The Impact of Banking Lending and Foreign Direct Investment On the Nigerian Capital Market Crisis
THE IMPACT OF BANKING LENDING AND FOREIGN DIRECT INVESTMENT
ON THE NIGERIAN
CAPITAL MARKET CRISIS
AYUBA, Akwe James[1]
&
EBAENYE, Ilesanmi Rita
Abstract
The current global financial crisis, which
was triggered by the credit crunch within the US sub-prime mortgage market, is
continuing to spread and deepen in several countries. Its impact on Nigeria is
evident in the performance of the Nigeria Stock Exchange and the financial
system as well as in the real sector. The study examines the impact banking
lending and foreign direct investment (FDI) on the Nigerian capital market
crisis. For the proper conduct of this study, data was collected from secondary
sources. Multiple linear regression via SPSS was used to test the hypothesis
set up in the study. In the final analysis, it was found that banking lending
and foreign direct investment (FDI) have significant impact on the Nigerian
capital market crisis. This study recommended among others the expansion of
liquidity to counteract the contractionary implications of the global financial
crisis on the domestic economy while at same time tightening the conditions for
operations on the capital market.
Introduction
The current global financial crisis, which was triggered by
the credit crunch within the US sub-prime mortgage market, is continuing to
spread and deepen in several countries. Countries around the world have
approached this whirlwind pragmatically, prompting emergency funding support
for relevant sectors, thereby mitigating the impact of the crisis on economies
as well as avoiding the entire collapse of the international financial system.
In spite of such support, some countries have been officially declared as in
recession, owing to a monumental decline in their wealth, manifesting itself in
falling productive capacity, growth, employment and welfare.
Since the early 1980s, the global economy has seen a rapid
expansion in the availability of savings due in great part to the rapid
economic growth of East Asian economies. Because the U.S. economy has
historically been viewed as a financial “safe haven” – a safe place for foreign
citizens to bank their savings – foreign citizens have often moved their savings
to the United States. The financial crises and dislocations of the 1990s
enhanced the perception of the United States as a safe haven. Important to the
current crisis, the movement of savings from abroad into this country
significantly increased the financial base of the U.S. economy in the 1990s and
the early part of this decade.
During the 1990s, the United States was in a globally
dominant economic position. This led the federal government and the central
bank – the Fed – to act as a global guarantor of economic stability. This was
seen in U.S. backing of Mexican debt in 1995 and with the Fed’s significant
injection of money into markets following global crises. Unfortunately, these
tools were blunt. While they aided the foreign community (and the U.S. economy
through greater global stability), these actions tended to again increase the
financial funds available in the United States.
Also during the 1990s, and continuing into this decade, the
United States ran very large trade deficits. While the cause of these deficits
is subject to various causal interpretations, the consequence is clear. Any
continuing trade deficit must be balanced over time by a net inflow of
financial capital from abroad. These inflows again increased the availability of
financial assets in the United States. Compounding the complexity of absorbing
these financial assets was the significant move toward deregulation throughout
the U.S. economy starting with the Carter Administration. During the 1980s and
1990s, deregulation moved into the banking industry and allowed for rapid
changes in how banks did business.
Two particularly noteworthy changes were the partial
revocation of the Glass-Steagall Act in 1980 and 1999, and the significant
decreases in restrictions on the formation of interstate branch banking
operations. These changes increased the range of activities banks were allowed
to engage in and reduced the personal connections between bankers and
borrowers. While it would be foolish to conclude that these innovations were
universally wrong, the rapidity of their introduction did not allow for a
sufficient period of time to develop tools to manage new risks. In retrospect,
it is clear that downside risks were underestimated (first in dotcom stocks,
second in housing, then in financial derivatives). The introduction of these
innovative products, combined with the increased monetary base to fund them,
allowed for the consequences of poor risk control to be significant.
The objective of this study is to determine the impact of
private sector lending by commercial banks and foreign direct investment (FDI)
on the Nigerian capital market crisis. In line with the research objective, the
research hypotheses are formulated in null form as follows:
HO1:
Banking lending has no significant impact on the Nigerian capital market
crisis.
HO2:
Direct Foreign Investment has no significant impact on the Nigerian capital
market crisis.
Pre-Crisis Nigerian Economy
The integration of financial markets has increased the
contagion effects of the financial crisis. In developing countries, tracking
the transmission of the effects has been hampered by the fact that these
countries: i) are at different stages of development; and ii) have different
structures to their productive capacities and different socioeconomic problems
and abilities to respond promptly to global shocks.
The Nigerian economy prior to the crisis in 2007 performed
below projection, with an estimated GDP growth of 6.2%. This figure, below the
set target of 10%, was still higher than the 6.0% recorded in 2006. This growth
was driven primarily by the non-oil sector, which grew by 9.6% (CBN, 2008a),
largely attributable to the agriculture sector, which grew by 7.4%, led by crop
production, livestock and fishing. Other drivers of growth in non-oil GDP
included wholesale and retail trade, building and construction and services,
which recorded growth rates of 15.3%, 13.0% and 9.8%, respectively.
Industrial output fell by 3.5%, attributable mainly to the
5.9% drop in crude oil production occasioned by the Niger Delta crisis. By
year-end 2007, the crude oil production shut-in stood at 0.9 million barrels a
day. Official confirmation from the Nigerian National Petroleum Company (NNPC)
showed that the country lost N16.9 billion to petroleum pipeline vandalism. The
downstream sector of the petroleum industry remained comatose and the country
relied on imported refined petroleum products for domestic and industrial
operations. Official confirmation indicated that Nigeria consumed about 14.13
billion litres of refined petroleum products or 38.7 million litres per day
during 2007, with premium motor spirit accounting for 9.81 billion litres. By
end-September 2007, the Manufacturers Association of Nigeria (MAN) reported a
drop in manufacturing capacity utilisation from 44.06% in 2006 to 43.5% owing
to the difficult operating environment. The industrial sector made a negative
contribution of 0.78 percentage points. The agriculture sector, on the other
hand, contributed almost half of the GDP growth rate of 6.2%.
Meanwhile, earnings from non-oil exports, such as finished
leather products, cocoa and its products, sesame seeds and manufactured
products like cosmetics and toiletries, rose during the year to about US$1.38
billion. By the end of 2008, this value rose to $1.8 billion, the highest in
the country’s history. In addition, gross official external reserves rose by
20% to stand at about $50.75 billion by end-December 2007, as against $42.3
billion in December 2006.
In 2008, estimated growth of GDP of 6.77% was higher than
that of 2007 (at 6.2%). Growth was again driven by the non-oil sector,
especially the agriculture sector, which contributed 39.8% out of the 80.7%
total contribution of the non-oil sector to GDP in the first half of 2008. This
increased to 60% by the last quarter of 2008. This improvement in its output,
especially in the first half of 2008, was attributed partly to moderate
weather, especially the early rains experienced in the southern and northern
states of Nigeria. Other factors that helped to boost agricultural production
included several government intervention measures, like the National
Agricultural Project, the National Special Programme for Food Security, zero
tariffs on imported agro-chemicals, export expansion grants4 as well as
tightening of controls on illegal imports of agricultural products. The country
maintained a balance of payments surplus in 2007, fuelled by the current account
surplus.
The 2008 half-year report indicated that the trend
continued although, judging by the performance of major drivers of the current
account, the latter part of the second half of 2008 –especially the last
quarter – is likely to show deep deficit.
Shocks in the Nigerian Capital Market
The all share index and the market capitalization of the
233 listed equities capture activities and performance on the Nigerian Stock
Exchange (NSE). The index has been growing over the years from a value of 12,137
in 2002 to 66,371 in March 2008, with a market capitalization of about N12.640
trillion, after which values fell precipitously to 22,349 points in January
2009, with a market capitalization of 4998 trillion because of the meltdown. By
the end of the first week of March 2009, values had declined to 21,893 points;
with a market capitalization of 4900 trillion. This value had further declined
to 21,608 points, with a market capitalization of 4836 trillion, by the end of
the second week of March 2009. This reveals that between March 2008 and March
2009, the all share index had lost a total share of 67%, while market
capitalization had lost 62% of its value.
There are concerns regarding how rapidly the global
financial crisis penetrated the Nigerian capital market, especially given that
there is hardly any thriving domestic mortgage market. The decline of
indicators of activities on the NSE before the escalation of the crisis on the
global scene in July 2008 became a source of concern for many. Emerging facts
reveal that the crisis may have been made evident in the capital market through
various channels.
Foreign Direct Investment (FDI) and Sustainable Development: The
Nigerian Experience
Nigeria being a developing economy has not been any
different from other developing economies in using Foreign Direct Investment
(FDI) as a strategy for achieving economic growth and development. However,
unlike countries like Malaysia, Nigeria in spite of its huge deposit of human,
natural and material resources has failed to achieve rapid economic growth due
to several factors, the principal of which is an unstable political environment
occasioned by long periods of military rule.
Under the military rule, Nigeria witnessed a decline in the
influx of foreign investments as a result of various economic sanctions imposed
on the country by the international community. To best explain the Nigerian
experience in Foreign Direct Investment (FDI) and sustainable development, we
shall take a look at the country in two different dispensations or eras:
Pre-1999 and Post-1999. The choice of 1999 as a central or focal era for this
study is due to the country’s restoration to civil and democratic rule after
about Sixteen (16) years of military reign on May 29, 1999.
PRE-1999
Prior to its independence from British Colonial rule,
Nigeria had played host to a couple of foreign investments, companies like the
United African Company (UAC) were involved in the purchase and export of Palm
Oil which was a major foreign exchange earner for the country. However, the
country’s independence in 1960 was to change a lot of things politically,
socially and economically for it. Nigeria now had to take her future in her
hands and so; various economic policies were adopted to ensure the young
country’s survival.
The first twelve (12) years of independence saw the
country’s economy being sustained by export earnings from agriculture. With a
vast array of cash and food crops, the country soon became famous in Africa and
beyond. Then in the mid seventies (70s) came the discovery of oil and with it
several challenges that was to last for several years. Soon, major investments
started coming into the country in order to tap the huge oil deposits there. By
the late 1980s the country had been reduced to a mono income economy. Budgets
were based on estimated revenue from the international sales of crude oil.
Politically, the nation had undergone quite a traumatic
experience. Between 1960 and 1995, the country had experienced eight major
military take-overs (coup detats) some of them ending in bloodshed. Military
rule was to remain the dominant form of governance for over twenty out of the
country’s 39 years of independence.
As a result of this socio-political situation, Corporate
Social Responsibility (CSR) practices by large multinational corporations
particularly in the oil and gas sector was taken for granted and therefore
received very little attention from the government and civil society.
Environmental pollution was at an all time high and
citizens of the Niger Delta region were subjected to untold economic hardship.
Marine life and soil fertility was devastated by frequent oil spills in the region.
This phenomenon has been referred to as the “resource curse” thesis (Auty,
1998). The pursuit of sustainable development via Corporate Social
Responsibility (CSR) and the activities of the oil companies operating in the
Niger Delta region were soon to spark off an internationally celebrated
confrontation between the late environmental activist- Ken Saro Wiwa – and
Shell Petroleum Development Company (SPDC). Unfortunately, the war did not last
for long as the activist along with eight other people were tried by a military
tribunal and sentenced to death.
The inauguration of a democratic government in May 1999
raised hopes of redressing the ecological social and economic damages of
military rule. The country began a gradual progression towards creating a
political and social environment supportive of Corporate Social Responsibility
(CSR) and ultimately sustainable development.
As a matter of fact, Nigeria witnessed greater Foreign
Direct Investment (FDI) inflow between 1990 and 2001. Another factor
responsible for the phenomenal increase in Foreign Direct Investment (FDI)
apart from economic policies is the fact that the legal regime and its related
institutions required for the creation of a market economy and suitable
investment climate were priority public policy agenda of the new civilian
regime.
Methodology
Secondary sources of data were employed with simple linear
regression analysis. A major source of data used is the Central Bank of Nigeria
Statistical Bulletin for Various Years. The choice of the method was informed
by the nature and the requirements of the topic which requires the use of
secondary data.
Results and Discussions
This section covers the presentation and analysis of
secondary data i.e market capitalization from 1998 to 2008 and their respective
private sector lending and foreign direct investment collected from the Central
Bank of Nigeria Statistical, Annual Reports and Statements of 1958-2008. The
hypotheses formulated are tested to determine the impact of banking lending and
foreign direct investment on the Nigerian capital market crisis. The aggregate
values of dependent and independent variables within the period of the study
are presented below:
Multiple linear regression has been used to measure the
impact of banking lending and foreign direct investment on the Nigerian stock
market crisis. From the regression output shown in the appendix, there is an
ordinary relationship between banking lending and foreign direct investment and
market capitalization. The relationship is a strong positive one of 0.947.
Rsquare is the coefficient of variation. From the regression result, it means
that about 90% of changes in market capitalization is caused by banking lending
and foreign direct investment while 10% is caused by other factors.
Table 1: Market Capitalization, FDI and Private Sector
Lending (1999-2008)
YEAR
|
MARKET
CAPITALIZATION N’M
|
FOREIGN DIRECT
INVESTMENT
N’M
|
PRIVATE
SECTOR
LENDING
N’ M
|
1999
|
300
|
0.1542
|
0.1267
|
2000
|
472.3
|
0.1575
|
0.1796
|
2001
|
662.5
|
0.1623
|
0.2796
|
2002
|
764.9
|
0.1666
|
0.3666
|
2003
|
1,359.3
|
0.1785
|
0.4339
|
2004
|
2,112.5
|
0.2492
|
0.5687
|
2005
|
2,900.1
|
0.2698
|
0.7469
|
2006
|
5,121.0
|
0.3028
|
0.2524
|
2007
|
13,294.6
|
0.3640
|
0.1529
|
2008
|
9,516.2
|
0.3974
|
0.2750
|
Source: CBN
Statistical Bulletin 2008
ANOVA explains cause-effect relationship and also
determines whether or not a slope exists. Here, a slope exists because the
significance value of 0.000 is within 5% level of significance and as such
there is regression.
From the coefficients table, the significance value of
0.061 is more than the 5% level of significance. We therefore, accept Ho and
reject Hi and conclude that banking lending has no significant impact on the
Nigerian capital market crisis.
Also, from the coefficients table, the significance value
of 0.000 is less than 5% level of significance. We therefore reject Ho and
accept Hi and conclude that foreign direct investment has significant impact of
the Nigerian capital market crisis.
Conclusion and Recommendations
The current global financial crisis, which was triggered by
the credit crunch within the US sub-prime mortgage market, is continuing to
spread and deepen in several countries. Countries around the world have
approached this whirlwind pragmatically, prompting emergency funding support
for relevant sectors, thereby mitigating the impact of the crisis on economies
as well as avoiding the entire collapse of the international financial system.
In spite of such support, some countries have been officially declared as in
recession, owing to a monumental decline in their wealth, manifesting itself in
falling productive capacity, growth, employment and welfare.
From the study, specific conclusions are that foreign
portfolio investment withdrawals and withholdings in order to service financial
problems at the foreign investors’ home, as well as prospects of reduced FDI,
are bound to affect investor confidence in the economic health of Nigeria.
Evidence on the foreign portfolio withdrawals shows that the total financial
inflows to Nigeria between 2007 and 2008 increased by 21%, while that between
2008 and 2009 is predicted to reduce by 38.6%. The adoption of a public–private
partnership (PPP) policy platform to implement huge investment plans such as
oil and gas (liquefied natural gas – LNG – projects), power plants, railways,
housing and roads, therefore, exposed the country more to FDI uncertainties and
vagaries.
The credit crunch experienced by lending (particularly
bank) institutions affects businesses that require short- and long-term money,
including banks lending to corporate organizations as well as inter-bank
short-term lending. In a country like Nigeria, where mortgages and credit card
purchases are not well developed, this credit crunch became manifest in
weakened risk assets of banks that had given out loans to some investors to
invest in other financial instruments (particularly secondary market purchase
and initial public offerings – IPOs), in the hope of making quick returns
through a quick turnaround of their portfolio. This was what was termed
otherwise ‘margin lending’. This may also be termed Nigeria's own version of
the ‘sub-prime problem’, resulting in an exploding domestic stock market and
stock prices and astounding returns to both the speculators and providers of the
margin funds (the banks).
Other factors that have had a serious impact on the stock
market are what can be called the ‘intensifiers’. These include policy
interpretations by the market, which may have been induced by the slow
government initial stand on the economy. This also includes interpretation of
announcements, proclamations and rumors by the market. Examples include the
proposed recapitalization plan of the stock market players (stock broking
firms), as well as rumors on the termination of margin lending by banks.
However, some specific recommendations include:
Expansion of liquidity to counteract the contractionary
implications of the global financial crisis on the domestic economy while at
same time introducing more regulation and tightening the conditions for operations
in the capital market.
There is loss of public confidence not only in governments
but also in institutions, hence the need to urgently instill public confidence
in the markets through transparent and honest dealings of financial instruments
and institutions.
Standards and rules on cross border finances should be
established because this will provide early warning signals and limits risk
exposures.
The structure of existing institutions like the UN, IMF
World Bank lack the capacity to tackle the crisis hence the need for a reform
and standard setting in the governance of the international economic
institutions.
Actual policy responses by government and other
institutions on areas of impact on Nigeria include: reduction in bank lending;
reduction in portfolio flows; reduction in remittances from emigrant
populations; and reduction in export revenues as demand in rich countries
starts to shrink. Until recently, the official response to the crisis was slow
and the adopted stand was that of indifference in the country.
The shrinking of demand in richer economies for commodities
led to cuts in production levels at the different plants located in developed
countries. This meant a reduction in the consumption of fuel, metallic and
other primary products. Consequently, the earnings of companies will decline.
One key factor for an appropriate policy intervention is a proper understanding
of the nature and depth of the crisis as it affects the sources of
international capital flows to Nigeria. Furthermore, since no two economies are
exactly the same, the model or methods used to intervene in times of financial
difficulty will differ from one country to the other. The understanding of the
composition and behaviour of the Nigerian economy is paramount in developing
short- and long-term policy responses that will be relevant to minimizing the
damage of the crisis on the country’s economy.
Some of the policy measures already in place to reduce the
problem of the global financial crisis in Nigeria are therefore as follows: i)
reduction in the monetary policy rate (MPR) from 10.25% to 9.75%; ii) reduction
in the cash reserve requirement (CRR) for banks from 4% to 2%; and iii) cutting
the liquidity ratio from 40% to 30%. In addition, the CBN has given a directive
to banks that they have the option to restructure the already crystallised
margin loans up to 2009; inter-bank lending facilities to banks are expanded
and extended up to 360 days.
References:
CBN (2008), Statistical Bulletin
http://www.advfn.comADVFN Commodities
website http://www.emerginvest.com/
WorldStockMarkets/EmergInvest website http://money.cnn.com/quote/
historical/historical.html? symb=INDUCNN
Money: Historical DJIA Quotes
http://en.wikipedia.org/wiki/
Dow_JonesDow Jones & Company
http://en.wikipedia.org/wiki/Global_financial_crisis_of_September%E2
%80%93October_2008Global
financial crisis of September–October 2008
http://www.meristemng.com/research/Default.aspx
Meristem Research: NSE ASI Statistics
APPENDIX:
SPSS OUTPUT
Descriptive Statistics
Mean
|
Std. Deviation
|
N
|
|
MCAP
|
3.6503E3
|
4426.40122
|
10
|
FDI
|
.2402
|
.09047
|
10
|
LENDING
|
.3390
|
.19751
|
10
|
Correlations
MCAP
|
FDI
|
LENDING
|
|||
Pearson
Corre
|
lation
|
MCAP
|
1.000
|
.908
|
-.239
|
FDI
|
.908
|
1.000
|
.033
|
||
LENDING
|
-.239
|
.033
|
1.000
|
||
Sig.
(1-tailed)
|
MCAP
|
.
|
.000
|
.253
|
|
FDI
|
.000
|
.
|
.464
|
||
LENDING
|
.253
|
.464
|
.
|
||
N
|
MCAP
|
10
|
10
|
10
|
|
FDI
|
10
|
10
|
10
|
||
Correlations
MCAP
|
FDI
|
LENDING
|
|||
Pearson
Corre
|
lation
|
MCAP
|
1.000
|
.908
|
-.239
|
FDI
|
.908
|
1.000
|
.033
|
||
LENDING
|
-.239
|
.033
|
1.000
|
||
Sig.
(1-tailed)
|
MCAP
|
.
|
.000
|
.253
|
|
FDI
|
.000
|
.
|
.464
|
||
LENDING
|
.253
|
.464
|
.
|
||
MCAP
|
10
|
10
|
10
|
||
FDI
|
10
|
10
|
10
|
||
LENDING
|
10
|
10
|
10
|
||
Variables Entered/Removedb
Model
|
Variables Entered
|
Variables Removed
|
Method
|
|
1
|
LENDING, FDIa
|
.
|
Enter
|
a. All
requested variables entered.
b. Dependent
Variable: MCAP
Model Summaryb
Std. Error of the
Estimate
|
Change Statistics
|
||||||||||
R Square
|
Adjusted R Square
|
R Square Change
|
F
Change
|
df1
|
df2
|
Sig. F
Change
|
Durbin-
Watson
|
||||
Model
|
R
|
||||||||||
1
|
.947a
|
.898
|
.868
|
1605.21633
|
.898
|
30.717
|
2
|
7
|
.000
|
3.078
|
|
a. Predictors:
(Constant),
LENDING, FDI
b. Dependent
Variable: MCAP
ANOVAb
Model
|
Sum of Squares
|
Df
|
Mean Square
|
F
|
Sig.
|
||
1
|
Regression
|
1.583E8
|
2
|
7.915E7
|
30.717
|
.000a
|
|
Residual
|
1.804E7
|
7
|
2576719.481
|
||||
Total
|
1.763E8
|
9
|
a. Predictors:
(Constant), LENDING, FDI
b. Dependent
Variable: MCAP
Coefficientsa
Unstandardized Coefficients
|
Standardized Coefficients
|
t
|
Si
|
||||
Model
|
B
|
Std. Error
|
Beta
|
g.
|
|||
1
|
(Constant)
|
-5083.915
|
1742.242
|
-2.918
|
.022
|
||
FDI
|
44882.903
|
5917.429
|
.917
|
7.585
|
.000
|
||
LENDING
|
-6033.251
|
2710.579
|
-.269
|
-2.226
|
.061
|
||
a. Dependent Variable: MCAP
Residuals Statisticsa
Minimum
|
Maximum
|
Mean
|
Std. Deviation
|
N
|
|
Predicted Value
|
313.8759
|
1.1180E4
|
3.6503E3
|
4193.91376
|
10
|
Residual
|
-1.75164E3
|
3.12566E3
|
.00000
|
1415.66774
|
10
|
Std. Predicted Value
|
-.796
|
1.795
|
.000
|
1.000
|
10
|
Std. Residual
|
-1.091
|
1.947
|
.000
|
.882
|
10
|
a. Dependent
Variable: MCAP
[1]
Ayuba and Ebaenye are M.Sc. and Accounting and Finance at the department of
Accounting, Nasarawa State University, Keffi-Nigeria.
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