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.
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.
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.
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.
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......
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