Nigeria speculators' wild cash ride
By Andrew Walker
BBC News, Lagos
The first time Peter Ugochukwu heard about shares was when his father
died in Nigeria.
It was suddenly revealed he had a portfolio worth thousands of
dollars, a hidden fortune that his family knew nothing about.
"We found stocks, and bonds, and all kinds of things. We realised -
this is money!" the 33-year-old management consultant from Lagos
said.
After this discovery, Mr Ugochukwu (who agreed to talk to the BBC
only on condition that his real name was not used) became one of
thousands of Nigerians who played the stock market last year and won.
The bubble over-inflated the market in Africa's number one oil
exporter.
The inevitable correction in value led to some losing their
investments, and ended in severe damage to the reputation of the
exchange in Africa's most populous nation.
No crunch
Nigeria's banking sector has only been open to international trade of
wholesale debt for a short time, and so its exposure to the global
credit crisis is limited.
But last year, just as banks were waking up to their problems in the
US, Nigerian investors rode a rapidly expanding stock bubble as the
value of shares went through the roof.
Now the bubble has burst and the stock values have reduced to a saner
level, but some people have been burned by their experience.
In April 2007, banks and insurance companies were really the only
shares to invest in on the Lagos stock exchange.
Their value rocketed, drawing in more customers to highly publicised
Initial Public Offerings.
Some of the adverts for the share issues suggested that there was no
way the value of the share would go down, a practice illegal in
Europe and the US.
Banks were borrowing money from each other to buy shares in other
banks, and as awareness of the rising value of the stock market
filtered out to the public, people were tempted to buy in to the
ride.
A small number of individual speculators like Mr Ugochukwu borrowed
thousands of dollars from banks - as much as a whole year's salary
for a civil servant - to buy what they believed would be a sure-fire
money-making scheme.
The loans had huge rates of interest, as much as 25%.
'Share fever'
But "naive" investors thought it was free money, and the stock market
would not fail, analysts told the BBC.
"Share fever" did not last and prices tumbled, wiping a third off the
value since March.
"All my uncles were doing it too," said Mr Ugochukwu.
"They were all talking money money money. Were they too greedy? Well,
they're making money legally so, what's the problem?"
Financial analysts said the Nigerian stock market experience was a
classic example of greed gone too far.
"There is a huge naivety in Nigerian investment institutions, a sense
that the market is a one-way bet," Matthew Pearson, equities analyst
for investment group Renaissance Capital, who specialise in emerging
markets.
The stock market made huge profits for some, doubling in value in a
matter of weeks.
"You're left thinking: 'How much is enough?'" he said.
Tipping point
The boom reached its zenith after banks began to rail in the loans
they laid out to fund the boom.
Analysts say this was at the request of the Central Bank of Nigeria,
worried at the pace of the booming market in an economy that is based
on a single export -oil.
But it denies it interfered.
The tightening of money available for shares, and analysts' growing
concern over the market's over-valuation, ended the boom.
Then international investors pulled out.
In the panic of the plunge, the stock market experienced a suspicious
"technical fault" which prevented downward trades being reported for
over a week.
Afterward limits were placed on how much value a share can lose in a
single day, but it is not enough to rectify the dent in confidence
resulting from unregulated speculation.
The market is now being subjected to "death by a thousand cuts",
according to Mr Pearson.
Scared
Mr Ugochukwu said he sold his shares close to the top of the market,
unloading his depreciating stock.
"I was so scared," said Mr Ugochukwu.
"It was the thought of losing the whole thing and owing all that
money that made me get out."
He had borrowed $12,700 (£7,800) and bought bank and insurance
shares, which raced up to over $33,900 (£20,000).
Individual investors bought a relatively small number of shares
traded on the market, but they were following the principles laid
down by the markets' largest investors, the big banks themselves.
Although analysts say the number of individuals who bought shares
since the beginning of the downturn is small, Mr Ugochukwu says he
owes his fortune to novice share investors.
"At first the only people who were doing this were in the banking
industry, or who knew what was going on."
"Then as the public, the novices, started to get involved, those
first in took their profits," he said.
Learning lessons?
More bubbles lie ahead, according to Mr Pearson.
"When these speculators got out of the stock market, they poured
their cash into property, which is now in the middle of a new boom in
Nigeria, while house prices crash globally."
A three-bed roomed flat in Lagos, one of the most chaotic and violent
cities on earth, can cost a similar amount to a luxury flat in
Knightsbridge, in west London.
"In the next 12 months the same thing that happened to the stock
market will happen in property," said Mr Pearson.
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