October 19, 2011 3811 VIEWS


October 18 2011 / Article was first published on November 20, 2009 by C. Biosah



We republish an article written by Dr. Chukwumah Biosah, Technical Analyst to Proshare and member of its Board of Analysts on November 20, 2009 addressing the challenges ahead of the Nigerian Capital Market as an aide memoiré to the Chartered Institute of Stock Brokers Annual Conference. – Proshare






I recently read in a National Daily that several stockbrokers at the NSE believe that the proposed AMC will impact the stock market positively and create liquidity for the Nigerian Stock Market (NSM). These stockbrokers argue that “AMC will assume majority of the impaired margin loans from the books of the banks and transfer the stocks used as collateral for the loans to the AMC. The transfers will clean the Balance Sheets of the banks, stimulate bank lending, reduce the volume of stocks supplied to the market (i.e., the float), thereby stabilizing the Nigerian Stock market simultaneously”.


I beg to differ at this point; while espousing a different opinion about this issue. Based on the proposed initial funding of AMC which is estimated between N250 billion and N500 billion, it is unlikely that the funding will be able to absorb all non performing loans and impaired margin loans. For example, non-performing loans are currently estimated at approximately N 400 billion after adjusting for the N600 CBN infused into the 9 bailed out banks, and the impaired margin loans are estimated at N1 trillion.


Even if AMC is able to assume all non-performing and impaired margin loans and the shares that collateralized these loans, the following issues must be taken into consideration:


  • *Several financial institutions and publicly listed companies own company shares (either as part of their investment portfolio or employees retirement plans). Since majority of the stocks of these companies have lost between 14% and 96% over the last 18 months, it is very likely that there will be temptations for these companies or employees to sell their shares into any significant stock market rallies.

  • *Even though AMC assumes all the bad loans from these banks to allow them to lend again to the public, my question to these brokers is which of these banks will be negligent enough to loan money to investors who will use the funds to artificially inflate prices at the stock market bringing us back again to the rally and burst cycle?.


Regardless of what the functions of the AMC will eventually be, what we need to turn the NSE around is infusion of liquidity. I recently read a book “Trim Tabs Investing by Charles Biderman”. The book looks at the stock market in terms of volume of shares, their overall price, and the money chasing those shares. Mr. Biderman believes that market liquidity is impacted by four factors:

  • *Insider and corporate trading
  • *General investor trading
  • *Foreign investor trading
  • *Margin debt


In the short term the money from general investors can influence the direction of the stock market. However, funds from the general investors is not sufficient to have a lasting impact on the market, because considering the current float for listed companies in the NSE, it is doubtful that funds from regular investors is sufficient to make a significant impact on the market direction. Additionally, most investors are emotionally attached to their investments, and tend to believe the future actions of the stock market will follow the recent past. Since the recent past has been nothing short of dismal for most investors, it will be difficult to convince these investors to get back into the market without any indication of significant upward movement for shares


Infusion of cash from foreign Investors (primarily institutional investors) partially contributed to the significant growth that was experienced by the Nigerian Stock market prior to March 2008. However, the global financial crisis forced most of these foreign investors to divest the funds they invested worldwide including investments in the Nigerian Capital Market. The divestiture of these funds contributed to the downtrend of the Nigerian Stock market. Although, there has been investment resurgence by foreign investors and hedge funds into developing markets, the current situation in Nigerian regarding the scandals in the banking sector and the moribund Nigerian stock market has made our capital market very unattractive to some of these foreign institutional investors to return.


Another factor that brings in liquidity to the stock market is the availability of margin loans to investors. It is an open secret that excessive margin loans from banks to investors and brokerage firms contributed to the precipitous rise in stock prices experienced by the shares of most listed companies in the NSE. The lack of stringent criteria for providing margin loans and subsequent monitoring of these loans is a contributory factor for the large impaired margin loans currently on the books of most banks in Nigeria. Since these non-performing margin loans are partially to blame for some of the problems of the banking industry, it is unlikely that most banks will be willing to offer investors or brokerage firms such margin loans that mirrors the past in the near future. Therefore, this possible source of liquidity for the Nigerian stock market is very uncertain.


Typically, Insiders funds are another source of market liquidity, because these insiders usually absorb any excess shares in circulation at prices below their fair value to prevent any further downtrend. For example, at the peak of the Nigerian stock market boom, banks accounted for 65% of the market. The banks and their investment subsidiaries were very active participants in the market. As insiders they had access to “better or the real” data, and their actions were thus inclined to be more representative of actual market conditions. Additionally, their ability to control the float (number of shares on the market) gave them an unfair advantage. However, most of these financial institutions were taken unawares because they believed their own hype and were too late to react to the market realities. As a result they were also hurt by the market downtrend, as they were unable to sell their shares because the downward spiral of share prices resulted in investors’ retrenchment. Since these banks have been bitten by the “gods of the stock market” most of them will be very cynical about becoming active participants in the market in the near future, thereby freezing another important source of liquidity.


Conclusively, it appears that it will be a very difficult challenge to generate liquidity from most of the aforementioned traditional sources of liquidity. Therefore, it appears that the CBN, SEC, NSE and the Federal government has their work cut out for them. Bold measures have to be taken to directly address the problems of the NSE (which includes lack of transparency, one directional market, inability of investors to sell their shares during market decline, bloated outstanding shares for several listed companies, etc). Additionally, the CBN has to show domestic and international investors that they are serious about the banking reforms not just business as usual. If some of these problems are corrected, investors will regain the confidence in the market and return to the NSE and in-turn improve the liquidity of the NSM. It may however not be enough if actions from CBN are not complemented by both short term and long term actions from the NSE/SEC.


Prepared by Chukwumah Biosah, President CEBAL Audit Group, USA and InvestIQ, Technical Analysts to Proshare. All opinions on this page/site constitute our best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All enquiries should be directed to Biosah@ca.rr or info@proshareng.com






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