2009 Outlook: Key Questions for the Director-General of the Nigeria Stock Exchange

If you had an opportunity to ask the Director General of the Nigerian Stock Exchange a question, what would you like to know from her?

Some investors, fund managers and equity analysts have sent in their concerns/questions; some of which were addressed by the DG, NSE at the Annual Review held at the Nigerian Stock Exchange on Monday, January 12, 2009.

However, the following questions, submitted by our board of analysts remain unanswered:

1) Bail-Out: Why has the Federal Government refused to provide a concrete bail out plan for the capital market, not just lip service? Do we think this will change with a change in the Federal Ministry of Finance given that other forward looking economies recognised the need to re-build confidence in its capital markets by taking actions that would bring about the much desired liquidity needed, albeit; with much more emphasis on regulatory control and accountability?

2) Alternative Market Strategies: The NSE (an SRO) along with other regulators has been talking about the introduction of simple options to the capital markets for over two years now. Why has this not been implemented?

At the moment, there are only two strategies investors can use in trading the NSE (that is, buy or sell) and in a free fall or in a downtrend as we have currently, there are usually no buyers for willing sellers.

Even with the introduction of market makers and ‘funding providers’, the makers will not be willing to buy shares that they know are fundamentally weak (given that the incidence of corporate governance and believability of financial reporting in the country is subject to risk discounting risk here relates to poor observance of standards and reporting requirements). If options are available or other strategies, investors can play the market even in a downtrend. The limited options/alternatives for traders at the NSE is keeping sophisticated ‘international’ investors from the NCM. The market appears too one directional.

3) Margin Accounts: With banks not providing margin loans to investors, it appears difficult for the Nigerian Stock Market to maintain any upward momentum or traction.

Has the Director General looked into other alternative source of financing for investors and brokerage firms?

Can the Federal Government provide brokerage firms guaranteed loans which can be loaned to investors based on strict guidelines as an alternative to an outright bail-out?

4) Demutualisation of the NSE: How does the NSE intend to conclude this key 2009 internal goals during a market cycle where most investors are not able to fully participate? The conversion of the NSE into a listed company appears desirable and precedents in Eqypt, J’borg and New York support the viability of such a proposition but to do so in a year where strategic management changes and movements have taken place, and will take place, as well as the governance and process capacity issues/challenges taking place will require a broad range of investor support.

We are interested in knowing more about the conversion of the not-for-profit organisation to a value and profit driven one in such a way as to allow each willing and able investor to participate.

5) New Products: The NSE recently launched five new indexes (including the NSE 30) working with reputable firms that have a history of creating such. We believe it is a welcome development that forward looking firms may create products around.

When will this be introduced in the market and does it not portend a dire signal for firms not included in the index or their sector not considered profitable enough to have a sectoral index?

Is it possible for the criteria or/and weighting of the index be made available for equity analysts?

6) Dealing with Current Challenges: in the last few weeks, there has been a spate of occurrences, not on such a large scale as to pronounce it a major crisis but it is a crisis itself, given that it is occurring in a market with confidence at its lowest ebb. Dud cheques have been issued to investors and fellow fund managers alike. What does the aggrieved receiver of such cheque have to do and what measures are in place to address these challenges given that it goes to the heart of the ‘confidence’ question?

7) Investor Enlightenment: The astounding reality of the market and indeed our larger economy was best summed up by the former president, Olusegun Obasanjo, who in a departure from the less than believable comments of the CBN Governor, declared that the current crisis will visit the poor and rich alike.

If you consider the yearning of the hard working employee, market trader, artisans, aspiring manager, church goer and widower, who in the heat of the capital market boom were plastered all over with offers and media blitz on the viability and security of investments in the NCM, and who now have to worry about the expected income due from the market to meet obligations but cannot access it; you will know that the current meltdown will affect people differently.

Hope is a casualty in this market, so also is the believability of the operators because of their silence. Investors have simply been told to wait and allow ‘nature to take its course’. The caveat emptor that should have been ringing out in the first place now becomes breaking news at this tail end of market downturn.

These are the first death throes. The question is what sort of market will remain?

Yet, one heard not one expression of real remorse or accountability from any of them. They had nothing to offer except the time-worn counsel of confidence men: trust me. Instead of protecting our market or at least preparing the investors and players alike for the possible challenges, we did what we have always done best as a nation…deploy self denial as a shield from the truth.

Maybe not everyone was playing the ostrich game, at least not brazenly. While the CBN Governor embarked on a self effacing trip on being nominated to attend the world deliberations on the crisis, the Ministry of Finance was silent, shooting down everything pushed forward to ameliorate the situation without providing an alternative. The Director General of the NSE, to her credit, continued to show empathy, and spoke consistently about her heavy burden and desire to see that the ordinary citizen/investor is assisted to overcome the current challenge.

The question she has to provide now is: how do we hope to achieve this? What should the investor do from tomorrow?

Source: Proshare Nigeria

BANK MDs TROOP TO FIRST BANK FOR BAIL-OUT…FINANCIAL INSTITUTIONS REJECT SHARES AND PROPERTY AS COLLATERAL

First Bank of Nigeria might have become the unofficial lender of last resort for many banks currently experiencing liquidity problems. A bank is said to experience liquidity crisis when it can not support its short term obligation to its customers by itself. Thus to continue to serve the needs of its customers, the bank may have a recourse to another commercial bank which may lend it the short term fund, usually for a period of between seven days and 90 days.

Traditionally, the Central Bank of Nigeria is supposed to be the lender of last resort for banks and other financial institutions, but FORTUNE&CLASS cross checks in the banking industry showed that rather than many commercial banks approach the CBN to augment their liquidity position, most of the banks managing directors opted to seek the support of the management of First Bank to provide short term funding support for their operations.

“I can tell you that most of the banks managing directors, these even include so called first tier (banks that are supposed to have more than a billion dollar capital base) troop to First Bank to negotiate funding support.” A banking industry insider said.

The option of adopting First Bank in the rather unusual role of a lender of last resort might not be unconnected with many commercial banks efforts to shy away from the official channel of funding provided by the CBN so as not to be labeled as desperate to survive and consequently provide ammunition for the de-marketing campaigners that are going around the sector, insinuating the parlous state of health of some banks on account of their liquidity position.

“It is easy for bankers to know who is applying for what with the CBN.” A senior banker said. “But negotiating and securing funds from a colleague banking institution has all the trappings of confidentiality and utmost secrecy. So, I think, these other banks would rather prefer to relate with First Bank on the inter-bank lending platform. At least, there is nothing illegal about that and as far as they are concerned, other practitioners and the public are not privy to these negotiations.” The banker explained.

Though the inter-bank lending platform is an organic relationship channel in the banking industry, however, concerned members of the board of directors of the bank are becoming quite uneasy with the load of demands from other banks.

A source in First Bank informed that the bank is becoming more serious with risks control measures.

“This is not a recent development. First Bank has been experiencing a deluge of demands for lending from other banks over the last six to seven months. I think that at one of the board of directors meeting, board members directed the management team to be more circumspect about their lending to these other banks.” A First Bank insider revealed.

The irony of banks seeking out bridging funds for their operations is not limited to beseeching First Bank, the industry is already abuzzed with banks chasing after deposits from the banking public in preference to approaching the CBN. The unofficial explanation for this action has the same texture with the one given by insiders for the First Bank option. Banks, industry sources said, would rather prefer to go after deposits in the public domain than to approach the CBN where data of their application for funding could be used against them when the CBN make public such data.

On the whole, nerves are gradually getting on the edge in the banking industry as interest rates and other related data show an escalation that are, increasingly becoming alarming signals.

“Even the illiterate can read the signs.” Ori Adeyemo, a forensic accountant said. “These banks are chasing after deposits with tempting offers beyond the market rate, they are not bothered with the implication for the cost of funds both to their operations and to the borrowers. Of course, we know that they are only interested in making their liquidity position look good as their different year end draw to a close. Despite the figures the CBN make public, you won’t believe that interest rate and other charges for loan in many banks are adding to about 34 percent of the loan offered. And that is where the borrower is lucky to get a bank to provide the loan. The simple truth is that lending activities have reduced significantly. That is a fact.” Ori argued.

The general impact on the liquidity position may have been further indicated with the considerable increase in the Nigerian Inter Bank Offer Rate (NIBOR) (the NIBOR is the rate at which banks lend short term funds to each other) CBN data on the NIBOR as at the preceding week, released last week, showed that the 7-day NIBOR at the inter bank market transactions increased by 123 basis point to close at 18.14 percent from the week before figure of 16.92 percent.

The 90-day NIBOR also closed higher in the same period from 17.42 percent to 17.96 percent.

“Is it not clear that there is a situation in the banking industry if banks are lending to themselves at these high rates? You can imagine what rate they will lend to their customers. Even at that, it is becoming increasingly difficult for some banks to secure funds from the inter-bank lending platform because the strong banks are considering exposures to them as highly risky.” Bisi Iyaniwura, a lawyer with specialized practice in banking and corporate law said.

Meanwhile, it has been revealed that some financial institutions now reject collaterals in the form of shares and property and even treasury bills as securities for loans.

“FORTUNE&CLASS gathered that a second tier bank had approached a discount seeking its (discount house) assistance to secure a N150 million short term fund for its operations. However, after the discount house which is a subsidiary of a another first tier bank sought the position of its principal, the first tier bank rejected all the traditional forms of securities like shares, treasury bills and property the fund seeking bank was willing to provide.

“This, ultimately, foreclosed the funding negotiation.” A source privy to the negotiation informed that the discount house demanded for trading securities.

“They said they would prefer collateral that can be easily turned to cash like goods in warehouses and some other strange stuffs.” The source informed.

BANK MDs TROOP TO FIRST BANK FOR BAIL-OUT…FINANCIAL INSTITUTIONS REJECT SHARES AND PROPERTY AS COLLATERAL

First Bank of Nigeria might have become the unofficial lender of last resort for many banks currently experiencing liquidity problems. A bank is said to experience liquidity crisis when it can not support its short term obligation to its customers by itself. Thus to continue to serve the needs of its customers, the bank may have a recourse to another commercial bank which may lend it the short term fund, usually for a period of between seven days and 90 days.

Traditionally, the Central Bank of Nigeria is supposed to be the lender of last resort for banks and other financial institutions, but FORTUNE&CLASS cross checks in the banking industry showed that rather than many commercial banks approach the CBN to augment their liquidity position, most of the banks managing directors opted to seek the support of the management of First Bank to provide short term funding support for their operations.

“I can tell you that most of the banks managing directors, these even include so called first tier (banks that are supposed to have more than a billion dollar capital base) troop to First Bank to negotiate funding support.” A banking industry insider said.

The option of adopting First Bank in the rather unusual role of a lender of last resort might not be unconnected with many commercial banks efforts to shy away from the official channel of funding provided by the CBN so as not to be labeled as desperate to survive and consequently provide ammunition for the de-marketing campaigners that are going around the sector, insinuating the parlous state of health of some banks on account of their liquidity position.

“It is easy for bankers to know who is applying for what with the CBN.” A senior banker said. “But negotiating and securing funds from a colleague banking institution has all the trappings of confidentiality and utmost secrecy. So, I think, these other banks would rather prefer to relate with First Bank on the inter-bank lending platform. At least, there is nothing illegal about that and as far as they are concerned, other practitioners and the public are not privy to these negotiations.” The banker explained.

Though the inter-bank lending platform is an organic relationship channel in the banking industry, however, concerned members of the board of directors of the bank are becoming quite uneasy with the load of demands from other banks.

A source in First Bank informed that the bank is becoming more serious with risks control measures.

“This is not a recent development. First Bank has been experiencing a deluge of demands for lending from other banks over the last six to seven months. I think that at one of the board of directors meeting, board members directed the management team to be more circumspect about their lending to these other banks.” A First Bank insider revealed.

The irony of banks seeking out bridging funds for their operations is not limited to beseeching First Bank, the industry is already abuzzed with banks chasing after deposits from the banking public in preference to approaching the CBN. The unofficial explanation for this action has the same texture with the one given by insiders for the First Bank option. Banks, industry sources said, would rather prefer to go after deposits in the public domain than to approach the CBN where data of their application for funding could be used against them when the CBN make public such data.

On the whole, nerves are gradually getting on the edge in the banking industry as interest rates and other related data show an escalation that are, increasingly becoming alarming signals.

“Even the illiterate can read the signs.” Ori Adeyemo, a forensic accountant said. “These banks are chasing after deposits with tempting offers beyond the market rate, they are not bothered with the implication for the cost of funds both to their operations and to the borrowers. Of course, we know that they are only interested in making their liquidity position look good as their different year end draw to a close. Despite the figures the CBN make public, you won’t believe that interest rate and other charges for loan in many banks are adding to about 34 percent of the loan offered. And that is where the borrower is lucky to get a bank to provide the loan. The simple truth is that lending activities have reduced significantly. That is a fact.” Ori argued.

The general impact on the liquidity position may have been further indicated with the considerable increase in the Nigerian Inter Bank Offer Rate (NIBOR) (the NIBOR is the rate at which banks lend short term funds to each other) CBN data on the NIBOR as at the preceding week, released last week, showed that the 7-day NIBOR at the inter bank market transactions increased by 123 basis point to close at 18.14 percent from the week before figure of 16.92 percent.

The 90-day NIBOR also closed higher in the same period from 17.42 percent to 17.96 percent.

“Is it not clear that there is a situation in the banking industry if banks are lending to themselves at these high rates? You can imagine what rate they will lend to their customers. Even at that, it is becoming increasingly difficult for some banks to secure funds from the inter-bank lending platform because the strong banks are considering exposures to them as highly risky.” Bisi Iyaniwura, a lawyer with specialized practice in banking and corporate law said.

Meanwhile, it has been revealed that some financial institutions now reject collaterals in the form of shares and property and even treasury bills as securities for loans.

“FORTUNE&CLASS gathered that a second tier bank had approached a discount seeking its (discount house) assistance to secure a N150 million short term fund for its operations. However, after the discount house which is a subsidiary of a another first tier bank sought the position of its principal, the first tier bank rejected all the traditional forms of securities like shares, treasury bills and property the fund seeking bank was willing to provide.

“This, ultimately, foreclosed the funding negotiation.” A source privy to the negotiation informed that the discount house demanded for trading securities.

“They said they would prefer collateral that can be easily turned to cash like goods in warehouses and some other strange stuffs.” The source informed.