With banks and other operating firms seeking to raise over N3 trillion from the capital market in the coming months, there are growing doubts that the Nigerian economy can soak the expected fundraising pressure.
The skepticisms are further triggered by the fact that the market has shrunk since 2005, the last time banks went to the market en masse to raise funds. Market capitalisation of the Nigerian Exchange Limited , which is currently put at $40.2 billion and constitutes a paltry 10.72 per cent of Nigeria’s gross domestic product is considered extremely low for a country of over 200 million people. And it is far below its peers.
Despite its low capacity, seven banks joined with Nigerian Breweries Plc have concluded plans to raise a total of N1.9 trillion from the market in the coming months. Meeting the needs of the local market, experts have said, is a tough task. A professor of finance at the University of Nigeria Nsukka, Chuke Nwude, said the market is still shallow and yet to be properly positioned to support the huge funding need.
“Companies are converting the borrowings in their financial statements into equity, that does not solve the problem, if you convert debt or loan into equity, at the end of the day you must pay dividends. If the owners of the capital are foreign-based you must buy foreign currency to pay them their dividend.
“Of course, if we go by history, during the previous exercise, many banks were liquidated, some even engaged in financial crimes to show that they doctored their financials claiming that they raised new capital where many of them did not succeed, we knew what happened then, so if such repeat itself this time around, we are going back to square one,” he warned.
However, the latest report of the Exchange released in February 2024 showed that the participation of foreigners has dropped steadily in the last 10 years, constituting a paltry 18 per cent. “It will be a tough one because of the high-interest rate environment. Who will buy equities when fixed income can give you a yield of 27 per cent, more so all the banks are hitting the market at the same time, said the Head of Equity, Planet Capital, Dr. Paul Uzum.
“Do you think foreign investors will just come to a country because banks are raising capital? No, foreign investors determine the risk assessment of each country before deciding whether to go to those countries. Consequently, he argued that if this continues with undiminished intensity, it can cause migration of financial assets from equities to debt which may derail the flow of investment funds to the primary equities market for the bank recapitalisation.
“What is likely to play out now is that a lot of new investors are likely to come in; foreign investors will come. So, there is going to be an influx of new entrants into the stock market. The Attorney General of the Federation and Minister of Justice, Lateef Fagbemi , has promised a review of the law imposing sentencing for suicide attempts.