Impact of the 2007/2008 Global Financial Crisis on the Stock Market in Nigeria

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Thursday, June 11, 2015 6.03/CBN

1.0 Introduction

The place of Nigeria in the global economy has become an issue of policy relevance as a result of the rapid integration of the world’s goods, services and financial markets. The trend in globalization has been sustained by the rapid liberalization of trade and capital flows between countries of the world, the process is expected to intensify as we move into the new millennium, since the trend has been established, and the reversal is not imminent now and in the near future, the window of opportunities that existed in the system is opened to those countries that can move along as effective. Thus, the potentials for Nigeria must be critically examined to define the path towards the realization of the full benefit of the Nigerian Stock Exchange, which is contributing to growth of the Nigerian economy and the world at large (Andrea, 2008).

The resent global economic melt-down was traceable to the sub-prime mortgage crisis and rising home foreclosures, which commenced in August 2007 in the United States (US). Sub-prime mortgages were granted to borrowers whose credit history was inadequate to attract conventional lending.

The mortgages were packaged by banks into Mortgage Backed Securities (MBS) and sold to financial institutions created by the US government, namely: Federal National Mortgage Association and Federal Home LoanMortgage Corporations, who in turn repackage the loans and sold them to individual investors and financial institutions around the world (Ayuba, 2011).

However, certain factors, including rising fuel prices, the hurricane Katrina, global food crisis, amongst others led to rising domestic unemployment in the US which occasioned massive mortgage defaults and foreclosures. This development negatively affected the US capital markets and those of other economies worldwide with the consequential on-set of the global financial crisis.

According to Ujunwa et al. (2011),the immediate past governor of Central Bank of Nigeria was puerile in preventing the global financial crisis from having adverse effect on the Nigerian economy. As a result, the Nigerian capital market was seriously hit by the crisis. The prices of shares in the market nose-dived and investors lost huge sum of money.

The crisis also crept into the banking sector as a result of excess exposure to the capital market and oil gas sector. He pointed out that Central Bank of Nigeria responded simultaneously by injecting N600 billion into the banking sector, while this effort has been applauded by analysts and justified on the basis of the vital role of banks in economic development, Ujunwa et al. (2011) argues that capital market regulators must undertake swift reforms, which would restore public confidence and protect investor. Ayuba (2011) observed that some of the key stock marketand other economic indicators point to the fact that all is not quite well with Nigeria.For instance, 62.18%. Additionally, the nation‘s foreign reserves decelerated from $64 billion in August 2008 to $47 billion as at March 2009, a 27% decrease (Andrea, 2008).This was partly due to the flight of hedge funds as Nigerian banks were estimated to have been heavily exposed to the Nigerian capital market through several share linked loans to individuals, institutional and other types of investors. The sudden withdrawal of hedge funds created panic among exposed banks which also panicked in a bid to cut their losses from the exposure to the capital market.

Arunma (2010) revealed that the global financial crisis triggered large portfolio outflows as international investors exited the Nigerian capital markets to address challenges in their home countries, stock prices started to decline, prompting margin calls and local investors who were unaccustomed to huge and persistent declines started to panicked, fueling more sell orders, further depressing prices and eroding investor confidence.

To him the situation was exacerbated by the huge borrowing and margin finance exposure of individual investors, brokers and banks. While the market recovery to date has been limited because different categories have taken advantage of any recovery to reduce their exposure, the recent establishment of the Asset Management Corporation promoted by the Ministry of Finance and the Central Bank of Nigeria is expected to make and sustain the recovery since AMCON will take over about USD 12 billion in non-performing assets and manage them through an orderly disposal of the assets.



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