Daily Independent (Lagos)
Kingsley Ighomwenghian
11 November 2008
It was time for members of the nation's stockbrokerage community to tell themselves some home truth recently, while seeking a way out of a market meltdown that has almost rendered the profession unenviable and its ardent practitioners bankrupt after eight months of being on the receiving end.
There was no better place to do such than the sleepy town of Ilorin, capital of Kwara State, where members of the Chartered Institute of Stockbrokers (CIS) retreated to away from the hustle and bustle of the Central Business District on the Lagos Island where most of them have plied their trade for decades.
In all six papers were presented in what seemed like the traders relearning the trade afresh, as if to possibly remind them of where they failed individually and collectively and suddenly found themselves in a sorry pass as this.
It was not all about paper presentation, as the brokers also took time off to review the entire economy and the roles played by the government, as well as the various regulatory agencies, who they accused of trial and error in other words resulting in policy gymnastics.
According to the communiquÈ at the end of the annual conference between October 22 and 25, 2008, signed by Oladipo Williams, President and chairman of the institute's council, the stockbrokers, while not absolving themselves, also blamed the government.
Despite the spirited efforts of the Central Bank of Nigeria (CBN) Governor, Prof. Chukwuma Soludo, to distance the apex bank from the trouble on Customs and its adjourning streets on the Lagos Island, the stockbrokers lamented: "the fundamental problem of the capital market is the credit induced illiquidity in the banking system."
For example, during an interview in his office in Lagos some months ago, Albert Okumagba, chief executive, BGL Group, an investment banking outfit and one of the biggest players in the nation's capital market, attributed the market lull to factors such as illiquidity in the system resulting from credit crunch, in addition to new regulations that put more pressure on liquidity and other speculative activities. This, said then, is in addition to "suspension of margin facility and the minimum trade to move prices (by the Nigerian Stock Exchange)," in addition to the possible effect of global economic crisis which began with the sub prime mortgage problem that started in the US and spread like wild fire across Europe and Asia, leading to the death or government take over of some of the world's once celebrated financial supermarkets. As a result of the stoppage of further facilities and recall of even existing ones, a situation, he said, led to panic disposal of stocks by bank loan funded investors."
Soludo has since denied any such order from the CBN since the various banks are business concerns with boards that have leeway to determine who to extend credits depending on their risk appetites. He told business editors and media executives recently at a parley in Lagos that the common year end was withdrawn because of the thinking that it was part of the major causes of the meltdown. Since the withdrawal, just as in the other recants by the apex bank, Soludo said the declines have continued, sometimes at a ferocious pace, meaning that there are other causes of the meltdown like the global recession.
Not withstanding the arguments of the CBN chief, the stockbrokers lamented a situation where the regulatory agencies do not have a harmonized position on how to tackle the capital market meltdown. This is despite the setting up by Vice President Goodluck Jonathan of the Presidential Advisory Committee on the Capital Market chaired by Dr. Shamsuddeen Usman, Finance Minister. The committee draws members from the stockbroking community, NSE, the Securities & Exchange Commission (SEC), the banking community represented by Access Bank chief executive, Aigboje Aig-Imoukhuede, among others.
The CIS communiquÈ also noted that "the fundamental problem of the capital market is the credit induced illiquidity in the banking system," while noting that the problem in the capital market has three components- loss of confidence, liquidity issues and over-hanging sale of equity orders.
While also agreeing that the global economic crisis has a direct impact on developments in the nation's economy, which includes the capital market, the institute lamented perceived inconsistencies and lack of harmonization in government monetary, fiscal and financial systems policies. There are also concerns about "loose corporate governance practices in the financial sector of the economy,"
One of the topics discussed, expectedly at the conference was the share buy back option, which was discussed by Lance Musa Elakama, assistant director of the NSE who in his paper "Sustaining the capital market: share buy-back" described it as "the stock of a company which was issued and then bought back by the corporation or otherwise reacquired by the company. A share buy back distributes cash to existing shareholders in exchange for a fraction of the firm's outstanding equity. That is, cash is exchanged for reduction in the number of shares outstanding. The firm either retires the shares or keeps them as treasury stock, available for re-issuance."
A buy-back, he explained, reduces the number of shares held by the public, provides a competitive return on investment and helps the company maintain a stable earnings and dividend per share. It could also be motivated by management, where executive compensation is tied to executive ability to meet set earnings per share target, in addition to preventing a hostile take-over by predators. It could also be another way to utilize excess cash not required by the company.
Against the backdrop of recent talks about the benefits of share buy-back as one of the solutions being thrown up by various analysts, with the support of government and the regulatory agencies as a way of enhancing the value of listed companies, the communiquÈ said the policy is no quick fix. Instead, they say is "a medium to long-term panacea to the problems the capital market is currently facing."
They are also unhappy that unlike in the advanced markets where the government has come out strong to executive a bailout for their trouble giants, the stockbrokers are worried that the government's intervention is yet limited and not far-reaching enough. As if in response to this thinking, the Usman committee said some months ago, after its meeting that there was no need for a bailout as the fundamentals of the market and the nation's economy remain strong, as can be seen from the fact that almost all the listed firms continue to propose juicy dividend and bonus issues. Soludo, believes that any amount put into the market in the form of bailout will end up in the pockets of profit taking investors, leaving the market the same. It is time, he insist that Nigerian investors are made to realise that the market does not just go up all the time, but can also come down as it is being witnessed currently.
The communiquÈ however agreed on the need for stockbrokers to invest in market research activities as a basis for operating and advising their clients, rather than the now common herd mentality or rule of the tomb method.
After apportioning blames, the stockbrokers urged policy makers to harmonise all policies relating to affecting the capital market, just as there is need to diversify the nation's economic base with less dependent on oil, in the face of the global economic recession. There is need, the communiquÈ continued, for the SEC to urgently resolve the legal technicalities involved in the share buy-back programme, reducing the time lag in granting approvals.
The stockbrokers believe the institute should do more of public enlightenment campaigns to re-orientate investors towards a paradigm shift from a market that is largely seen as a gaming machine. They want the institute to use the campaign to restore investor confidence, talking about the resilience of the market and its ability to bounce back, just it should invest on continuous mandatory professional education for stockbrokers to upgrade their skills and competencies.
The communiquÈ also agreed on the need for stiffer penalties for erring operators and institutions who fail in the area of good corporate governance practice thereby reducing the high incidence of abuse, while engendering transparency.
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