Stock market development: Nigeria seeks to re-invent the wheel (1)

In the aftermath of the recent GDP rebasing that places Nigeria as Africa’s largest economy, the verbiage from Abuja has been characteristically construed in the superlatives. It is a common feature in the mass media these days for conversations to quickly veer into the realm of Nigeria’s economic, financial and geostrategic pre-eminence on the African continent. The accolades are indeed plenty. In addition to being Africa’s largest economy and most populous nation, Nigeria also boasts Africa’s largest consumer market and recipient of the largest chunk of Foreign Direct Investment. The country is increasingly gaining traction with foreign portfolio investors and is estimated to have attracted some $59 billion in FDI since 2012. A dearth of infrastructure, a burgeoning middle class, an increasingly stable macroeconomic environment and the recent wave of legislative and regulatory headwinds are some of the factors luring investments and inbound capital.

However, an increasingly important strategic concern for Nigeria is that the size of its capital market and its level of financial innovation lag behind South Africa, Egypt and, in some respect, Kenya. In a recent media briefing, the director-general of the Securities and Exchange Commission (SEC), Arunma Oteh, decried the fact that the stock market lacks depth and breadth and does not fully reflect the tissue of the economy with the resultant low levels of trading volumes and equity investment product offerings.

In terms of the ratio of market capitalization to GDP, the Nairobi Stock Exchange market capitalization represents 36 percent of Kenya’s GDP, Johannesburg Stock Exchange 230 percent of South Africa’s GDP, while the Nigerian Stock Exchange represents only 16 percent of the country’s GDP. With about 200 listed stocks, the NSE ranks third to JSE and Egypt. A similar trend is noted with their respective average daily trading volumes, never mind the different investment product offerings. While exchange-traded funds (ETFs) and exchange-traded notes (ETNs) are still new to the Nigerian market, JSE is a global leader in warrants and single stock futures (SSFs), while contracts for difference (CFDs) are also widely traded. Even Saudi Arabia, our closest northern neighbour in the coveted G20 club that we seek to join, despite all its restrictions on civil liberties and private enterprise predicated on religious beliefs, still has a bourse that contributes a substantial 58 percent to its economy.

Initiatives aimed at re-launching the capital market and deepening trading volumes have gone into overdrive; membership of the World Federation of Exchanges (WFE) has been secured; a tour of Asia to woo investors is underway; online trading platforms have been developed; and a corporate governance rating framework has been adopted. On the external front, integration with the Bourse Regionale de Valeurs Mobilier (BRVM) in Abidjan is nearing completion, and a 10-year strategic plan spanning the period 2015-2025 has been designed by the Capital Markets Commission (CMC). The political will is also manifest. President Goodluck Jonathan and the Transformation Ambassadors of Nigeria (TAN) have placed the economy as a central theme of his 2015 re-election bid. Capital market deepening is an integral part of Vision 20:2020.

This awakening is due partly to the realization that all major economic powers are also major financial centres and that capital markets are central in capital formation. A buoyant and vibrant capital market is an indispensable platform from where the financial inclusion agenda can be launched. Empirical evidences also demonstrate that efficiency in the capital market enhances corporate growth and job creation. According to a study undertaken for the New York Stock Exchange, 92 percent of job growth in a company occurs post IPO (Initial Public Offering). Access to the capital market provides the most significant opportunity for permanent access to capital and the deepest pool of liquidity in the world.

A brief history

When the Nigerian Stock Exchange (NSE) was formed in the 1960s, Nigeria had already degenerated into “hardened enclaves” in terms of its sociological make-up and business practices. The Easterners were leveraging their family ties, a savings-savvy culture, superior money management skills and shrewd deal-making to monopolize petty trading businesses. The more educated Westerners were relatively risk-averse and did not possess superior business acumen as one of their strengths. The North’s communal lifestyle and religious ideology preclude aggressive profiteering on the back of the collective. Lack of adequate formal education also hindered them from venturing into “uncharted waters”. Nowhere did there exist the industrialist mindset of conceiving gigantic projects, mutualizing resources on a large scale and undertaking these projects. The mutual suspicions and mistrust that ensued among the different ethnic nationalities hindered cooperation along business lines necessary for capital formation. Technical skills and expertise were also in short supply in a young nation still to consolidate the institutions of power. Consequently, the “jewel on the crown”, our rich petroleum deposits, were auctioned off to foreign multinationals.

Nor does Nigeria possess the business pedigree of South Africa. When British “journeyman” trader Benjamin Whoolan arrived the shores of the Western Cape in 1886, there was diamond in Kimberley and gold in Johannesburg and an army of businessmen of all shades – British, Jews, Boers, Anglican, Afrikaans – all willing to claim a stake in the rich mineral deposits that South Africa sits atop. The JSE was born out of this “gold rush” and the need for a central marketplace where companies seeking to raise new capital and investors looking for superior returns on their investible funds could meet. This created the momentum that sustained the bourse during its embryonic years and underpins its role as an “avant garde” in channelling public funds to profitable businesses. Till this day, looking at the trading data on the JSE board, it is easy to discern the pre-eminence of mining in the South African economy.

Compulsory or voluntary listing

The Private Companies Conversion and Listing Bill 2013, currently under debate in the National Assembly, seeks to, inter alia, oblige private companies with shareholders fund in excess of N40 billion or annual turnover of N80 billion to compulsorily convert to a public limited company and list their shares on the NSE within 12 months of passage or face penalties amounting to a fine of 10 percent of their annual turnover or a two-year imprisonment term. It also carries embedded “sweeteners” by way of fiscal incentives over five years: Private companies that list up to 40 percent of their shareholdings will be entitled to one-third reduction in their tax liability; 30 percent listed shares get 25 percent reduction in income tax payable, and 20 percent benefits from one-eighth of tax liability. Furthermore, all costs borne out of compliance with this legislation shall be considered allowable deductions for tax purposes.

ABANG KENNEDY MBAH