Nigerian Stock Market Price Crash – The Real Reason


The Price crash in the Nigerian stock market has continued unabated since March 2008. In the early months of the price crash, the media was awash with news on the reason for the downward trend which was at that time excusable and endurable. Investors thought that the exit of foreign investors from the market though undesired at that time could not prolong the bears reign. The media had adduced the reign of the bears to the exit of such investors.

Not Long after when the bears refused to abate, the global melt down due to the crisis in the American financial sector was credited with the cause of the reign of the bears. By August 2008, the short recovery of the market gave hope to investors that the nightmare was over. Investors could recount that the financial crisis spared the Nigerian stock market when the financial crisis started in 2007. That year was the most interesting in the annals of the stock market with multiple issues so it was not difficult to expect quick recovery of the market since local investors were still interested in the market.

That was a wrong expectation. It will take further unexpected price crash beyond prime prices of stocks to reveal the real domestic reason for the worst price crash in the history of the stock market. In January 2009 alone for example, the market lost more than 3 trillion naira.

Growing discontent and public outrage led to the revelation of the real reason for the unprecedented price crash by the Security and Exchange Commission who accused the banks of hiding their exposure to margin debts without strong collateral. It was revealed that stock broking firms used shares as collateral. The banks were said to be owed more than 388 billion naira margin debt by stock broking firms who have found it difficult to pay back the loan.

In order to minimize loss, banks went ahead to aggressively dispose of the equities held by the broking firms. This singular action led to the massive offloading of shares by other investors who saw the banks action as loss of confidence in the market. The public has grown confidence in the strong capital base of the banks since post consolidation. Seeing the banks exiting the market was a signal of doom to other investors who have continued to mount pressure on their brokers to sell off their shares. Confidence is now at its lowest ebb. No one really knows when the bulls will return. However, one thing is sure- the lessons learnt from the price crash cannot be forgotten in a hurry.

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