Nigeria at 60: Whither the Capital Market? By Uche Uwaleke




Prof Uche Uwaleke

Not unmindful of the floatation of a development stock by the Colonial government in 1946, the doors of a formal market for raising long term funds in Nigeria actually opened in 1960, same year as the country’s independence, on the heels of the incorporation of the Lagos Stock Exchange and commencement of operations the following year pursuant to the recommendations of the Barback Committee.

So, about sixty years after a formal capital market took off in Nigeria, the pertinent question to ask is: where is it headed? Arguably, compared to other sectors of the Nigerian economy, the capital market has evolved from a very tepid beginning to a force that is reckoned with in the country’s financial system. As a matter of fact, one can point to notable developments in the capital market since the Lagos Stock Exchange, renamed in 1977 as the Nigerian Stock Exchange, commenced operations.

With just 19 Securities (comprising 3 Equities, 6 Federal Government Bonds and 10 Industrial loans) listed for trading in 1961, the flagship Exchange in Nigeria now boasts of over 300 Securities. In 1984, the NSE All Share Index was launched while the Central Securities Clearing System started in 1997. 
Other landmarks worth remembering include the introduction of the T+3 settlement cycle in 2000, the Trade alert in 2005 and the first Exchange Traded Fund in 2011.

Today, it can be said that the capital market in Nigeria has expanded the menu of product offerings beyond equities and bonds. Further, market infrastructure has been modernized and strengthened. The NSE, for instance, introduced a modern trading engine known as X-Gen in 2013 and has since implemented remote trading.

Platforms for Over-the-Counter trading namely the NASD and FMDQ together with three Commodity Exchanges namely the NCX, AFEX and the LCFE have contributed in advancing the frontiers of the capital market ecosystem. Admittedly, market regulation was strengthened following the establishment of the Securities and Exchange Commission in 1980 and the enactment of the Investment and Securities Act as amended in 2007.

Improved regulation and confidence building measures introduced by the SEC and the NSE over the years, including a zero-tolerance for infractions and the setting up of the Investment and Securities Tribunal by the government pursuant to the Investment and Securities Act, have helped in no small measure to lift the market. 


When the 10-year (2015-2025) Capital Market Master Plan (CMMP) was launched in November 2014, it was meant to harness the potentials of the market in catalysing economic growth and development. Consistent with the CMMP, the SEC undertook a raft of initiatives to enhance transparency and boost investor confidence notable among which were the Direct Cash Settlement scheme designed to ensure that investors received money directly whenever securities were sold, the Corporate Governance scorecard for companies listed on the Nigerian Stock Exchange meant to foster good governance practices by public companies as well as the recapitalisation of capital market operators aimed at improving their baseline infrastructure and service delivery.

As a complement, the NSE implemented minimum operating standards for market operators, set up an Investors Protection Fund as well as introduced a Whistle Blower policy. In addition, physical share certificates have been fully converted into electronic form in what is known as dematerialisation of share certificates. Also, activities in the non-interest capital market space gained traction with the introduction of Sukuk bond. Indeed, over the last six decades, it would be difficult to argue that the capital market in Nigeria has not made remarkable strides.


Despite these accomplishments, the journey to making the Nigerian capital market “one of the largest, most liquid, most diversified and most sophisticated emerging markets by 2025” as envisioned by the CMMP seems very far. The market is still shallow and yet to be properly positioned to support Nigeria’s economic priorities. At less than 20 per cent of the country’s GDP, the size of the capital market constrains its role in economic development. Compared to South Africa with over $1trillion in market capitalization representing over 200 per cent of the country’s GDP, the total market capitalization in Nigeria actually pales into insignificance. A few years ago, the NSE had set a target of $1trillion market capitalization by 2016 but it never materialized. Closely tied to this is the non-diversified nature of the issuer base with listing concentrated in a few sectors as well as the small number of listed companies (less than 200) in a country touted as the biggest economy in Africa. As a corollary, market liquidity, measured by turnover, remains a challenge despite the appointment of market makers in 2012 expected to provide liquidity to securities through the provision of bid and offer prices. One implication of this is that compared to South Africa for instance, Nigeria would not be the preferred choice for bigger listings given that a strong price discovery system is often associated with a significant turnover which presupposes a larger pool of buyers and sellers.


Moreover, a number of other challenges have lingered. The Nigerian capital market is still plagued by high transaction costs when compared to other Jurisdictions. Regrettably, the introduction of e-dividend has not helped to reduce the huge unclaimed dividends as expected while the Alternative Securities Market (ASeM) platform introduced by the NSE in 2011 is inactive not least because public awareness about the platform remains low. Also, relative to peers, the market lags behind with respect to variety of asset classes. Financial derivatives such as stock options and futures have yet to be traded while Asset Backed Securities yearn for attention. It is instructive to note that the first Real Estate Investment Trust (REIT) was registered in Nigeria in 2007. Since then, the country can only boast of 3 REITs namely Skye Shelter fund, Union Homes, and UACN Property Development Corporation (UPDC). Contrast this with the case of South Africa having over 30 REITs notwithstanding the fact that the REIT legislation was passed in that country only in 2013. 


Further, seen in the light of the Nigeria’s huge population, the level of individual or retail investors’ participation leaves much to be desired. Also, the private bond market is very small compared to that of the government and consequently the private fixed income market is not a significant long-term financing source for companies. Until 2020 –partly due to the pandemic-, foreign investors were significant players in the equities market often dictating the pace of market activity which leaves the market vulnerable to external shocks. So, in many ways, it is easy to see why the country’s capital market continues to trail behind that of peer countries. 
Today, the consensus view is that both the government and the regulators need to put in place measures to enhance the competitiveness of the Nigerian capital market in order to unlock its potentials. Some major initiatives in the CMMP designed to enhance its contribution to the nation’s economy include establishing a National Savings Strategy, reducing the tax burden for listed companies, promoting capital market participation in the listing of government-owned firms as well as granting incentives for companies in priority sectors to get listed. Others include establishing specialised funds to support critical economic sectors as well as incentivising venture capital and private equity. All of these will entail proactive and sustained engagement with the Executive and the Legislature which is why ownership of the CMMP at the highest level promises to yield dividends as the experience of countries with success stories in capital market plan execution have shown.


A few examples will suffice here: in Kenya, a high-level committee championing the implementation of the Capital Market Master Plan is chaired by the Cabinet Secretary National Treasury (the equivalent of a Finance Minister). Other members of the committee include the Attorney General, Cabinet Secretary Agriculture, Cabinet Secretary Mining, the Governor of the Central Bank of Kenya, the CEO of the Capital Markets Authority among other top government officials. Sri Lanka shares a similar experience where the Capital Market Advisory Council is the key driver and is chaired by the Secretary to the Sri Lankan Treasury with the Governor of Sri Lanka Central Bank as a member. In Malaysia, the Prime Minister championed the successful implementation of its first 10-year (2001-2010) capital market master plan. Not surprisingly, the outcome was phenomenal- market size nearly tripled from US$186bn in 2000 to US$517bn by 2010. The success of the plan paved the way for the launch of a second master plan currently being implemented till end of 2020.


Back home in Nigeria, the 12-member Capital Market Master Plan Implementation Council (CAMMIC) which comprises the DG SEC, Deputy Governor (Financial System Stability) of CBN, DG PENCOM, CEO of the NSE, chairmen of the capital market committees of both chambers of the National Assembly and some other distinguished Nigerians should be expanded to include the Ministers of Finance, Justice, Budget and National Planning, Industry, Trade & Investment and Education. By so doing, it is easier to obtain the buy-in of the Federal Executive Council.
That said, a key priority in forging ahead should be to include the CMMP as an integral part of the next government’s Economic Growth blueprint especially given the fact that the capital market received no mention in the current ERGP expected to lapse by the end of this year. It bears repeating that the successful implementation of the CMMP hinges on support from the government hence the need to have somebody operating at the highest level on the driving seat.

To this end, it is suggested here that the Vice President and Chairman of the National Economic Council, Prof Yemi Osinbajo, who has been ably piloting the Presidential Enabling Business Environment Council, should consider assuming the responsibility of championing advocacy for major outstanding initiatives contained in a revised capital market master plan. Doing so will send a strong message, especially to the investing community, regarding government’s disposition to capital market development in Nigeria.


At another level, the need to have proper co-ordination and enhanced information sharing among the various financial markets regulators (CBN, NDIC, SEC, PenCom, NAICOM) cannot be overstressed. The Financial Services Regulation Committee (FSRCC) is largely perceived as inactive which is why the CBN should champion the resuscitation of this body by making it more relevant to both the money and capital markets. In particular, the handshake between the CBN and the SEC needs to be strengthened. The idea of having on the Board of the Commission a representative from the CBN not below the rank of a Director is one step in the right direction. But it is not sufficient. In amending the CBN Act of 2007, consideration should be given to including the Director General of the SEC as a member of the CBN Board as is the practice in other jurisdictions.

In Egypt for example, it is not for nothing that the Chairman of the Capital Market Authority serves on the Board of the Central Bank of Egypt. The reason is obvious: listed banks, supervised by the central bank, also come under the regulation of capital market authorities. Quite frankly, there are compelling arguments why government intervention could spur capital market development. Empirical studies have shown that enabling government policies significantly influence issuer demand for capital markets funding. China is one good example of this trend. In emerging markets in particular, listing of state-owned enterprises has proven to be one of the strongest levers for influencing issuer demand. This must be the intent of some provisions in the Petroleum Industry Bill. The version of Petroleum Industry Governance Bill (PIGB), as passed by the 8th National Assembly, provides for the establishment of the Ministry of Petroleum Incorporated (MOPI) which shall hold shares on behalf of the government in the two commercial entities to be established namely the Nigerian Petroleum Assets Management Company (NPAMC) and the National Petroleum Company (NPC).

Specifically, Section 66 of the PIGB provides that ‘’the government shall within 5 years from the date of incorporation of the NPC divest in a transparent manner not less than 10% of the shares of the NPC and within 10 years from the date of incorporation divest not less than an additional 30% of the shares of NPC to the public’’. Without a doubt, implementing this provision will put Nigeria in the league of countries that have expanded the frontiers of their capital market using their national oil companies. These include Norway (Equinor), Italy (Eni), Brazil (Petrobras), Russia (Rosneft), China (Sinopec) India (Oil and Natural Gas Corporation) and Saudi Arabia (Aramco) to name just a few.

In Malaysia, plans are afoot to list the national oil company, Petronas, on the Malaysian bourse. In Norway, the national oil company Equinor (previously Statoil) was partially privatized and listed on the Oslo Stock Exchange in June 2001 with the government retaining 81.7% of the Statoil shares and gradually reducing it to 67%. No one denies the fact that the success story of Equinor owes a lot to its listing on the Stock Exchange. Similarly, the listing of Aramco, Saudi Arabia’s Oil giant, on the Saudi Stock Exchange on December 11 2019 gave the company a market value of $1.877 trillion, according to Reuters, and boosted the country’s stock market.

So clearly, giving effect to the relevant provisions of the PIGB will provide fillip to the equities market in Nigeria. By the same token, government policies can be used to lead more issuers into the country’s capital market. It is worth remembering that the period of 2005 to 2007 was a robust one for the capital market having been catalysed by the banking consolidation exercise of 2005 and 2006 which was mandated by the CBN. It goes without saying that tax policies have a strong influence on the development of capital markets. Malaysia created tax policies to deepen select asset classes, while Singapore employed incentives to attract the private sector, including tax exemptions and access to business opportunities such as mandates from the sovereign wealth fund.

The Nigerian government can toe a similar path by granting tax incentives to companies that are willing to list on the NSE as well as rewarding already listed firms through government patronage and preferential business access. Not a few agree 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 listed on the stock exchange.It bears repeating that a stable and well-functioning capital market requires a broadly diversified investor base with significant participation of retail investors.

As noted in a 2017 study on ‘’Enhancing retail participation in Emerging markets’’ published by the World Federation of Exchanges, ‘’while individual investors may be driven more by emotional rather than pure economic factors, their participation in the market may improve the legitimacy and perceived relevance of the market’’. This will require a great deal of education efforts including developing financial markets courses not only for secondary schools, as currently being championed by the SEC, but also for tertiary educational institutions. Singapore, for example, launched numerous initiatives to reinforce financial literacy in the country both at the undergraduate and graduate levels. Singapore’s universities tailored courses to address the growing needs of the financial sector including through the introduction of relevant graduate programmes by the National University of Singapore. Nigeria can do likewise.

The National Universities Commission should encourage Universities to mount graduate programmes in capital market studies. It is a fact that, like every other sector of the economy, a major challenge the capital market has faced over the years has been dearth of infrastructure and poor ease of doing business in the country generally. Therefore, improvements in these areas will certainly bode well for the nation’s capital market. All told, the Nigerian capital market presents various untapped opportunities and so its development should be a key policy issue going forward if it must be headed in the right direction.

* Uwaleke is Professor of Capital Market and the President of Capital Market Academics of Nigeria

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