This statement is relevant in the turnout of events leading from the global financial crisis of 2007. Like the Central Bank of Nigeria (CBN), the continuous reform of the Nigerian capital market had been necessitated from the crash which the market experienced largely due to the effect of the global financial crisis at the end of the first quarter of 2008. Several authors have defined the financial crisis in various ways. The CBN defined it as a situation where financial institutions or assets suddenly lose a large part of their value. Eichengreen and Portes (1987) defined it “as a sharp change in asset prices that leads to distress among financial markets participants” (cited in Sanusi, 2010).
The crisis can be in form of a banking crisis, speculative bubble, international financial crisis and economic crisis. The financial crisis destabilized the global financial system and led to a major economic crisis in 2008. Following the reforms carried out between 2003 and 2008 in the Nigerian banking sector, the capital market deepened and public awareness and involvement increased significantly. This development indicates that the interrelationship between the CBN and the capital market cannot be understated.
The Securities and Exchange Commission (SEC which was established by the SEC Decree 29 of 1988) is the apex regulatory agency for the Nigerian capital market. The Commission has evolved over the years with its current enabling law being the Investment and Securities Act (ISA) 45 of 1999. The Commission is charged with the dual role of developing and regulating the market. On the other hand, the Nigerian Stock Exchange (NSE) is an organization with oversight function on the professional activities of its members, that is, stockbrokers who trade on its floors and is required to provide a periodic report of its activities to the SEC.
Antecedents show the first financial crisis to be the Great Depression of 1929-1933. The recent financial crisis which originated in the US was preceded by over a hundred episodes of financial crises (CBN, 2009). It is pertinent to note that 75 per cent of these crises had either been caused by the capital market or had affected the capital market. Prior to 2008, the market enjoyed a decade of unprecedented growth, driven principally by the banking sector reform. Market Capitalization (MC) rose by 318.3 per cent, from N2.90 trillion in December 2005 to N12.13 trillion in March 2008, while the All-Share Index (ASI) also rose by 161.6 per cent with the index rising from 24,085.8 in December 2005 to 63,016.56 in March 2008 (NSE, 2008).
The state of the Nigerian capital market is largely affected by the state of the banking sector, hence the need to discuss the banking sector reforms which the CBN has undertaken following the global and financial crisis which began in 2007. The reforms undertaken by the CBN has aided that undertaken by the other regulatory bodies.
CONCEPTUAL AND THEORETICAL LITERATURE
The Nigerian Capital Market
The capital market is a market for raising funds by organizations and sale of securities. It is the main source of long-term funds to finance investment. Major studies have identified that viable projects have collapsed due to the mismatch of funds utilized. The capital market which is an arrangement that facilitates the mobilization and allocation of medium and long-term funds through the issuance and trading of financial instruments affords projects with long gestation period an avenue to raise appropriate long term funds. The capital market which is a segment of the financial markets facilitates the raising of long term capital through equities and bonds. Equities represent an ownership stake in a company which issued them while bonds are debt instruments with the principal and interest usually payable to the holder at pre-specific periods.
The primary market segment is for raising funds through the issuance of new securities while the secondary market segment provides facilities for trading in already issued securities. As the major source of appropriate long-term funds, the capital market is obviously crucial to any nation’s economic development. Specifically, the capital market facilitates economic growth by, among other things, mobilizing savings from numerous economic units such as governments, individuals and institutional investors for users such as governments and the private sector. It also improves the efficiency of capital allocation through a competitive pricing mechanism.
REGULATION OF THE CAPITAL MARKET
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission is the apex regulatory agency for the Nigerian capital market. It was established by the SEC Decree 29 of 1988. However, the Commission has evolved over the years with its current enabling law being the Investment and Securities Act (ISA) 45 of 1999. The Commission is charged with the dual role of developing and regulating the capital market.
In fulfilling its developmental role in the market, SEC has embarked on a number of effective measures such as enhancement of its regulatory oversight, thus, building the foundation for investors‟ confidence in the Nigerian capital market. The commission is saddled with the responsibility to protect investors in the market and to minimize the risk of becoming victims of any malpractice. In line with this objective, the Commission has adopted innovative measures to ensure that malpractices are prevented/minimized. In achieving this, the Commission utilizes the following: registration, surveillance, investigation, enforcement and rule making.
Nigerian Stock Exchange (NSE)
The Nigerian Stock Exchange (NSE) has oversight function on the professional activities of its members, that is, stock brokers who trade on its floors. The NSE is also required to provide a periodic report of its activities to the Securities and Exchange Commission. The Nigerian Stock Exchange in its effort to improve the capital market has undertaken a number of market development activities including re-engineering of investigation planning, bond trading platform, an extension of trading hours, communication plan and introduction of the Bond trading platform.
THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE NIGERIAN CAPITAL MARKET
The effect of the financial crisis that began in the United States of America (USA) on emerging markets was wide-ranging and was both internally and externally induced (Nijathaworn, 2010). The initial financial crisis had affected mainly the US and Europe. However, due to the connectivity of the financial system also known as the „contagion effect‟, most economies were affected
The impact of the crisis started to show by mid-2007 with the fall of major stock market prices. The crisis entered a new phase with the collapse of Lehman Brothers in September 2009 and spread across economic sectors in advanced, emerging and developing economies, Nigerian inclusive.
Avgouleas (2008) enumerated the causes of the crisis as breakdown in underwriting standards for subprime mortgages; flaws in credit rating agencies’ assessments of sub-prime Residential Mortgage Backed Securities (RMBS) and other complex structured credit products especially Collateralized Debt Obligations (CDOs) and other Asset-Backed Securities (ABS); risk management weaknesses at some large US and European financial institutions; and regulatory policies, including capital and disclosure requirements that failed to mitigate risk management weaknesses.
According to Adamu (2009), the causes of the crisis can be summarized as the liberalization of global financial regulation, Boom and Bust of the housing market, speculations, new financial architecture, poor credit rating, high-risk loans and government policies. Most scholars have argued that the crisis was not without warning, the housing boom witnessed in the United States and lack of coherent regulation highlighted the flaws in the system. Most proponents argued that any form of strong regulation would stifle innovation and with the growth of small businesses in the US and Europe, this was discouraged. Banks and financial institutions repackaged these debts with other risk debts and sold them to worldwide investors creating financial instruments called Collateralized Debt Obligations (CDO).
These financial innovations of the market termed financial derivatives also known as Mortgage-Backed Securities (MBS), which derived their value from mortgage loans, spread the risk to financial institutions and investors around the world. Research shows that major banks and financial institutions borrowed and invested heavily in MBS and reported losses of approximately US$2.8 trillion as at October 2008 (Adedipe, 2009). The credit derivatives compounded the effects mainly in the capital markets (property and stock markets) (Ibid, 2009). The effects of the crisis on major stock markets indicated losses as at end December 2008.
The crisis led to the demise of large banking institutions, large size conglomerates and small businesses with governments, in even the wealthiest nations, providing rescue packages to bail out their financial systems. The impact of the crisis is still currently felt with countries such as Greece and Ireland seeking rescue packages. Like other African countries, the Nigerian economy was initially perceived to have been isolated from the financial crisis. The total share of stock market capitalization stood at only 1.81 per cent of the global market (CBN, 2009). However, the effects began to show by end-March 2008 with the crash in the capital market and some banks having expanded their businesses outside the shores of Nigeria, the contagion effect of the crisis hit the Nigerian economy.
Based on the nature of the Nigerian economy, the financial crisis had an impact on the foreign exchange market. This was attributed to the disinvestment and repatriation of capital and dividends by foreign investors thereby intensifying the demand for foreign currencies. This further led to a depletion of the external reserves. The implication for the Nigerian economy was borne by the various sectors of the economy.
Firstly, the Nigerian stock market witnessed a continuous drop in the All-Share Index and volume of traded securities.
Secondly, the banking subsector was affected by a credit contraction as most foreign banks reduced their credit lines, exchange rate exposure, and the continuous decline in the NSE eroded their profitability.
Thirdly, the decline in the revenue receipts by the three tiers of government, leading to a contraction in the fiscal sector. The contraction of the fiscal sector led to a crowding-out of the private sector credit, which in turn affected the real sector.
Based on the assessment conducted by the Ministerial Conference on Financial Crisis (2008), the financial sector had been in receipt of US$15.73 billion in portfolio flows in 2007 alone (cited in Sere-Ejembi, 2008). With the emergence of the global financial crisis, foreign investors began to withdraw holdings in the capital market which in turn led to capital flight. The withdrawals of portfolio holdings, given the size of the market, led to significant volatility and to a sharp decline in stock prices across the Nigerian stock market.
Prior to the crisis, stock prices had appreciated though without correlation with any market fundamentals. Between 2002 and 2008, the Nigerian stock market capitalization rose to peak at N12.6 trillion in March 2008. The boom led to an investment rush by all classes of society. Bank customers took out loans to invest in stocks of their banks. The withdrawal of funds by the foreign investors led to the huge decline of most stock prices as supply exceeded demand. The market capitalization was worth only N4.5 trillion in March 2009.
THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE REFORMS
The Banking Sector Reforms
As an oil dependent nation, the state of the Nigerian banking system was largely dictated by the aftermath of the global financial crisis. The crisis resulted in a decline in oil revenues leading to revenue attrition for all tiers of government; reduced capital inflows into the economy; depletion of external reserves; demand pressure in the foreign exchange market; substantial decline in stock market capitalization and share prices. The stock market lost about 70 per cent of its market value in 2008. The price collapse of the market resulted in massive wealth destruction, credit contraction, impairment of banks, assets liquidation and loss of confidence in the global financial markets (CBN, 2010).
For instance, bank stocks were hard hit on the market with second round effects on their balance sheets and lending capabilities. In order to stabilize the financial system, a joint special examination by the CBN and NDIC was conducted in May 2009. The results showed that of the 24 banks, 10 had a substantial non-performing loan; poor corporate governance; weaknesses in capital adequacy; and illiquidity. Following the revelation of the exercise, the CBN adopted a phased approach to addressing the main issues. Firstly, in its bid to fortify the banking sector, the CBN replaced the Chief Executives/Executive Directors of the banks and injected N620.00 billion (Tier II capital). In addition, efforts were made to recover nonperforming loans held by debtors of the banks and all foreign credits and correspondent banking commitments of the five banks was guaranteed.
The second phase was termed the “Alpha Project“. The CBN articulated a blue print for reforming the Nigerian financial system in the next ten years. The blueprint which is built on 4 pillars of enhancing the quality of banks, establishing financial stability, enabling healthy financial sector evolution and ensuring that financial sector contributes to the real economy highlighted the direction for the reforms. With regards to enhancing the quality of banks, the CBN initiated a five-part program to enhance the operations and quality of banks in Nigeria. Industry remedial programmes were adopted to repair the key causes of the crisis, a risk based supervision approach was put in place, the regulations and regulatory framework were reformed, consumer protection was enhanced and the internal transformation of the CBN was undertaken.
In terms of establishing financial stability, the capital market was key to this reform. The CBN laid emphasis on strengthening the Financial Stability Committee within the CBN and established a hybrid monetary policy and macro-prudential rules (CBN, 2010). This also included the development of directional economic policy and counter-cyclical fiscal policies by the government and further development of capital market as an alternative to bank funding. The major aim is that developing a strong and deep capital market can help ensure financial stability.
In order to enable a healthy financial sector, the CBN reviewed the basic one size-fits-all model of banking (universal banking). Banks were mandated to streamline their operations unlike the Universal Banking (UB) model adopted in 2001, which allowed banks to diversify into nonbank financial businesses, they were mandated to apply for licenses to suit their mode of operation. This included the international, national, regional, monoline and specialized licenses such as Islamic banks, etc, with different capital requirements, commensurate to the depth of their activities. With regards to ensuring that the financial sector contributes to the real economy, the CBN Governor‟s role as Adviser to the President on Economic Matters came into play. The Governor of the Bank has been able to secure funding for different sectors of the economy such as the N500 billion Agriculture fund and the N200 billion Power and Aviation fund disbursed through the Bank of Industry recently.
Of utmost importance and priority was the creation of the Asset Management Company of Nigeria (AMCON)). This body would serve as a resolution vehicle to soak the toxic assets of the CBN-intervened banks and provide liquidity to them as well as assist in their capitalization.
Capital Market Reforms
In performing its developmental role, the Securities and Exchange Commission undertook a number of reform activities. Fixed income is a key investment class for institutional investors such as pension funds and insurance companies due to its near certainty of income. It is a major source of financing infrastructural and industrial development and hence critical to economic development. In recognition of the important role of the fixed income market, the Commission is working with various stakeholders to further develop the Bond markets to enable it to compete with international fixed income markets. As part of its reforms, the Commission has introduced rules to guide book building and shelf registration which are expected to enhance market operators ability to raise fixed income while giving investors confidence.
In addition, investor’s confidence plays a significant role in encouraging participation in any capital market. Consequently, it is imperative that any reform of the capital market must ensure that market operators are perceived to be transparent by investors. Therefore, meaningful reform of the capital market must include addressing corporate governance of entities and players in the market. In recognition of this fact the Commission, included a review of the 2003 Corporate Governance Code in its capital market reform in order to address weaknesses in current practices and strengthen governance and disclosure by public companies. The draft of the new Corporate Governance Codes which is based o internationally accepted standards has been provided to the public and will soon be released.
The adoption of International Financial Reporting Standards (IFRS) by listed companies and regulated entities is expected to improve the quality of financial reporting in the country and give further credibility to the reports. Publicly listed companies and significant interest entities such as banks are required to adopt IFRS in reporting their financials by January 2012. Furthermore, high transaction costs act as a deterrent to organizations who may otherwise seek to raise funds and inhibit the growth of the capital market. Consequently, the Commission instituted a 40% downward review of fees and commissions charged.
This action made the market more attractive to participants. As part of an effort to encourage market operators to contribute to the growth of the real sector, the minimum paid-up capital was reviewed upwards. Also, in line with the ongoing reform of the Nigerian capital market, the then Abuja Stock Exchange was converted into a Securities and Commodity Exchange. A commodity exchange facilitates trade in commodities, as opposed to shares and bonds. The Abuja Securities and Commodities Exchange (ASCE) eventually commenced operation on 25th July 2006, trading manually in six (6) selected grains. They include sorghum, maize, cowpea, Soya beans, sesame seeds and millets.
The Commission is actively encouraging an institutional market with retail investors participating in Collective Investment Schemes (CIS). This is to protect retail investors, who have been identified by the Commission of lacking the ability to engage in direct investment in the capital market. Nigeria currently has 40 CIS with a majority of them being specialized and able to provide for specialized appetites of investors. The existing CIS provided specialized vehicles that invest in bonds, equity, balanced (combination of various capital market instruments), guaranteed (fixed income), money market, Islamic and Real Estate Investment Trusts (REITs). In order to protect retail investors who have shown an increased interest in mutual funds, the Commission has increased its surveillance funds managers and trustees of these schemes.
Human resources have been identified as the most valuable assets within any organization. The Commission in recognition of this fact and seeking to enhance the capacity of market operators is reviewing the programs offered by its training institute, the Nigerian Capital Markets Institute with a view to enhancing the quality of programs. This is expected to ensure that capacity within the industry develops along with the complexity of the capital market product offerings.
METHODOLOGY AND DATA ANALYSIS
For the success of this study and the analysis to ascertain the impact of the globalization financial on the Nigerian capital market and the reforms questionnaires were drafted to sample people opinion. A total of sixty (60) questionnaires have been designed and only fifty-one was used. The questionnaires were randomly administrated to the staffs of the Nigerian Stock Exchange (NSE), the information retrieved will be presented in a table while the chi square method of data analysis was used to analyze the data.
Chi-square (X2) = ∑ (O-E)2
O = observed value and
E = Expected value
Therefore chi-square test was used to evaluate whether or not the expected result was realized.
Ho; the global financial crisis has no impacts on the Nigerian capital market and the reforms
H1; the global financial crisis has impacts on the Nigerian capital market and the reforms
Source: field survey, 2012
Source: own computation, 2012
X2 = 96.9
The critical value at 5% level of significance with degree of freedom (d/f) = 4
For one tail test = 9.49 and two tail test = 11.14
Since X2 is greater than the critical values we then reject the null hypothesis (Ho) and accept the alternative hypothesis (H1). It means the global financial crisis has impacts on the Nigerian capital market and the reforms.
CONCLUSION AND RECOMMENDATIONS
Nigeria, a frontier market has shown remarkable economic growth with an average economic growth of 10.03 per cent from 2001 to 2009. However, a lot still needs to be done to enable the country to become one of the top twenty countries in 2020. Consequently, there is a need to sustain the current level of economic growth and encourage both domestic and foreign investments in Nigeria. Evidence from recent empirical economic studies suggests that deeper, broader, and better functioning financial markets can stimulate economic growth (Ndikumana, 2001, cited in Levine. n.d). Hence, the interrelationship between the reforms of the CBN and that undertaken by the regulators of the capital markets should not be undermined.
The financial markets stimulate economic growth through the provision of short and long term funds to the productive sector. The banking sector, a major source of short to medium term funds, has contributed actively to the economic development in Nigeria. No business can succeed without access to adequate working capital and only the banking system can fill this gap. Consequently, the various banking sector reforms had been developed in order to ensure that the productive sector has access to this critical source of funding.
Economies also require long term capital investment for productive activities that produce goods and services that drive economic growth.
However, the surplus sector (households) is usually unwilling to surrender control of its savings for a long period. The capital markets bridge this gap by providing an arrangement where organizations can raise long term capital while providing investors the flexibility to liquidate their investment without holding them to maturity. By providing investors with financial instruments that match their risk preferences and liquidity needs, the capital market enhances the prospects of sustainable economic growth through the generation of long term capital for the productive sector. The high cost of borrowing discourages organizations from making investments, thereby limiting economic growth.
However, capital markets eliminate the high cost of borrowing by offering companies the opportunity to raise equity with minimal issuing cost. Companies benefit from an injection of funds through equity to embark on expansion without the burden of interest payments.
In addition, capital markets listing requirement and banks due diligence ensure that companies provide regular information. This information enables shareholders to scrutinize the businesses and demand efficiency from the organizations. This, in turn, results in further growth as resources are deployed only to profitable ventures within the business and inefficient units are let go.
Capital markets provide a level playing ground for the numerous organizations seeking to raise funds. A competition for funds drives businesses to outperform each other to the benefit of the economy. In this vein, the capital market efficiently allocates financial resources to the benefit of the economy.
Well developed financial markets stimulate economic growth and regulators are continuously embarking on reforms to fine tune the markets to achieve this. Consequently, regulators like CBN and SEC would continue to adopt appropriate measures to ensure that the financial system is well equipped to stimulate economic growth.
- Adamu, A. (2009) “The Effects of Global Financial Crisis on Nigerian Economy” [online] Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1397232 April 30
- www.gbmf.info/2009/Global Financial Crisis_Mahboob Ali_ Islam.pdf > [accessed May 09, 2011]
- Adedipe, B. (2009), “Impact of Global Financial Meltdown on the Nigerian Financial System and Suggested Way out‟. A presentation at the seminar on Global Financial Crisis held in Abuja.
- Al-Faki, M. (2007) “Capital Market Reforms and Real Sector Financing: What Options?‟ [online] Available at http://www.sec.gov.ng/uploads/speeches/ 20090408541420 capital market reformsandrealsectorfinancing.pdf [accessed May 10, 2011]
- Al-Faki, M. (2007), “Understanding the Nigerian Capital Market: Best Investment Practices & Regulatory Compliance‟.
- Avgouleas, E. (2008) “Financial Regulation, Behaviour Finance, and the Financial Credit Crisis in Search of a New Regulatory Model‟
- Central Bank of Nigeria (2009), “The Current Global Financial Crisis: Antecedents, Causes, Effects and Implications for the Nigerian Economy‟. A presentation by the Research Department, CBN at the seminar on Global Financial Crisis held in Abuja.
- Nigeria Country Report [online] available at http://www.gfmag.com/gdp-data-countryreports/207-nigeria-gdp-country-report.html#axzz1LqXbBERW. (accessed May 09, 2011)
- Nigerian Stock Exchange (2008), Market Capitalisation Indices.
- Oteh, A., (2010) “The Global Financial Crisis and Financial Reform in Nigeria: A Capital Market Perspective‟. A paper by Director-General, Securities & Exchange Commission, Nigeria”
- Sanusi, L.S., (2010) “Global Financial Meltdown and the Reforms in the Nigerian Banking Sector‟. Being the full text of a Public Lecture delivered at the Convocation Square, Abubakar Tafawa Balewa University, Bauchi
- Sere-Ejembi A.A., (2008), “Nigerian Stock Market Reflection of the Global Financial Crisis: An Evaluation‟. CBN Bullion Vol 32:4
- Economic Growth as an Objective for Macroeconomic Policy in Developing Countries