Ijeoma Nwogwugwu
10 November 2008
(Page 2 of 2)
Yet, some of these banks are the so called big banks in Nigeria. If these banks have such significant holes in their balance sheets which one of them can be trusted in the event of a merger or acquisition? Over a year ago, Standard Bank (Stanbic) before its merger with IBTC-Chartered had to pull out of talks with one or two other banks after due diligence showed up significant rot in their books. Yes, another round of consolidation may work. But it should not be mandatory. Instead the authorities may consider using a carrot and stick approach which by offering banks a raft of incentives may compel them to merge.
Stock Market Institutional Changes
This may be the most difficult aspect to implement because it requires a change in mindset on the part of investors more than anything else. Traditionally, local investors, especially through the various shareholders associations, have always put considerable pressure on quoted companies to pay dividends and bonuses annually to their shareholders. Companies that fail to do so, or indicate in their prospectus that profits shall be retained, are usually punished by the market leading to negative share prices (the shares of Starcomms have taken a bashing for this reason). But the downside to this is that very high dividend payout ratios and bonus issues support low levels of earnings growth.
Companies go to the market for one primary reason: that is to raise funds to grow their businesses. But when these companies are put under pressure within the first couple of years of their listing and secondary offers to start paying dividends from their profits instead of retaining them, it curtails their ability to expand their businesses. In other words, the mindset of retail and wholesale investors has to shift from what has obtained in the past and begin to view their investments in the stock market as long term investments. By reducing the pressure mounted on banks and other operators in the financial services sector to declare dividends and bonuses, quoted companies will be the better for it, because the retention rate of profits will be higher. That way, financial institutions will be less inclined to falsify their books and declare false profits for the benefit of fickle minded investors.
Lastly, a revision of the pension legislation and PFA guidelines is still necessary given the sheer scale of investible funds pension contributions can constitute in the development of the stock market. According to a market research study published by ARM Investment Managers, a Lagos-based investment banking firm, pension funds provide a natural and stable pool of capital for the stock market and can be harnessed more effectively. A revision of the legislative framework should include the strict enforcement of private sector compliance with existing regulations, particularly with respect to the establishment and funding of retirement savings accounts for employees. Covered employers should be compelled to make the mandated regular contributions, with stiff penalties imposed where defaults occur. This would enhance market liquidity as the PFAs allocate additional funds to the market.
A review of asset allocation guidelines to PFAs to increase the equity exposure limit to more than the current 25% is also necessary. For example, ARM estimates that a 10% upward review would potentially result in an immediate injection of over N100 billion into the stock market. Using PFAs in this manner would also avoid the negative signal from the lobby for a "bailout measure" predicated on the use of public funds (otherwise known as Stabilisation Fund). Added to this, the remittance of public sector contributions currently in custody of PENCOM and/or its successor body to the PFAs would help push up equity prices, as it is estimated that this currently amounts to N100 billion.
But most important of all, and as a superior argument to the establishment of a Stabilisation Fund, is the need to ensure the funding of public sector pension arrears at the federal level. These are estimated at over N1 trillion, and would provide a massive boost to the stock market, if an agreement is reached with the Federal Government to fund this liability in a phased manner.
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