THE CRASH OF THE NIGERIAN STOCK MARKET: WHAT WENT WRONG, THE CONSEQUENCES AND THE PANACEA

Abstract

As a result of the economic reforms that began in 2003 in Nigeria, earning Nigeria a BB- credit rating, which led to US$18bn debt write-off and created pension funds which have several billions of Naira to be invested in Nigerian securities, investors confidence was ignited and lifted in Nigeria Stock Market. The banking sector reforms which necessitated recapitalization also fuelled a boom in the equity market. Most Nigerian bank stocks increased in value many folds, despite billions of Naira of new shares being issued, with some stocks more than quadrupling in value in less than a year between 2004 and 2007. Companies kept the free float of offers which were greatly matched by demand. The capital market thus became the haven for profit taking. From an all time high of N13.5 trillion market capitalization in March 2008 the stock prices experienced a free-for-all downward movement to generate less than N4.6 trillion market capitalization by the second week of January 2009 and N6.53 trillion as at last trading day of 2011. With this downward movement regime,   more than 60% of slightly above 300 quoted securities were on constant offer (supply exceeding demand) on a continuous basis. Consequently many of the quoted stocks lack liquidity as their holders are trapped, not being able to convert them to cash to meet their domestic and other investment needs. Fresh investors became cautious of jumping into a vehicle that does not seem to have a brake should they wish to disembark. With exploratory research, the study discovered that the downturn was caused mainly by fears of contagion effects of the then rampaging global financial crisis. The consequences were legion as many investors lost heavily in terms of capital employed, confidence in the market and the capacity of pension funds to meet their obligations as they become due. The panacea lies in restructuring the toxic assets generated by the downturn into marketable instruments, to give a fresh start to the affected firms.