Babajide Komolafe and Peter Egwuatu
5 January 2009
The year 2008 will always be remembered by the banking industry as one of those years of turmoil and crisis. Whilst there were a lot of positive development in the industry during the year, the magnitude of the crisis which gripped the industry towards the end of the year, a fall- out of the global financial crisis, overshadows the effect of the positive development.
The crisis arose from three development which occurred separately in the course of the year.These are the common financial year policy, the stock exchange market decline, and the global financial crisis.
In January the Central Bank of Nigeria (CBN) announced that all the banks in the country will now have a common financial year end and directed in February that the policy will take effect from December 31st and also extended the policy to subsidiaries of banks within the country.
The major objective of the policy is to facilitate the rating of banks in the country. Despite caution from several quarters, the apex bank insisted there is no going back on the policy. Hence, some banks sought and got the approval of shareholders to change their year end as directed by the monetary authority.
This, however, sparked-off an aggressive drive for deposit mobilisation by banks in apparent bid to shore up their deposit base ahead of the December 31st common year end. To achieve their deposit mobilisation drive banks jerked up their interest rate with deposit rate reaching 18 per cent in some banks and lending rates touching 30 per cent. The hike in interest rate forced the CBN to acknowledge the unsavoury consequences of the policy, and as a result it initially postponed the implementation of the policy and later suspended it in August.
Decline of the stock market The share offers by banks during the consolidation exercise in 2004 increased public awareness in capital market investment hence an many more Nigerians and institutional investors were attracted to the market between 2004 and 2007.
This occasioned steady demand for shares and with quoted companies especially banks declaring huge and sometimes unbelievable profit share prices rose rapidly thus further enhancing the attractiveness of the market to millions of Nigeria. Consequently, banks started offering share purchase loans also called margin loans both to individual inventors and to stock broking firms. However, the market owing to a number of factors began to decline steadily with share process falling by alarming rate. Consequently, it becomes increasingly difficult for investors to recoup their investment in the market. By extension banks too could not realize the money they gave out as margin loan.
Though the CBN said that total expose of banks to the stock exchange is about N700 billion, investigations reveal that it is more than that. This exposure prompted liquidity difficulties in the industry. Consequently, in the course of the year banks stop granting margin loans and also stop accepting share certificates as collateral for loans. However to moderate the effect of the exposure on banks profit and loss account as well as give investors breathing space, the apex bank granted banks the permission to restructure all margin loans by one year.
The global financial crisis
The global financial crisis started in the United States of America in 2007. However, it assumed a crisis status in September following the collapse of two of the world oldest and biggest investment bank namely Lehman Brothers and Merrill Lynch. Like wildfire the crisis spread to other parts of the world prompting major stock markets to tumble and fumble, while central banks and world leaders announced bailout measures to improve liquidity and forestall further collapse of banks. All together about $3 trillion dollars have been expended in this regard.
Initially, it seems the Nigerian banking industry was totally insulated from the crisis. The year 2008 will always be remembered by the banking industry as one of those years of turmoil and crisis.
There were apprehensions in many quarters that the crisis might also cripple the Nigerian banking system, with some experts calling for bailout measures for the banks.
Despite its assurance that the impact of the crisis would be limited, the CBN nevertheless took preemptive steps to minimize whatever impact the crisis will have the banks and on the economy. Among other things the apex bank reduce the Monetary Policy Rate (MPR) from 10.25 per cent to 9.75 per cent; Reduced cash reserve ratio of banks from four per cent to two per cent ; Reduced the liquidity ratio from 40 per cent to 30 per cent.
It also allowed repo transactions against eligible securities for 90 days, 180 days and 360 days; while offering to buy and sell securities through the two way quotes. These measures which were intended to buoy liquidity in the industry, translated to injection of about N1 trillion liquidity into the economy.
Notwithstanding these measures, Nigerian banks started feeling the hit of the crisis when the foreign correspondent banks began to recall or reduce credit lines extended to them. Also foreign Fund management firms began to pull out of the country.
These resulted into capital flight which triggered huge demand for foreign exchange between October and November. From $1.27 billion sold in September, foreign exchange sales shot up to $3.4 billion in October and $3.1 billion in November. This prompted a sharp depreciation of the naira as the exchange rate rose rapidly from N117 per dollar to N135 per dollar between November and December.
But besides the above, the impact of the global financial crisis on Nigerian banks has been relatively minimal. Unlike banks in the developed countries which suffered credit crunch, severe illiquidity and recorded losses as well as takeover by government through bailout measures, Nigerian banks have continued to grant credit, enjoy robust liquidity and one of the best capital adequacy ratio of about 20 per cent. They have also continued to post eye popping profits and declare generous dividend payment.
Speculations, profit taking, inconsistent policies mars stock market growth in 2008 The downturn in the stock market experienced in year 2008 will remain indelible in the minds of many investors and other stakeholders in the Nigerian economy as the bubble which was built several years ago suddenly burst, leaving investors with bitter experience.
Apparently, the stock market recorded an unprecedented growth hitting N12.6 trillion market capitalisation and 66,371.20 points All Share Index in the first week of March 2008 before the bears set in .In absolute terms, the market lost N3 trillion from March to October 2008 before the intervention by regulators to stem the pathetic situation.
After some weeks of losses, the market witnessed a rebound in the second week of May 2008. However, that recovery did not last as the bears set in again towards the close of May and sent panic signals to investors and regulators. But after the market recorded its first real dip of 3.03 per cent for the week ended May 6, 2008, regulators had to step in freezing further downward the movement of prices. The intervention paid off as the index closed with record appreciation of 7.04 per cent to close at 60,191.83 base points while the market capitalisation stood at N11.72 trillion.
But as at end of trading a day before the yuletide, the market capitalisation closed at N6.797 trillion and index 30728.91 base points. This indicates that investors had lost N5.9 trillion between March and December 24, 2008, while index dropped by 35,642.29 base points.
Genesis of Bear Run The continual slide in prices of equities at the Nigerian Stock Exchange (NSE) began March 5, 2008. Ordinarily, stock markets go in two directions-up and down. But a bear run in March was considered worrisome as that period was supposed to be bullish. The market was supposed to be bullish in March due to the high expectation on the part of investors that companies with December as year end would begin to declare their various returns.
While most of the companies actually announced improved performances and rewarded investors with higher dividends, prices continued to move downwards. Market operators attributed four factors for that decline in prices of stocks.
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