Ajaokuta — The nation's capital market witnessed a remarkable expansion in less than a decade, making it the fourth best performing in the world and the toast of investors worldwide. But unfortunately, this tempo could not be sustained due to rapid decline of the Nigerian stock market since early 2008, resulting in alarming fall in share prices across board. This piece seeks to identify the underlying factors precipitating the stock market crisis, and points the way to a vibrant Nigerian capital market.

Contrary to the general belief that the Nigerian capital market's problem was caused by the current global economic crisis, the truth is that the market began to experience an unprecedented bearish trend before the advent of the world economic meltdown. Several factors contributed to the slump in the capital market. Among these factors were the deluge of new issues emanating from the banking sector consolidation; the release of pension funds to market operators with more institutional investors; insurance sector consolidation and the implementation of destination inspection and ports concession, which affected the capacity utilization and consequently, profit earning potentials of the quoted companies on the Nigerian Stock Exchange (NSE).

Moreover, some experts argue that the crisis in the Nigerian stock market was precipitated by massive profit-taking by investors; the escalating crisis in the Niger delta; foreign investors' pull out; delay in the passage of 2008 budget; portfolio review and liquidity squeeze in the system. Other factors identified by experts were panic offloading of shares by investors, stockbrokers' recapitulation policy, Central Bank of Nigeria (CBN) directive on margin facilities and the almost uniform financial calendar (year end) for Nigerian banks.

As pointed out in my article titled, "The Naira Free Fall" published in the Daily Sun of March 5, 2009, the Nigerian capital market's problem started with the banking consolidation during which over 23 banks approached the capital market at the same time to raise funds. I, then, pointed out that the unsavory development led to each bank trying to outdo the other, thus pushing them to apply some unwholesome practices to raise enough funds to shore up their capital base.

Some of the untoward practices of the banks then, included margin trading, unbridled pushing up of stock prices to earn higher returns, especially by institutional investors and stockbrokers, and delays in releasing share certificates. While the party lasted, speculators earned so much return on equities that were propped up just for that purpose. In fact, empirical studies showed that many banks earned over 1,000 per cent capital appreciation even when the fundamentals were not strong to sustain such hype and mark ups.

One may ask why dwell so much on the banking sector as the main culprit of the rot in the nation's capital market? The answer lies in the fact that the banking industry controls most of the activities on the floor of the Nigerian Stock Exchange.

Consequently, the Securities and Exchange Commission (SEC), the CBN and even the Nigerian Stock Exchange should all be blamed for their failure to control the manner banks rushed to the capital market to raise funds. The stockbrokers and even the chief executives of quoted companies, including banks, indeed colluded to take advantage of unsuspecting and largely ignorant investors. They simply drove the prices of their shares only to dump them on the public, after which the value fell. As a result, the nation's investors lost a colossal N240 billion to the crisis in the capital market.

If we may add, the CBN's policy on margin facilities took its toll in the capital market, considering the fact that a lot of funds were tied down to private placement. This dragged the market down even as early as June 2008.

Should market operators be exempted from blame for the crisis in the Nigerian stock market? My findings show that the operators contributed to the crisis. For instance, the Senate Committee on Capital Market had once accused market operators of creating artificial share prices through marginal trading while its House of Representatives' counterpart raised an objection to the banking sectors' excessive mopping of funds from the market through frequent public offers. Other sharp practices according to experts include delay in issuance of share certificates, diversion of unclaimed dividends to personal use, non-lodgment of shares, non-payment of sales proceeds, failed requests for share transfer, non-purchase of shares paid for, fraudulent dealings in Central Securities Clearing System (CSCS) accounts, non-refund for processed applications, insider dealings and unauthorized conversion of shares. The list of misdeeds by market operators is endless.

The above malfeasances were the harbingers of the crisis in the Nigerian stock market. The crisis was compounded by the global economic recession, which made foreign investors to suddenly withdraw their hedge funds from the Nigerian Stock Exchange. And when some Nigerians, who are only new and entering the stock market for the first time saw the action of the foreigners, they also panicked and sold out their shares, resulting in the sudden decline in value. Since many people panicked and sold their shares at the same time, the law of demand and supply came into play since price must fall if the supply exceeds demand.

The roadmap to a vibrant Nigerian capital market is for the regulators to be alive to their statutory responsibilities. The operators must also abide by their ethics while their umbrella union body, the Association of Stock Broking Houses of Nigeria (ASHON), must enforce discipline on any of its erring member(s).

To bring an end to share price manipulation and guarantee integrity of share price movement upwards or downwards, a parallel system of record keeping involving both manual and electronic systems of transaction should be put in place. Experts posit that, keeping dual records of transactions would not only guarantee integrity of price movement on the Exchange, but also serve as a reliable back up for thedata base of the CSCS.

With transactions on the Exchange seeing the market indicators (Market Capitalization, All-Share-Index, etc), daily shedding some points, there is no respite in sight. Obviously, many investors are confused, because the situation is uncertain. With the current trend in the market, operators should intensify awareness campaigns at the grass roots level if they really want liquidity in the market, instead of depending on a few moneybags and top government functionaries to bring their money into the market for investment.

Since the stock market is very sensitive and information-driven, the news of government intervention will definitely lead to its turnaround for good. Government should, therefore, intervene in the Nigerian capital market in order to inject more funds into it. Government should also make the environment right for investment, as that would attract investors to Nigeria. It is imperative for the government to create the right environment, infrastructures and incentives for investors in order to ensure that the global economic recession does not unduly affect Nigerians negatively.

Above all, I urge Nigerians to take advantage of the current lower price at the stock market to invest more in the buying of shares. I want to counsel Nigerians not to sell their shares now because the price value of the stock at the market have reached their bottom level and could only grow better with time. Just as the saying that, after darkness comes the light, it is also true with the stock market, for after the bearish period (lower share price) comes the bullish era (rising share price). The Nigerian stock market will rise again.

*Obaka, an economist, writes from Ajaokuta, Kogi State.