By Uche Joe Uwaleke
The capital market in Nigeria has come a long way, contributing to the country’s economic growth over the years including through helping to fund government’s fiscal deficits, facilitating expansion of companies listed on the Exchanges as well as creating opportunities for long term savings and wealth creation.
But these contributions have not been in the required scale due in part to its relatively small size. 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.
Compared to other emerging markets such as South Africa with 274 companies listed on the Johannesburg Stock Exchange and equities capitalization a little shy of US$1 trillion, the issuer base of the Nigerian capital market is small and over-concentrated with the attendant ‘keyman’ risks.
For example, while Dangote Cement, the most capitalized stock on the NGX as at 27th December 2024 with market cap of circa N8.2 trillion makes up about 14% of total equities cap, only ten of the currently listed 153 companies on the main bourse account for over 56% of total market cap of about N62 trillion.
The other bellwether stocks are Airtel (N8.1 trillion), MTNN (N4.1 trillion), Seplat (N3.4 trillion), BUA Cement (N3.2 trillion), Geregu (N2.9 trillion), GTCO (N1.7 trillion), Zenith (N1.5 trillion), UBA (N1.3 trillion) and FBNH (N1.1 trillion). Moreover, many eligible companies in Nigeria are not listed in any of the trading platforms which leaves the market vulnerable to domestic and external shocks.
Given that investment is a function of savings, poor savings mobilization, made difficult by low disposable income, has been a major constraint to capital market growth. This partly explains why the retail investor base, relative to Nigeria’s population, is considered shallow with fewer than 5 million participants. As a matter of fact, the small size of the NGX Growth Board and the mutual fund industry is not unconnected with the high exclusion rate as well as the large informal sector of the Nigerian economy.
Indeed, there are compelling arguments why government intervention could spur capital market development. Studies have indicated that enabling government policies significantly influence issuer demand for capital markets funding.
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, including fully exempting domestic investors from income tax on the interest from fixed income instruments, 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.
It is against this backdrop that the proposed tax reforms by the federal government, containing a raft of fiscal incentives, represent a welcome development that will boost the capital market. For example, Section 56 of the Nigerian Tax Bill 2024 has proposed a gradual reduction in the income tax on total profits of a company from the current 30% to 27.5% in 2025 and to 25% from 2026.
This reduction will go a long way in improving shareholders’ wealth and valuation of companies listed on the Exchanges. In addition, what is considered as the threshold for small companies exempted from income tax has been increased from N20 million per annum, as per the Finance Act of 2019, to a maximum gross turnover of N50 million per annum with total fixed assets not exceeding N250 million.
It bears repeating that the reduced income tax rates and other generous incentives to small businesses through increased exemption thresholds will most likely spur business activities, and create more job opportunities essential for the growth of the capital market.
The NTB 2024 has also proposed new income tax rates for individuals graduated such that any person earning below N800,000 per annum will no longer pay income tax.
Under the current graduated tax table for individuals after deduction of allowances, the first N300,000 is taxed at 7% while income above N3.2 million is taxed at 24%. The NTB proposes 0% tax on the first N800,000 while income above N50 million will be subjected to a tax of 25%.
This new pro-poor progressive tax system guarantees a savings of about N80,000 per annum for individuals earning N800,000 or less and has the potential of increasing the retail investor base of the capital market as well as act as fillip to the mutual fund industry which accommodates low-income earners.
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One of the objectives of the Bill is to simplify tax administration and reduce number of taxes from over sixty to a single digit. This will go a long way in not only improving the ease of doing business in Nigeria, but will also rub-off positively on the bottom line of listed companies. It is pertinent to note that chapter 8 of the NTB 2024 contains a number of tax incentives capable of uplifting the capital market in Nigeria. Section 164 grants income tax exemption in respect of ‘dividend distributed by authorized collective investment scheme; dividend or rental income received by a real estate investment company on behalf of its shareholders where not less than 75% of the dividend or rental income is distributed within 12 months after the end of the financial year in which the dividend or rental income was earned; and compensating payments, which qualify as dividends received by a lender from its approved agent or a borrower in a Regulated Securities Lending Transaction’.
Also to be exempted are ‘pension funds and assets created pursuant to the Pension Reform Act’; gains accruing from the disposal of assets by an angel investor, venture capitalist, private equity fund, accelerators or incubators with respect to a labelled startup provided the assets have been held in Nigeria for a minimum of 24 months; as well as income earned from bonds issued by a State or the Federal Government of Nigeria’.
Without a doubt, these incentives to collective investment schemes, securities lending and alternate investments will stimulate activities in those segments of the market. Section 167 provides for tax incentives for priority sectors of the economy covering agriculture, textile production, manufacturing, and energy which are capable of encouraging more listings on the Nigerian Exchange.
On the flip side, the proposal to increase the VAT from the current 7.5% to 10% in 2025, 12.5% in 2026 and 15% by 2030 will likely increase transactions costs in the capital market. The good news, however, is that basic food items, all medical and pharmaceutical products, educational books and materials, fertilizers and agricultural seedlings, some of which were previously exempt (input VAT is not recoverable), are now considered as zero-rated for VAT which means that any input VAT paid on them can be recovered. Besides, the President has given assurance during his first media chat recently that the proposed VAT rates are subject to negotiations and further debate.
All said, the capital market in Nigeria needs fiscal incentives to gain traction. The implementation of the proposed tax reforms, as contained in the Tax Bills currently before the National Assembly, will help provide the needed elixir for the Nigerian capital market.
*Uche Joe Uwaleke is a renowned Professor of Capital Market and the President of Capital Market Academics of Nigeria
