The former governor of the Central Bank of Nigeria (CBN), Prof Chukwuma Soludo yesterday admitted that the stock market crash was a direct fallout of the consolidation of the country’s banking sector between 2004 and 2005.
Soludo, who also served as chief economic adviser to President Olusegun Obasanjo told the House of Representatives ad-hoc committee investigating the near-crash of Nigeria’s capital market that the consolidation exercise ushered in a “new capital market” backed by improved liquidity in the 25 surviving banks which sparked a “speculative frenzy”.
Soludo also admitted that no amount of reforms or regulation will stop future crashes, hinting similar crashes typical of the “boom and bust” nature of stock markets all over the world.
“Except this committee is ready to switch from an ad-hoc committee to a permanent one, the stock market will always crash,” Soludo said.
Three years after Soludo left office, he alluded to widely bandied opinions that the near-collapse of the market could be traced to the CBN-sanctioned consolidation of the country’s banking sector in 2004-2005 under his watch.
“We (CBN) basically engineered the new market we are talking about now. Without consolidation, there would have been no market collapse to talk about,” Soludo told the lower house panel.
The capitalised banks, with excess of N25 billion recapitalisation funds, had so much freed-up cash in their kitty which they gave out as margin loans to investors in the prior booming capital market before the bust.
“The market boomed from a paltry N1.95 trillion (US$14 billion or 11 per cent of GDP) the day I assumed office to a peak of N12.64 trillion (US$105 billion or about 50 per cent of GDP on March 5, 2008),” Soludo stated at yesterday’s investigative hearing. He said “bank stocks accounted for about 65 per cent of market cap; and 77 per cent of top 20 stocks”.
In his presentation to the Ibrahim El-Sudi-led panel, Soludo reeled out what he termed the by-products of the bank consolidation on the new capital market.
“New IPOs in size and number never experienced in Nigeria; national awareness about the market exploded; insurance companies joined; Other companies ‘discovered’ the potentials of the market and listed; private placements emerged in every nook and cranny; millions of new, inexperienced investors invaded the market... 90 per cent of domestic investors were new.’’
He added: “The race for size by the banks also spurred second and even third-round capital raising by some banks — and investors smiling to their banks — new millionaires emerged, and a thriving briefcase-carrying middle class began to emerge; new cars adorned the streets.
As thousands made so much money, thousands also poured in. Some even sold their assets to join in the speculative frenzy in the irrational expectation that what goes up remains up. Everyone wanted to become a stockbroker or dealer in the market.”
“Banks extended margin loans to market participants such that the operational (skills and technology) capacity of the regulators and operators were stretched to the limit and risk management and corporate governance infrastructure of the operators and regulators could not cope with the explosions in size.”
In a prior presentation by the minister of state for finance, Dr. Yerima Ngama, he linked the market’s near-crash to the global economic crises at the time. He said if recommendations of the Presidential committee set up by President Umaru Musa Yar ‘Adua had been implemented, it would have impacted positively on the country’s financial system.
Among the recommendations were full deregulation of the downstream sector of the oil industry, the privatisation of the nation’s refineries and the removal of fuel subsidies, and reforming the Petroleum Products Pricing and Regulatory Agency (PPPRA).
Ngama parried questions from the panel on the qualification of the director-general of the Securities and Exchange Commission (SEC), Arunma Oteh, to head the regulatory body.
He said: “The issue of qualification and competence, you can have the certificate, you can go to the school but you can one day decide not to be competent...this is one thing that you people (referring to the committee) have also examined and I know that you are just asking me but you already have your facts. If you have those facts and you advise us, we will take your advice.”
The minister however scored the SEC DG low on her performance so far. “It should be better, far better, than what it is...From what I have read in the papers, from what I have watched, the body is not one,” Ngama said.
Last Wednesday, SEC’s executive commissioners had publicly distanced themselves from the actions and decisions taken “unilaterally” by the Oteh-led SEC.
The House panel exposed a sharply divided SEC brought about by bitter internal wrangling between staff members of the commission and the DG of SEC. SEC senior officials said the face-off has led to the “regulatory comatose” of the commission.