How the Big Lenders Crashed the Stock Exchange and were Enabled by Dr. Soludo

Abdulmumuni Yinka Ajia

Janice Kew and Michael Patterson over at bloomberg.com recently did a story on the Nigerian stock exchange and how bank losses have had a profound impact on the exchange. According to the duo, bankers (otherwise known as lenders) may be holding as much as $10 billion in toxic assets which is estimated to be almost equal to half of the entire capital of the exchange. [See Story]

Now if you take into account that the lenders make up about two thirds of the Nigerian stock market, you will agree with me that as a regulator, Professor Soludo has not done a good job overseeing the banks and ensuring financial discipline. The state of the Nigerian bank is very precarious because of it.

Before I go into the disaster that is going on within the banking sector, let us first take a look at some of the reasons why the Nigerian stock exchange has moved from one of the best performing market to one of the world’s worst barely less than a decade! Perhaps, there are many reasons that led to the collapse of the exchange, I will focus on five critical areas.

1. Speculation: I know, most markets are speculative in nature but what was going on in Nigeria prior to 2008 was of the worst kind. A friend of mine who works in middle management for one of the so called big banks confessed to me sometime in 2007 that the insider joke is that the Nigerian stock exchange has broken all rules. What he wasn’t saying was that while this speculation was going on, the major lenders were not creating any real value within the economy which can ultimately boost the Naira and save the exchange from itself. This was a period, when the big lenders were just floating ridiculous IPOs, give it massive publicity and have unsuspecting Nigerians buy into their voodoo companies. Barely ten years ago, most of these new big banks were not even in existence. Today, they are unraveling. Posting bogus profits and fuzzy book keeping. Now lets examine the next reason why the exchange floundered terribly as it did.

2. Insider trading: the trading of a stock or other securities by individuals with potential access to non public information about the company. This is not only going on, the Securities and Exchange Commission has not been alive to its responsibilities. It has also been suggested that SEC employees may be conniving with some of these traders while the public bears the pains of the loss in value. Most of these insiders have continued to dump their stocks using non public information at their disposal.

3. Bogus balance sheets: here you will find the legally backed margin loans that allowed banks to delay booking losses. This lack of full disclosure has left investors unable to identify potential losses. In some cases, there have been rumours of outright falsified balance sheets to deceive the public. The Nigerian media have been (with the exception of a few outlets) enablers, they publish these false reports and do not engage in any investigative follow up to ascertain the health of these institutions. To round it up, these lenders are into free wheeling and shaky securities. All of these activities have put investor’s funds at risk. The last time I read, the pension fund is threatened. This is perhaps, the only retirement instrument most Nigerian civil servants have. How do you explain to a 65 year old man or woman that you have gambled away their fortune?

Now let us take a look at the disease within the Nigerian banking sector. And while we are at it, let’s examine the activities of the bureau de change.

Sometime in March, specifically March 21, Soludo arbitrarily curbed the lending rate at 22% and the deposit rate at 15% respectively. But you and I know that this is not going to happen. What will eventually happen will be a form of shadow banking, sadly it is already being practiced in Nigeria and this will only exacerbate it.

Presently, Nigeria has a law that requires the banks to notify some security agency or the other if a cash lump sum is being deposited at once. What the banks actually does is to have the customer deposit all the amounts in bits, in order to evade this legal provision.

This arbitrary lending and deposit cap will only give rise to one thing, back room dealing between the customer and the bank. You think that our banks are in a bad shape right now, that will push them to the precipice.

Then you have the bureau de change. I still don’t understand why the CBN has its own exchange rate and then you have the real market, where 80% of the foreign exchange transactions occur and the price is sharply different. Presently, there is about a N20 difference in the rate between the CBN and the parallel market. If you think N20 is insignificant, wait until you buy 1 million dollars @ N144 to a dollar from the CBN and take a walk down the street to the bureau de change and sell in the parallel market for N165 to a dollar. Tell me, what kind of business will give you so much instant return and at a very high percentage profit? So this is what is at stake. Why wouldn’t Soludo abolish the official rate and allow the banks to sell foreign exchange to anyone (with identification) at the market rate? The CBN should also be able to sell to the banks at the prevailing market rate minus one Naira (leaving a margin for profit). Soludo has refused to tow this line. Why? Because the status quo is beneficial to all of them (players within the Nigerian financial industry) you buy cheap from the CBN, you cross the street and sell high and you go to the bank smiling. In the process, you haven’t really created any value to the economy. While these financial tricksters line their pockets, the Nigerian economy and the general public bears the brunt of their nefarious ways.

And we also have cases, where lenders have written out huge loans without any significant collateral. It is risky behaviour and ultimately we are witnessing the unraveling albeit in a sad way. These kinds of behaviours have put genuine investor’s life savings in a toilet.

I am not going to even dabble into the activities of the illegal micro finance institutions that mushroomed between 2006 and 2007. Where was Soludo when all these illegal activities were going on? Nigerians lost millions of Naira to this fraud, the CBN responded a little too late.

This kind of behaviour is emblematic of the kind of leadership that Soludo has provided at his perch as Nigeria’s treasury chief. You can not be a regulator and at the same time parleying around with the same people you are supposed to regulate.  Rather than consider him for a reappointment, Soludo should be allowed to go back into the ivory tower to finesse his economic theories (I would suggest to him to decide whether he wants to be a free trader or not), perhaps some day in the not too distant future, he can become the conscience of the nation like prize winning economist and Nobel Laurent Paul Krugman.

And while we are shopping for a new treasury chief, one name stands shoulder above the rest; Dr Ngozi Okonjo Iweala. The talk of Isa Yuguda is not only petty but absurd.

Post Script: I am aware that Professor Soludo is not the Chairman of the Securities and Exchange Commission, however it is instructive to note that because of weak treasury regulation, the banks are the worst offenders at the exchange. The lenders are supposed to be under Dr. Soludo’s supervision and if they had acted ethically at the exchange we could have been spared this ugly scenario. And yes, while the failure of the exchange will be laid at the door step of the SEC chairman, the banks attitude is as a result of a weak central bank regulation.

Robot  # 1 | 05.04.2009 07:43

How the Big Lenders Crashed the Stock Exchange and were Enabled by Dr. Soludo Abdulmumuni Yinka Ajia Jason kew and Michael Patterson over at bloomberg.com recently did a story on the Nigerian stock exchange and how bank losses have had a profound impact on the exchange. According to the duo, bankers (otherwise known as lenders) may be holding as much as $10 billion in toxic assets which is estimated to be almost equal to half of the entire capital of the exchange. Now if you take into account that the lenders make up about two thirds of the Nigerian stock market, you will agree with me that as a regulator, Professor Soludo has not done a good job overseeing the banks and ensuring financial discipline. The state of the Nigerian bank is very precarious because of it. Before I go into the disaster that is going on within the banking sector, let us first take a look at some of the reasons why the Nigerian stock...Read the full article.

aguabata  # 2 | 05.04.2009 09:50

You have confused the role of the NSE and CBN, you need to understand the simplified definition of capitalism and you will understand that Nigerias dysfunctional macro economy and corrupt institutions will churn out a peculiar form of capitalism that will tax the wisest regulatory body. you moaned about the banks not impacting the real economy with their humongous annual profit as if you dont know banks are awash with government money stolen by politicians. However, banks in Nigeria are still churning out profits, you also failed to see that a financial crisis turns into an economic crisis partly because of human psychology. at the peak of the stock market crisis which has bank stocks as a major force, should it be the right thing by the CBN to go hard on the banks at that time. The fact remains that our banks are still liquid despite the toxic assets, if the CBN fairly knows the true figures in our bank's balance sheet then they are right to talk up our financial institutions if they are comfortable with their liquidity. Would our stock market crashed before 2010 if not for the external factors?

only1integrity  # 3 | 05.04.2009 11:35

This is a better criticism of Soludo regime. However as you have noted Soludo is not directly responsible for the activities of the NSE. Your analysis on the activities of the NSE and the financial service providers is insightful and objective.

Iroabuchi Onwuka  # 4 | 05.04.2009 11:59

I dont think you are from the stockmarket. The Job of the CBN chairman is to help banks archieve constant stability not losses. You are listening to these Turkish people, who I don't what they are doing in Nigeria. Many of all our foolishly hoping to manipulate the downfall of Nigeria using religious ambiguity. They are just doing rounds instigating hate for Soludo. Europeans want him and his colleagues out. The Nigerian savings is nolonger flowing into their pants. Soludo is not the greatest banker ever, some Northerners or some Yoruba may actually be as good as Soludo but it is wrong to falsely accuse the CBN Chair of the stockmarket burst. I have personally once accused him of not watching what was happening with the Nigerian stockmarket, given the fact the 300% yield a year was artificial as such the money has to come from elsewhere, e.g Europe. 83% of Nigerian stocks are banks and they are doing positive. A complete opposite of your position. The exchange rate allowed Euro to balloon up Nigeria stock market and when the new facilities of credit and melt down arrived, foreign investors decapitated with thier money. Nigerian credit default is much less than 10%, so it couldn't have affected the market that much. Besides much of the credit grant was used for mounting big houses in the North, in Abuja and Lagos. That's why we are flat. What we might need is a Federal Reserve System. Iroabuchi Onwuka

saemoenl  # 5 | 05.04.2009 13:34

Hello Mr. writer, According to what you wrote about the CBN boss, what I understand based on the facts you outlined is that Soludo has cause a problem to our economic system, but you forget that when all this started was when American, UK and other powerful world economics started to announce the recession in their country whereby lead to many of our foreign investors pull out their money from financial system. What again do you think will happen as Nigeria failed to produce anything rather depend generally on importation. Can’t you see what is happening in America stocks/ UK stocks dallies? But the way all this countries will face recession will be relatively low compared to Nigeria. My friend, your argument was wrong, Soludo is not the problem. The world is in downturn and Nigeria will never be exempted as we are in the receiving side. Ciao

Abeem  # 6 | 05.04.2009 16:58

The CBN as the regulator of banks has a share in the blame. They have a fiduciary role to the public and the owners of the bank to make sure that the bank's lending portfolio is secured. Most of the bank's lending to the public for acquisition of shares in recent times has been characterized as margin-lending where the only collateral used for the loan to buy the shares are the share certificates. This work well in bull market situations, where the value of shares is headed up-north. In time, the bank's exposure on the shares diminishes (with value appreciation) as the market value of the shares increases in the market. However, this has not been the case. For more than one year now, the market values of the shares have continued to tank, and the value of the shares has been eroded, leaving the bank with large amount of unsecured borrowing. The borrowers have nothing to loose. I will be surprised if the borrowers have not been walking away from their loans. I presume this is what is happening which could be a reason why the banks have a lot of toxic assets (hardcore loans that cannot be recovered) in their portfolio. The problem is compounded in Nigeria which has no credit scheme that will ensure borrowers live up to their obligation to repay their debt or face the music( I stand to be corrected on this). If this is the situation, the banks have to write off the debt off their balance sheet which will adversely affect their bottom line.

only1integrity  # 7 | 06.04.2009 02:17

As Nigerian banking law does not permit unsecured lending, the banks and the officials involved should be prosecuted without delay. It is highly irresponsible for any competent banker to advance loan based on a potentially worthless piece of paper called a share certificate. A share certificate for a responsible banker can only form part of collateral and not the sole collateral. Even the best company can go burst without notice. The Banking Act (CBN) prohibits this type of fraudulent lending. Soludo can only regulate. This he has done. Let the prosecuting authorities do what they are paid to do. I suggest the first person that should be question is madam NSE. She was busy raising money purportedly for Obama while her house was on fire. Dereliction of duty. Period.