Democracy Day 2020: The Nigerian Capital Market On My Mind

Prof. Uche Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University Keffi.

In the last 21 years of democratic rule, Nigeria has made remarkable progress in capital market development. The menu of available asset classes has been expanded beyond equities and bonds to include Exchange Traded Funds with plans afoot to launch derivative products. Market infrastructure has been modernized and strengthened with the Platforms for Over-the-Counter trading namely the NASD and FMDQ now functional including three Commodity Exchanges namely Nigeria Commodity Exchange, AFEX and the Lagos Commodity and Future Exchange as the latest entrant.

Indeed, not a few would be ready to roll out the drums especially in the light of improved regulation and confidence building measures put in place by the regulators which have contributed in no small measure to reposition the market. Over the years, the Securities and Exchange Commission has undertaken a raft of initiatives, in line with the 10-year Capital Market Master Plan, to boost investors’ confidence notable among which were the dematerialization of share certificates obviating the burden of holding physical share certificates and establishment of the National Investors Protection Fund meant to cushion the adverse effect of losses suffered in the capital market.

Others include the e-dividend policy designed to minimize cases of unclaimed dividend, the Direct Cash Settlement scheme which ensures that investors receive their money directly whenever securities are sold, the Corporate Governance scorecard for companies listed on the Nigerian Stock Exchange and the recapitalization of capital market operators aimed at improving their infrastructure and service delivery which has gone a long way in curbing sharp practices in the market.

By the same token, the Nigerian Stock Exchange implemented minimum operating standards for market operators as well as launched the Premium Board which offers issuers the benefits of greater visibility and opportunities to raise capital. Also, the NSE established a Whistle-blowing policy and together with the apex regulator, SEC, maintained zero tolerance for infractions. Undoubtedly, these measures have sent the right signals to the investing public with regard to rules enforcement and market discipline. In addition, activities in the non-interest capital market space are beginning to gain traction especially with the introduction of Sukuk bond.

Equally gratifying is information obtained from the SEC website indicating that, as part of efforts to boost capital market literacy, the Commission, in conjunction with the Nigerian Educational Research and Development Council, is walking the talk with respect to the inclusion of capital market studies in the curriculum of both Junior and Senior Secondary Schools in Nigeria.

Despite these giant strides, the journey to making the Nigerian capital market “one of the largest, most liquid, most diversified and most sophisticated emerging markets by 2025” as envisaged in the 10-year Capital Market Master Plan seems far. The market is still relatively shallow and concentrated and yet to be suitably enabled to support Nigeria’s economic priorities.

The flagship securities exchange, the Nigerian Stock Exchange, established since 1960, is small compared to the major international exchanges, with a total market capitalization of circa US$66 billion (about N25.5 trillion) according to the NSE Q1 Fact sheet 2020 boasting of just 158 listed companies (8 on the Premium Board, 141 on the main Board and 9 on the ASeM), compared to the Johannesburg Stock Exchange for example with equities capitalization alone a little shy of US$1 trillion representing over 280 per cent of South Africa’s GDP and over 380 listed companies not to mention the New York Stock Exchange with market capitalization of about US$21 trillion having more than 2000 listed companies.

At less than 20 per cent of the country’s GDP, the current size of the capital market constrains its role in national economic development. Market liquidity as measured by trading volume and turnover is comparatively low and the issuer base is not well-diversified. In other words, industry composition in the stock market is concentrated in a few sectors namely consumer goods (especially Nestle and Nigerian Breweries) and industrial goods (driven by Dangote Cement) and of recent Telecom (MTN). The major equity index (NSEASI) has significant weights in banking stocks which are sensitive to business cycles. In contrast, agriculture and technology sectors critical for economic diversification take up a much smaller proportion.
Most of the systemically important corporations such as the International Oil Companies are not listed on the stock exchange and so it is not difficult to see why the market fails as a barometer for measuring economic performance. Moreover, the performance of the equities market remains tied to the apron-string of foreign investors who often dictate the pace of market activity. This has left the market vulnerable to external shocks. In fact, the dismal performance of the stock market in 2016 in the wake of the economic recession had a lot to do with the exit of foreign portfolio investors.
Local institutional investors such as pension funds and mutual funds are less active in the equities market with asset allocation concentrated in government bonds and until recently Treasury Bills generally considered safe and liquid. The private bond market is very small compared to that for the government. According to the NSE Q1 2020 fact sheet, outstanding 87 FGN bonds as of 31st March 2020 stood at circa US$32.7 billion (about N12.7 trillion), 20 State and municipal bonds at about US$959 million (or N369 billion) while 27 corporate bonds amounted to only about $982 million (or N379 billion). Thus the private fixed income market is not a significant long-term financing source for companies due in part to the crowding out effect from government borrowings.
At present, provision of capital market services is still concentrated in the major cities leaving investors residing in smaller towns and villages at a disadvantage especially with respect to awareness about capital market products and services needed for improving their economic well-being. For example, the network of stock broking firms and other capital market operators is spread only in Lagos and a few other major cities and has yet to reach many state capitals in a country where online access for many retail investors remains a big challenge.

Other challenges the Nigerian capital market is still grappling with include the issue of non-competitive pricing relative to peers. In terms of transactions costs, it is relatively cheaper in jurisdictions like India and Malaysia and ditto for the cost of primary and secondary issues processes. Regulatory charges are comparatively high and the situation is not helped by the high interest rate environment in Nigeria with Monetary Policy Rate as high as 12.5% whereas it is single digit in these other countries including South Africa having a single-digit benchmark interest rate and inflation rate. In the same vein, the Transaction cycle especially for equities (T + 3) as well as the time-to-market or the processing time it takes to bring new issues to the market is still lengthy owing in part to regulatory procedures. All these impede the competitiveness of the market.
Hence, the democracy day celebration marking 21 years of unbroken civilian rule in Nigeria provides an opportunity to take stock of developments in the market and examine in particular the role of the government in facilitating the growth and development of the capital market as an engine for economic growth. With respect to bringing down transaction costs for example, the government can help in this direction by once again removing VAT and Stamp Duties on capital market transactions which were reinstated some months ago.
Indeed, fiscal incentives represent a potential tool for lifting the capital market. The government can encourage listing by granting tax incentives to companies in priority sectors willing to list on the stock exchange as well as rewarding already listed firms through government patronage and preferential business access. It bears noting that listing promotes transparency and access to information, makes for corporate governance and mandates full disclosure which helps in objective compilation of data. Little wonder the bulk of the revenue from Companies Income Tax come from listed companies according to data from the Federal Inland Revenue Service. So it is equally in the interest of the government if many companies are quoted on the stock exchange.
Admittedly, the 2019 Finance Act has a number of incentives for companies which can benefit the market either directly or indirectly such as lower tax rate of 25% for small businesses which has the potential of unlocking funds for investments, creating more jobs and ultimately increased liquidity in the capital market. Be that as it may, this incentive can equally be extended to listed companies currently subjected to a tax rate of 30 percent.
Going forward, the Tax regime in the Finance Act should be such that would give some preferential treatment to quoted companies with a view to making listing on the Stock Exchange more attractive. It bears repeating that getting more listings especially from companies in the Telecoms, agriculture, power, oil and gas sectors will make for transparency through observance of financial disclosure requirements which the Stock Exchange requires with the potential of affecting government revenue positively.
Again, a number of studies have shown that in emerging markets in particular, privatization or listing of state-owned enterprises has proven to be one of the strongest levers for influencing issuer demand. Unfortunately in Nigeria, the Exchange has yet to welcome many of the privatized enterprises including those in the power sector.
As noted by Tony Elumelu, the Chairman of Heirs Holdings, ‘listing of privatized and systemically important entities helps to create a middle class which, like SMEs, is the engine of growth of modern economies’. In a lecture delivered to the joint session of the National Assembly sometime in June 2016, Mr Elumelu had urged the government to make it possible for the Nigerian public to invest in the oil and gas sector‎ through the creation of a Special Purpose Vehicle which can be floated on the Nigerian Stock Exchange. His recommendation is valid today as it was some four years ago.
As earlier noted, the Nigerian capital market suffers from the absence of a strong retail investor base. To expand the pool of such investors, it is important to recognise that capital market literacy is a major component of financial inclusion. No doubt, the Securities and Exchange Commission and Nigerian Stock Exchange have done a lot in this regard. While some progress has been made, a lot still needs to be done as recent research indicates low level of capital market awareness in Nigeria.
To buttress this point, the case of the Alternative Securities Market (ASeM), a specialised platform of the NSE with flexible listing rules and requirements for SMEs readily comes to mind. Many emerging businesses with high growth potential are not taking advantage of this window to access long-term capital due, in part, to lack of awareness of such a platform. Furthermore, with enhanced investor education, strongly supported by the Federal Ministry of Education, the level of participation in the Federal Government of Nigeria Savings Bond that accommodates low income earners will certainly be higher.
Undoubtedly, widening the retail investor base would help to de-risk the market and detach it from the apron-string of foreign investors. In this regard, a lot can be learnt from the experience of Singapore which launched numerous initiatives to reinforce financial literacy both at the undergraduate and graduate levels. This will require a great deal of education efforts including developing financial markets courses in secondary and tertiary educational institutions.
It goes without saying that large-scale infrastructure development is a potent stimulus in driving economic growth and by extension the growth of the capital market. Capital expenditure on critical infrastructure such as power, roads, housing, ports and IT is bound to filter through to industrial stocks, technological and agric stocks among others.
There is a consensus among capital market players that integrating the Nigerian capital market master plan into the country’s Economic blueprint will better position the market for sustainable growth. Now that the government has inaugurated technical committees to start work on the successor to the Economic Recovery and Growth Plan, another opportunity is presented to mainstream the outstanding initiatives in the capital market master plan into the federal government’s new medium term economic roadmap 2021 -2025 in order to enhance the contribution of the capital market to the nation’s economy. These include establishing a National Savings Strategy, having specialised funds to support critical economic sectors as well as incentivising venture capital and private equity firms.
At present, the capital market, alongside the entire economy, is reeling under the influence of the coronavirus pandemic. In the event of an economic recession leaving a prolonged bear market in its wake, the Central Bank of Nigeria should stand ready to act as market maker of last resort just like the US Federal Reserve, Bank of Japan and the Peoples Bank of China had done in the past helping to rescue stock markets during periods of economic crisis.
That said, capital market development in Nigeria should be a key policy issue going forward to foster savings and investments for inclusive growth. Indeed, the Nigerian capital market presents untapped opportunities for sustainable economic growth which a special day, like the democracy day, should bring to the fore.

Uche Uwaleke is a Professor of Capital Market at the Nasarawa State University Keffi and the President of the Association of Capital Market Academics of Nigeria.

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