discovery that some stockbrokers deliberately wait

until the last minutes of the session to move prices. The move, which most times, is in a bid

to perpetrate illegalities that cannot be manually detected.

Market watchers have since noted that the move is a tacit admission of the failure of

control measures like the Trade Alert and various investment protection mechanisms to

ensure market transparency.

It would be recalled that the SEC, some weeks ago, restated its zero tolerance for market

infractions.

This, according to Ms. Daisy Ekineh, the then Acting Director-General, has made the

commission adopt a name and shame approach to infractions, as part of the determination to

see the market play its developmental role in the economy. The commission’s management

may not be oblivious of the fact that the CBN got significant mileage when it used the

unconventional method by publishing, twice, the names and amount owed to 10 banks by

various organisations and individuals.

47

The loans, which are mainly oil and gas, real estate and margin facilities’ related, were

listed by the apex bank as having gone bad. Some of the debtors are believed to have paid

down large chunks of their debt to avoid the scandal associated with the publication of their

names in the national dailies, despite the fact that such approach by the apex bank has been

criticised as criminalising an otherwise civil bank-customer relationship.

While announcing plans to migrate to risk-based supervision in line with international

standards, Ekineh hinted of ongoing installation of software that would link the Lagos office

of SEC to the NSE. This is would trigger any unusual activity on the stock market, thereby

warranting investigation, rather than relying on human monitoring that may not be effective,

as the fact that such could be comprised. Such a measure, she assured, is in the

commission’s bid to create stronger institutions that would effectively and efficiently

intermediate in the capital market.

“We are doing quite a lot to stabilise the market and stem abusive practices. We are

migrating to the International Financial Reporting Standard (IFRS),” she explained,

following the understanding among stakeholders that such provides better transparency and

information.

The acting DG thereafter noted that there is now better compliance with market rules and

regulations, but warned that the commission “would swiftly deal with anybody that is

caught engage in insider dealing and manipulating the market. We will first discredit

anybody who wants to discredit the market.”

This did not, however, tally with the report presented by Okereke-Onyiuke, when she noted

that a total of 417 complaints were received against dealing (stock broking) firms in 2009,

representing an increase of about 168 or 58.53 per cent over the 249 complaints received

last year. A total of 130 such cases are still being investigated and pending resolution, she

said, noting that the bulk of the cases carried over from 2008 were mainly from inactive

dealing member firms.

48

As in cases reported over the past years, she noted that “complaints received during the

period under review were observed to border mainly on the unauthorised sales of shares and

failure to remit sales proceeds”.

Case of illegal sale of shares, are believed to be the most rampart of infractions committed

by stockbrokers who sell off their clients’ shares without the mandate of their clients. Most

cases, involve the sale of such shares while their prices hover around peaks, only for such to

be bought for the unsuspecting client when the prices are down.

Okereke-Onyiuke blamed this on the illiquidity suffered by the majority of dealing firms,

aside the desperation of banks to recoup outstanding margin facilities. The stockbrokers

were also found wanting in the critical aspect of the Article 102 of the rules and regulations

governing dealing members, as it relates to the “know-you-client” requirement, often

leading to the “fraudulent sales of shares to persons who are not real owners of the shares.”

The NSE boss also reported the suspension of six stockbrokerage firms - Century Securities

Limited, Transafrica Financial Services, Empire Securities Limited, Crossworld Securities

Limited, Dependable Securities Limited, and Monument Securities & Finance Limited, that

failed to submit audited accounts, contrary to Article 15(h) of the rules and regulations

governing dealing members.

The NSE boss also noted that the exchange is closely monitoring developments in t he

EFCC/CBN investigation into the alleged mismanagement of eight banks, and that

disciplinary actions would be taken against stock-broking firms indicted by the outcome of

the investigations.

49

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATION

5.1 SUMMARY OF FINDINGS

The study has tried to focus on examining impact of global financial crises on the Nigerian

Capital Market particular reference to stockbrokers and investors on Nigerian Stock

Exchange, Lagos branch. For valid conclusion of this study, the following findings were

noted:

1. Given the first hypothesis, it is noted that Manipulation of share prices has

significant affect on the Nigerian capital market crash.

2. The second hypothesis shows that insider trading/dealing is a significant factor in

destroying investor’s confidence in the Nigerian capital market.

3. The third hypothesis indicated that there is a significant relationship between the

global economic meltdown and the crises in the Nigeria Stock Exchange.

4. From data analysis, it was discovered that margin trading and speculation by

stockbrokers has a significant in destroying the market prices.

5. From data analysis, it was also discovered that structural deficiencies of the Nigerian

Stock Market contribute to the price crash experienced at the Exchange.

6. It was also discovered that the crash at the Nigerian stock Exchange was partly

caused by ineffective regulation and supervision by the Securities and Exchange

Commission.

50

5.2 CONCLUSIONS

Nigeria, a frontier market has shown remarkable economic growth with an average

economic growth of 10.03 per cent from 2001 to 2009. However, a lot still needs to be done

to enable the country become one of the top twenty countries in 2020. Consequently, there

is a need to sustain the current level of economic growth and encourage both domestic and

foreign investments in Nigeria. Evidence from recent empirical economic studies suggests

that deeper, broader, and better functioning financial markets can stimulate economic

growth (Ndikumana, 2001, cited in Levine. n.d). Hence, the interrelationship between the

reforms of the CBN and that undertaken by the regulators of the capital markets should not

be undermined.

The financial markets stimulate economic growth through the provision of short and long

term funds to the productive sector. The banking sector, a major source of short to medium

term funds, has contributed actively to the economic development in Nigeria. No business

can succeed without access to adequate working capital and only the banking system can fill

this gap. Consequently, the various banking sector reforms had been developed in order to

ensure that the productive sector has access to this critical source of funding.

Economies also require long term capital investment for productive activities that produce

goods and services that drive economic growth. However, the surplus sector (households) is

usually unwilling to surrender control of its savings for a long period. The capital markets

bridges this gap by providing an arrangement where organizations can raise long term

capital while providing investors the flexibility to liquidate their investment without holding

them to maturity. By providing investors with financial instruments that matches their risk

preferences and liquidity needs, the capital market enhances the prospects of sustainable

economic growth through the generation of long term capital for the productive sector.

High cost of borrowing discourages organizations from making investments, thereby

limiting economic growth. However, capital markets eliminate high cost of borrowing by

offering companies the opportunity to raise equity with minimal issuing cost.

51

Companies benefit from injection of funds through equity to embark on expansion without

the burden of interest payments. In addition, capital markets listing requirement and banks

due diligence ensures that companies provide regular information. This information enables

shareholders scrutinize the businesses and demand efficiency from the organizations. This

in turn results in further growth as resources are deployed only to profitable ventures within

the business and inefficient units are let go.

Capital markets provide a level playing ground for the numerous organizations seeking to

raise funds. A competition for funds drives businesses to outperform each other to the

benefit of the economy. In this vein, the capital market efficiently allocates financial

resources to the benefit of the economy. Well developed financial markets stimulate

economic growth and regulators are continuously embarking on reforms to fine tune the

markets to achieve this. Consequently, regulators like CBN and SEC should continue to

adopt appropriate measures to ensure that the financial system is well equipped to stimulate

economic growth.

However, there is the need by the capital market regulators to employ more efforts in

tackling some of the inefficiencies that surround the capital market crash and make more

transparent so as to restore investors’ confidence in the market.

5.3 RECOMMENDATION

The current macro-economic and social challenges posed by the global financial crisis

require a much better understanding of appropriate policy responses. Some recommended

policy responses which can be applied to the situation in Nigeria are enumerated as follows:

There needs to be a better understanding of what can provide financial stability, how

cross-border cooperation can help to provide the public good of international

financial rules and systems, and what the most appropriate rules are with respect to

development;

52

There needs to be an understanding of whether and how Nigeria and other

developing countries can minimise financial contagion;

Nigeria and other developing countries will also need to manage the implications of

the current economic slowdown – after a period of strong and continued growth in

developing countries, which has promoted interest in structural factors of growth,

international macroeconomic management will now move up the policy agenda.

Nigeria and other developing countries need to understand the social outcomes and

provide appropriate social protection schemes.

Central Banks should regulate issue of foreign exchange to companies during this

time of crisis to avoid creating a deep in foreign reserves.

Non-bank financial sector such as Pension Funds should also be regulated. This is to

protect pension funds from being invested in some of this complex instruments to

enable them meet their liquidity obligation as at when due.

African countries should strengthen domestic and regional markets and boost intra-

African trade and it is also important to promote domestic tourism.

There is a need for new stability of the global financial system in which the voice of

every nation, every continent is heard and their concerns taken into account.

53

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56

Department Of Banking and Finance,

University of Nigeria Nsukka,

Lagos School Center

Feb 15th, 2012

Dear Respondent,

I am a Student of the Department of Banking and Finance,University of Nigeria Nsukka,

currently undertaking a research project on “the effects Global Financial Crisis on the

Nigerian Capital Market with particular reference to stockbrokers and investors at the

Nigeria Stock Exchange, Lagos”, a requirement for the award of an Masters of Business

Administration (MBA) in Banking and finance of the University afore-mentioned.

I have chosen you for the purpose of this exercise and consequently soliciting your

maximum cooperation in addressing the attached questionnaire as objectively and sincerely

as possible. Your information will in no small measure contribute to the success of this

work in arriving at a reasonable conclusion.

Please, be rest assured that any information disclosed for the purpose of this project work

will be treated with the strictest confidence.

Thanking you for your anticipated cooperation.

Yours sincerely,

Okpo Emmanuel Ogbonnaya.

57

QUESTIONNAIRE

TOPIC: The impact of Global Financial Crisis on the Nigerian Capital Market.

Tick the answers that appropriately suit your opinion

1. What is your sex? Male [ ] Female [ ]

2. What is your marital status? Married [ ] Single [ ] Divorce [ ]

3. What is your highest educational qualification SSCE [ ] B.Sc [ ] Post graduate

degree [ ]

4. Do you think that the global financial crises impacted negative on the Nigerian

capital market? Yes [ ] No [ ]

5. Is there any relationship between share prices manipulation and the Nigerian capital

market crash? Yes [ ] No [ ]

6. Does insider trading affects investor’s confidence in the Nigerian capital market?

Yes [ ] No [ ]

7. Does the incessant initial public offers by commercial banks prior t0 2008,

overheated the Nigerian financial system thereby causing negative effects on the

market? Yes [ ] No [ ] No idea [ ]

8. Is there any significant relationship between the global economic meltdown and the

crises in the Nigeria Stock Exchange? Yes [ ] No [ ]

9. Does Structural Deficiencies of the Nigerian Stock Market contribute to the price

crash experienced at the Exchange? Yes [ ] No [ ] No idea [ ]

10. Does Regulating Inconsistencies and Pronouncements play significant role in

destabilizing investor’s confidence in the market? Yes [ ] No [ ] No [ ]

11. Does the meltdown led to the loss of confidence of banks and other lenders on shares

as collateral for loan facilities? Yes [ ] No [ ] No [ ]

58

12. Do you think that margin trading and speculation by stockbrokers has a significant in

destroying the market prices? Yes [ ] No [ ]

13. Does the Pull-Out of Various Foreign Investors from the Nigeria capital market

contribute to the price crash at market? Yes [ ] No [ ] No idea [ ]

14. Do think that the crash at the Nigerian stock Exchange was partly caused by

ineffective regulation and supervision by the Securities and Exchange Commission?

Yes [ ] No [ ]

15. Do think that the Nigerian Stock Exchange (NSE) has failed in its oversight function

on the professional activities of its members, that is, stockbrokers? Yes [ ] No [ ]

16. Will reforms in the capital market as well as in the banking sector help to restore the

confidence of investors in the market? Yes [ ] No [ ]

59