FMDQ Learning: The future of Nigeria’s Debt Capital Market

After a decade of high growth, Nigeria’s economy has reached a plateau in its maturity with output per capita at $3,000. In the same vein, the Country’s debt capital markets’ (DCM) development has lagged behind overall economic development. Peer group comparisons to similar emerging market economies show that the DCM are underpenetrated in Nigeria. Federal Government of Nigeria (FGN) bonds and bank debts have dominated the country’s credit markets since the 1990’s, leaving little room in the marketplace for corporate bonds.

In terms of issuance, Nigeria’s DCM is significantly smaller than peers and benchmarking Nigeria to the average peer shows that the market has potential to double or triple in size. The current situation presents an untapped opportunity for many stakeholders, as well as an opportunity for the country to re-position and finance the next chapter of its economic growth. There are many reasons why a deepening of Nigeria’s DCM is now required. The government’s increased financing needs, in most cases funded by the banks and pension funds, crowded out other issuers/borrowers for a number of decades. However, the post-global financial crises response to contagion and systemic risk has led to the emergence of various regulatory reforms and the emergence of the Basel 3 Accord. Loan-to-deposit ratios in Nigeria have grown an average of 6% in the last few years, while capital adequacy has remained flat at an average of 21%. At this point, banks are increasingly more selective on how they use their balance sheets, and will likely not be able to finance Nigeria’s growing economy at the same rate alone, highlighting the need for the DCM to close the growing gaps.

Many would argue that there are several reasons for a developing the economy to foster the DCM development, due to the attendant economic and commercial benefits. Alongside the banking system, such an ecosystem enables economic growth through meeting the needs of a diverse group of investors, promoting risk management options for companies and institutions and creating an environment of better governance, thereby improving corporate responsibility in different industries. Moreover, it facilitates price discovery across a range of assets.

What has Changed?
Several different drivers facilitate DCM development alongside economic development. In Nigeria, some of these include:
Banks’ balance sheets, while still sizeable, are no longer flush with liquidity and capital. Given new balance sheet constraints, declining return on equity coupled with the imminent implementation of Basel 3 Net Stable Funding Requirement (NSFR), banks will be more selective on where they place their capital.

Demand for long-term financing is growing, with several major development infrastructure investments in the pipeline (Power, Transportation, Oil & Gas, etc.) DCM legislation was recently aligned with international best practices around governance and transparency giving birth to the OTC Exchanges in Nigeria, with FMDQ OTC Securities Exchange (FMDQ) positioned as the DCM platform and NASD PLC (NASD) for trading of unlisted securities.

A Challenging, But Potentially Fruitful Transition
There are still a number of important challenges across the value chain for Nigeria’s DCM, however the opportunities to take the market to the next level are numerous and must not be ignored. FMDQ, as the foremost DCM securities exchange in Nigeria, has identified and is working towards providing actionable solutions to some of the challenges as shown below:
Commencement of Capital Market Track Record by Public Companies through Commercial Papers (CPs) and Short-Term Bonds (STBs)
Companies must build investor confidence in their papers through stellar issuance performance track records.

Continues next week