Dennis O Odife, MON

 December 2010

 

Introduction

The recent removal of the lid on the affairs of the Nigerian Stock Exchange has enabled us all to see the rot contained therein and to interpret it in our own ways. Credible financial reporting is vital to the work of any Stock Exchange because it is within the Stock Exchange process that we value credible financial reports as we use them to assign values to securities of the companies which have made such reports and trade in those securities on the basis of such reports. The Stock Exchange is like any other market, a market for trading in commodities and it has buyers and sellers as well as observers and regulators, rules and regulations. These attributes make it the most efficient of all markets in the land, often making observers to forget the process which gives it life.

 

The Stock Exchange is a normal company which is however granted monopoly powers by the State to license and regulate its members, to select and list securities for trading by its members and to be regulated by agencies of State in a process which ensures that orderly markets in those securities are maintained and sustained, and that the membership abide by the rules and regulations and by the codes of conduct which all conduce to and guide and led the economy to sustainable economic growth. What is going on in Nigeria at the moment is to be expected when there are major aberrations in the operations of the market. It is therefore important that we study the unfolding events and learn the appropriate lessons.

 

The need for credible financial reporting

We are conducting these proceedings in the context of the adoption of the IFRS by Nigeria, according to reports credited to the Nigerian Minister for Commerce even ahead of the convergence date advised by the US SEC and adopted by the IASC, the FASB and leading world accountancy bodies. The Nigerian position does not surprise me but is to be taken with a pinch of salt. For me, it makes one wonder whether the Nigerian authorities are aware of the amount of work required by the accounting organizations, by the universities and polytechnics and by both the public and private sectors to do the vital groundwork which alone will make the adoption of the IFRS by 2014 feasible talk less of 2012. For another one is reminded that Nigeria was in a similar haste to adopt the prudential guidelines for the banking sector when the BASLE Convention advised it in the eighties and nineties.

 

The records will show that Nigeria’s financial institutions just like the Nigerian economy were unprepared for the implications of the adoption of the prudential reporting system and that as a result of that unpreparedness, distress set it and we have hardly recovered from such distress till this day.

 

Infant Industries

This line of thought leads directly to the infant industry argument under which we built tariff walls to protect our infant industries. Indeed it was the fashion all over the world including Asia and Europe. The tragedy is that years later our infant industries remained infants but with imbecilic characteristics. This has led researchers to wonder why similar treatments proved very successful in Asia but quite disastrous in Nigeria.

 

The ideas of Margaret Thatcher soon hit the world and changed it forever: then came “TINA” [“there is no alternative”] and deregulation, privatization, etc. these concepts have never worked well in Nigeria nor have they worked here the way they worked elsewhere in the world.

 

The Latest Stage in world progress

The introduction of IFRS appears to be the latest stage in the logical attempt to integrate and to unify the economies of the world to speak the same language implicit in using the IFRS. I recall quite vividly that during the second phase of the indigenization programme in Nigeria, the Chairman of NIDB, [now BOI] had observed that there can be no Nigerian way to fly the Boeing 707. You either flew it the way the makers intended it to be flown or you did not fly it at all. It reminds me also of the admonition by the German Chancellor of Turkish immigrants to Germany who persist in keeping their own culture while residing permanently in Germany. The time for change has come.

 

No matter what the world is doing, there are reasons to doubt Nigeria’s commitment to positive change in this regard, and the dangers comes not from the man on the street but from those responsible for leading the country forward. I recall that several years ago I was obliged to invite the attention of two regulators to the fact that the financial documents on the basis of which their approvals were being sought for a public offer were not credible.

 

They ignored the warning and went ahead to approve the offer which misled the public. When I brought the matter to the attention of government officials who should be concerned they asked me if the State did not have agencies charged with ensuring that the public was not misled. I assured them that it had. There the case rested, but members of the public who bought the shares of such companies as Onwuka Hi-Tek lost their investment. And it took the intervention of a Federal Minister of Finance to protect me, but only for as long as he was in office. I paid a dear price later in 1993 as some of you may recall.

 

Lessons for Nigeria

The lesson Nigeria has to learn also is that the time for change has come and that we may no longer have any discretion in the matter. Let us examine a few questions. Please be patient and wait for the explanations even though the questions may appear to be irrelevant.

1.      How many people are there in Nigeria and how many of them are Catholics or Protestants or Muslims?

2.      How much crude oil does Nigeria produce?

3.      If Nigeria is such a small crude oil producer why is it that every little skirmish in the Niger Delta affects world oil prices?

4.      How much of the money allocated to the local government areas in Nigeria actually get into the hands of the local government chairmen?

5.      How come the State governments have no records of the money allegedly stolen from the coffers of the state by the outgoing State governors?

6.      How come the banks have no records of lost funds when EFCC and the police have records of large volumes of loot taken from the same banks?

 

I recall that during a public lecture several years ago, I interrupted a brilliant professor and challenged him to show me from his brilliant charts precisely where the Abacha loot left from. He went back to his seat. You could guess the answer. The point really is that when reference is made to credible financial reporting our minds go only to the published financial Statements of the banks and industrial concerns. That is correct only to a certain extent as these institutions exist and operate in milieu in which all the foregoing questions are relevant. When because of fear or whatever, we block out certain data from our national census, we create gaps in our database and such gaps will subsequently affect us elsewhere. How do you compute growth without accurate population data? Do we really know how much crude oil Nigeria produces? When monies meant for the local government areas do not get there, poverty ensues from the obvious misappropriation or manipulation and economic growth is neglected or at least delayed. When funds are looted they are obviously not reflected in the accounts, then such financial records could have not been credible in the first place. I believe the lessons are now clearer and there is no need to say more. But there is reason to be more watchful and vigilant.

 

Recent salacious revelations coming from the Nigerian Stock Exchange need to be placed in the right context. The temptation is to blame the Stock Exchange for malfeasance etc but that will be to miss the point. The Sock Exchange is a n efficient market because of the role of the State in its affairs. Without that role it could hardly be the efficient market that we all know it to be. However in the Nigerian case it is the state that has created and sustained the abuse in the Nigerian Stock market. If I say that the mess was caused by the incompetence of the State, I may be misleading you. Maybe the word inept would be more appropriate, and though President Olusegun Obasanjo, GCFR is hardly a leader to be described as inept and yet the ball must be placed squarely in his court in this instance.

 

One of the charges levied against the officials of the Nigerian Stock Exchange today is that they have been sharing monies contrary to the law setting up the Stock Exchange. Let me reveal here that one of the discoveries of the Panel on the Review of the Nigerian Capital market which I had the honour to chair in 1996 was that the officials of the Stock Exchange were sharing monies even then and we so reported in a confidential addendum to Government. Several years after, there is no reason to believe that they ever stopped. Indeed it is quite likely that they went on and on until they became so emboldened by their accomplishments to plan to take over and to own the entire Stock Exchange themselves.

 

The discovery that they were sharing money by 1996 was hot and no one could touch it. Recent revelations suggest strongly that they have been sharing monies illegally since then. Why should they have stopped? I hope you forgive the euphemism; we say they have been ‘sharing’ money because as considerate as we are, we do not wish to say that they have been ‘stealing’, for that would be a criminal offence.

 

The panel submitted its report in 1996 and a new draft law known as the Investment and Securities Act which the Panel prepared was soon promulgated as the Investment and Securities Act of 1999. I hope you can download a copy of both the report and the law from the internet.

 

       The report was clear on the ineptness of the managers of the Stock Exchange.

       We also reported that in violation of the Act setting up the Stock Exchange some officials of the Stock Exchange and their friends formed a private company called the CSCS to profit from the trading of the Stock Exchange for their private pockets. As a matter of fact, other than sharing their profits they had no other commitment for the future.

       There were instances where the price of a company making profits was falling and the price of a company not doing so well was rising in defiance of the market logic.

       We were thus obliged to recommend the creation of the Abuja Stock Exchange and prepared a blue print for its operations.

       We designed a new capital market architecture under which the State would fund the SEC for its new functions and keep its revenues. The Dg of the SEC at the time refused but today there is a Bill before the National Assembly for the purpose.

       When most of the expatriate companies on the Lagos Stock Exchange declared a preference for the Abuja Stock Exchange the story became either that Abacha bribed me with N500million to set up a Stock Exchange in Abuja so that he could corner the shares of the government agencies to be privatized or that I did it so that economic power would shift from Lagos to the North. It was of course sheer blackmail but which unfortunately was bought by the Government of the day.

       The good thing President Obasanjo did was that though he converted the Abuja Stock Exchange to a commodity exchange he refused to hand it over to the Nigerian Stock Exchange as they very badly wanted.

       But the NSE soon emulate d the business processes of the Abuja Stock Exchange and took over the first company to list there.

       The Director- General of the SEC who reprimanded and suspended the DG of the Stock Exchange for insubordination was soon replaced by a nominee of the DG of the Stock Exchange.

 

That was not all. The pettiness of the management of the Stock Exchange and the corruption on the exchange were known to all. Just like expatriates could purchase approvals in some government departments so companies could buy themselves high prices on the Stock Exchange, prompting me to write in the NIGERIAN SECURITIES MARKETS, [Malthouse Press 1988] that insider deals on the Nigerian stock market would not be possible without the knowledge and connivance of officials of either the NSE or the SEC or both.

 

Well, the story did not end just there; the Stock Exchange hated the work of the panel and vilified it in such vitriolic language that most brokers avoided both the members of the Panel, the report itself and the new law under which they were to operate. A few years later, the Stock Exchange moved to amend the law which was passed to implement the Report of the Panel which it never bothered to read.

 

I was obliged to invite the attention of the Minister of Finance that agencies regulated by the ISA were seeking to amend it to suit their purposes rather than the purposes of the State. I also invited the attention of the legislature to the fact that if they were amending a law that was promulgated to implement the Report of a Panel, they needed to see the Report and evaluates it’s continued that relevance as a prelude to their work. Needless to say, they paid me no heed.

 

There was however no need for me to be concerned about that. There is evidence that the legislature also paid no heed while Governor after Governor of the CBN altered financial legislation with their pencils and gave their alterations effect in the economy without further reference to the National Assembly.

 

Planning to buy the Stock Exchange

It was clear to me flowing from the work of the Panel that officials of the Stock Exchange had found their continued disobedience to the SEC together with their ownership of the CSCS so profitable that they now wanted to own the Stock Exchange itself and forever. And it was clear that they were going to do it in broad day light ostensibly pretending to be doing the nation a favour by doing for the Nigerian capital market what everyone else in the world was doing for theirs. Writing in 2008 when I alerted the nation to the dangers of the global financial crises to our own stock market I observed [see NIGERIA: Stopping the NEXT Financial Crises, Alkestis Books 2010] that

 

“…For the stock market, two further areas of possible danger are the proposed demutualizationand the proposed dematerialization by the end of the year. For those who may not fully understand these terms, demutualization is the conversion of the Stock Exchange from a company limited by guarantee and operating as a ‘not – for-profit’ organization enjoying monopoly control over certain matters as granted in the enabling legislation [and/or as extended thereafter,] into a company whose shares are listed on [itself] the Stock Exchange and which has to make profits and pay dividends to its new members and therefore owners.

 

It is a fact that nearly 50% of the Stock Exchanges in the world are now demutualized and perhaps as many as 70% in Asia; but this can be no compelling reason for Nigerian demutualization. It is widely known that monopoly power has been operated by individuals in Asia more in the interest of Asian economies than has been the practice of Africa.

 

If the pressure is coming from the World Bank and other donor agencies as did the recent banking consolidation, then every caution should be exercised and the move should be resisted stoutly. This is so because people in developing economies respond to ideas from the donor agencies by assuming erroneously that once an idea has come from the donor agencies then they must have examined it from our own point of view and found it to be in our best interest. Indeed they owe us no such obligation and no one can do such an evaluation for ourselves better than ourselves. Let us therefore be sure that we do it also in this case.

 

For a start, demutualization is a movement from broker-owned and managed or dominated Stock Exchanges to publicly owned and traded profit making Stock Exchange companies. In the case of Nigeria, the Stock Exchange has never been broker owned, managed or dominated. Moreover, the second source of pressure for demutualization is usually raising capital. Here, one doubts that this can be a valid reason for Nigerian demutualization in view of the high levels of listing fees and the record incomes made by the exchange in recent times. Then there is the issue of profit maximization. Here again, the exchange in Nigeria has been making profits through the CSCS which is a privately held profit-making entity enjoying monopoly control over the processing and settlement of trades on the capital market.

 

These observations do not imply that there may be no merit in demutualization; rather what they do in the case of the Nigerian Stock Exchange is to suggest that more scrutiny may be required. It is hardly relevant here to recall that over a decade ago when the Abuja Stock Exchange was born fully demutualized, the Nigerian Stock exchange led the campaign against its existence.Times and perspectives do change but many Nigerians will find it difficult to understand how an entity which they thought was government agency and which largely pretended to be such and enjoyed monopoly powers on that basis, can suddenly become a private entity owned by just a ‘few’ Nigerians, for profit taking and for their further private enrichment. The challenge before both the SEC and the Stock Exchange therefore is to convince the public that a demutualized Stock Exchange will be more obedient to the SEC than the former one and that the public interest rather than narrow private interests will be served…”

 

In a subsequent Memorandum to the National Assembly reproduced in the same book, I said,inter alia,

 

“…Do I need to say more? I doubt it. But the facts are that the process has commenced and you presently have before you, proposals to grant monopoly status to a private company claiming to be a depository, and which has, contrary to the statute under which it was established, been making and distributing profits to its shareholders at the expense of the investors in the stock market.

 

Secondly, proposals for demutualization continue on the erroneous assumption that the Nigerian Stock Exchange as capital deficient. It is important therefore that before further progress is made on these proposals you determine how much the Stock Exchange profited from the high prices prevailing on the capital market whilst the market basked in the delusion of false markets. You no doubt recall that both institutions earn their fees as a flat percentage of the market values of the companies and their securities. Hence, therefore, the higher the prices of the securities in the market, the better for them. Can it therefore be true that they lack capital as justification for demutualization? How much money did they really make in the recent bull markets? Answers to these questions should guide you and the nation in deciding how far and how fast to proceed in these areas…”

 

A recent editorial commentary suggesting that [Guardian 22nd November 2010] there was actually a disagreement as to how the shares of the Stock Exchange were to be shared between brokers and members of the Council of the Stock Exchange has most probably revealed what the problem was all about. In the light of those revelations, a relevant question is how were the shares of the Stock Exchange to be valued for us to have such confidence in pricing and believe that the prices were based on credible financial reports?

 

The IFRS is here and no one is waiting for us. Indeed there is no need for anyone to wait for us while we continue on our own different and evidently nefarious agenda. The adoption of the IFRS moving from a framework based on rules to one based on principles entails a lot of hard work and sincerity of purpose. Let us not pay lip service to it as we did to prudential reporting. There is need to mobilize the entire society to its demands. All of us need to ‘shine our eyes’ and keep them permanently shined if we are to ever achieve sustainable economic growth and development in this country. We need to remind ourselves as I tried to do in my recent book, “NIGERIA: Stopping the NEXT Financial Crises” [Alkestis Books 2010] that the man charged with ensuring credible financial reporting may, irrespective of race or colour, be doing the opposite. “Eternal vigilance” they say “is the price of liberty”.

 

From credible financial reporting it is easy and logical to go on to credible elections in Nigeria. The world is anxious that Nigeria should not let it down but I am afraid that the optimism of the world may be grossly misplaced unless more segments of the economy and especially the key players in the financial sector take an interest in the electoral process and support Professor Jega’s efforts at ensuring internal democracy in our political parties as a prelude to ensuring free and fair election s. it is quite apparent that the process on ground in all the parties and in all tiers of government may be very flawed and such a flawed process is unlikely to result in the sort of ‘good people’ who are going to be responsible for supervising the polity and the economy and ensuring that we have credible financial reports in parts of the nation going forward.

 

As we prepare the nation for 2011 elections, members of the financial sector should engage in the process and work hard to ensure that the process as designed will be capable of producing free and fair results. It is not that we do not trust people there now and who arranged or are arranging events; it is not even that the result may be rigged in our favour; perhaps indeed they could be; rather it is that the process that will produce the results are fatally flawed. It is the process that we need to trust and to rely on and not the people. The gentlemen who ran our Stock market are ‘good people’, gentlemen and ladies alike; but they are also human and but for our ‘vigilance’ or their ‘fortunate’ disagreement amongst themselves in broad daylight while assuring us that it was based on their own credible financial reports and the need to ensure credible financial reporting in the future. Here therefore is the strongest argument in support of the adoption of the IFRS and in the same vein on the political plane for the engagement of members of the financial sector of this potential great but currently constrained financial sector into the political process for overseeing the welfare of the good people who make up this great nation, with appropriate credit to Professor Dora Akunyili. Members of the financial sector have the most vital stake in this process and the time to jump abroad is NOW.

 

Thank you.

 

 

Dennis O Odife, MON

Chairman,

CentrePoint Investments Limited