Nigerian Stock Exchange and its Many Troubles

As the third biggest stock market in Africa, the Nigerian stock exchange is one of the few African exchanges that foreign investors continue to have their eyes on. The other two that are bigger than Nigeria’s (Johannesburg and Cairo exchanges) have over time become the only major Africa capital markets that regularly feature among emerging market drivers. The fact that South African economy is many times bigger than Nigeria’s provide some of the explanations behind the featuring of Johannesburg exchange among the emerging markets outstanding exchanges. While Cairo exchange is not only a hub for rising capital for African firms but more importantly it strategic location in one of the fastest growing regions in the world, the Middle East, provide it with the vibrancy that it is noted for over the last one decade. Like most other stock markets around the world, Nigerian stock exchange was devastated by the global financial crisis of 2008, but unlike many that have already recovered the recovery of the NSE is taking time, in fact some pessimist see the situation as if the market will never recover to it pre-crisis level. Many factors account for this slow recovery, some of which include the recent management crisis experienced in the exchange, many accusations that went round on some unethical dealings and binding of led down procedure, the bankruptcy of many of the stock broking firm that trade on the exchange floor, current financial sector reforms, as well as the fear of likely repeat of the lost incurred by unsuspecting public at the height of the financial crisis of 2008-09. Others include the fact that the bubble created during the peak of 2008 by margin lending from banks who on their part do so in order to boost the value of their shares, was completely out of tune with the fundamentals of the market at that time. The fake grow in transaction volume and valuation created by that bubble led many local and foreign investors into investing their hard earn money which they later lost when the market turned sour.

Exchanges around the world reflect the strength of the economies in which they are based, for example, technology firms are among the most capitalized firm on America’s exchanges, financial firms in the London stock market, and mining companies in the case of Johannesburg stock exchange. In Nigeria the most capitalized company listed on the NSE is Dangote group, a conglomerate that produces anything from cement, noodles, juice, to sugar, and then followed by Nigeria’s major banks. But, because the combine capitalization of the financial firms on the exchange is very significant, the exchange continue to move with the fortune of the banking industry; hence, the current persistent slide in the value of the exchange as the banking sector recover slowly from the crisis of 2008-09. Analysts (this January) predicted a growth of 14% by the exchange; this (again) is anchored on the expected recovery in the banking sector in 2012. The expected growth in the economy this year, and hope of improvements in the mediation of current EU debt debacle where other factors taken into consideration in arriving at this forecast. But I have my doubts, given the current reversal of forecast of the expected growth rate of the world economy by the International Monetary Funds; the IMF in its 2012 outlook have reduced it earlier released expected growth forecast in the world economy this year. Though, the expected rise in the international price of crude oil may offset any slow down from the world economy that may transmit to the Nigerian economy, looming threat of domestic security threat is still another major problem. Looking at the transactions on the exchange in the last one year, especially before the crisis of 2008, one of the major movers of the price of shares in the market was the continue inflow of foreign speculative investment, help by the attractions of the market at that period. Now that most of these attractions are no more there, the era of spectacular rise in the NSE is one or two years ahead or more.

The recent signal that the management of the NSE is planning to issue licenses to ten of it members to act as market makers in order to help in deepening the market and increase it liquidity a good move as it is (because it will help boost investors confidence) will end up not making the desired in fact, if not handle carefully. That is why it is very necessary to appoint reputable institutions as market makers to avoid shenanigans that have tainted the image of the exchange over the last few years. The Johannesburg exchange, though, bigger than Nigeria’s (with market capitalization of about $579) and listed on it own exchange, do not have the kind of complications that are apparent with the NSE. And, the reason for this is not far fetch; the governance mechanism that is guiding the exchange together with the management team is one of the best in the world. It was in order to put the NSE on the road to achieve world standard in management and accelerating growth in the exchange that I am very sure the appointment of the current CEO of the NSE was made. But appointment of some one from New York stock exchange alone will not do the magic because the infrastructures and the environment in which the two exchanges operated are not similar, likewise the nature of the companies operating in both. The exchange alone cannot change anything if the corporate culture and governance mechanisms of the listed companies did not under go transformation. Many Nigerian companies are a long way from meeting international listing standard, hence, the apparent absent of any Nigerian company on the main stock exchanges of the world. In some few studies undertaking to measure the relationship between corporate governance and financial performance of some of the listed companies on the exchange, the studies discovered that concentrated share ownership common with the listed companies tend to affect their performance, and that, adaptation of good corporate governance increase firm performance.

The current depreciation in the value of Naira is bound to affect the shares listed on the exchange negatively likewise continue rise in inflation rate. With increase in inflation any further rise in interest rate will assist the current slide in the performance and the recovery of the NSE. That apart, the plethora of reforms been put in place by the management of the NSE and Security and exchange commission are bound to slow down the quick recovery of the market, unless those reforms are undertaking to achieve only short term ends. But if at all they are mean to set the exchange on long term growth and consolidation they are bound to take time and in the process clash with the interest of many powerful individual that are known to have stakes in the running of the market. The past leadership of the exchange under Ndidi Okereke was accused of orchestrating most of the current ills that are affecting the performance of the exchange. It was Okereke who instead of concentrating on her core job that went on rising money for re-election of PDP, which is clearly out of tune with what people holding her position practice in other parts of the world. At a time, the market was rated the worst performing in the world in 2009, with market capitalization hitting N5 trillion from N14 trillion; which later led to calls for the sacking of the CEO. Now that good policies are been put in place to stir the exchange in the right direction, utmost caution most be exercised to avoid towing the same fatal line the previous management plunged the exchange into. Located in an economy with potentials like that of Nigeria’s, the exchange should brace itself for more challenges as the Nigerian economy moves to become the largest economy in Africa.

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