Energising the Nigerian capital market and its operators (2)

The Nigeria Capital market will not thrive unless there is sufficient Capital to drive its business. The CBN must act and extend its role of the Bank of last resort to the Investment Banking (Universal Brokers) category of the Capital market, if it was to get the necessary support to make it fulfill its role of helping to develop the market system that will efficiently allocate capital and trade risk.

The small size of the market inhibits its growth. If does not have the liquidity it needs, all of its other functions are also inhibited. The best way to make the market get funding will be to license larger intermediaries in the market ( the Investment Banks /Universal Brokers) to have access to the CBN discount widow and the Repo market.  These Investment Banking Institutions must be given access to the Discount Widow to discount their securities and Repo when they need capital to trade. The infusion of this size of Capital will enable the market work more efficiently and will provide the much needed liquidity to trade securities in the market. The framework has now been put in place by FMDQ Securities Exchange. They have demonstrated in the past, its competence in creating good systems that has allowed traders to trade market instruments. The Ten year Master Plan also recommended that a Universal Broker category be created and funded by the CBN widow.

This was the category of market intermediaries that was created in Malaysia that has enabled that market to rapidly grow and now ranks as one of the major markets in the world. The Association of Issuing Houses (AIHN) has championed this and has held meetings with Central Bank of Nigeria (CBN) and has also made proposals to it for consideration. AIHN has also requested that the CBN open Treasury Bills market to these Investment Banking / Universal Broker Category of the market to compete with other Banks.  Investment Banks /Universal Brokers will trade as the whole sale traders in both the equities market and the Money markets, taking large positions as whole sellers and making markets, thereby providing the much needed two way quotes to keep the market active and liquid. When it has excess securities it needs to fund its trade, it will go to the Discount market of the CBN to do a Repo and bring the cash into the market, while the CBN hold the securities.

The CBN has nothing to lose in holding the Securities. It can also sell to other brokers if there is default. The time to act is now. The market has considerable value and the average PE ratio of 9. It is an ideal market position for the CBN to quickly open this widow and allow the market to get the funding it needs to function. A booming Stock Market funded by the Discount Widow, will lift the entire financial market and the under lying Securities. The Assets Repo will always be there to support the loans from the Discount widow secured against it.  A booming Stock Market creates wealth all around. Retail investors can be encouraged to trade through Funds/ Collective Investment Schemes where they will have Fund managers who can better protect Retail investors as they spread the Risk over a larger number of investors and there by the entire economy benefits. A wealthy stock market encourages confidence and consumption is greatly improved. Foreign Capital inflow will resume once they see local investors making money in the market. The recently relaxed Foreign Exchange environment should encourage the return of outside investors.

Funding and improved trading conditions will also eliminate sharp practices in the market.  Nobody remembers now the crisis that was in the Nigerian Banking Industry in 2004, when major Banks  frequently had their certified Drafts instruments drawn on them or issued by them were frequently returned unpaid from clearing, because they did not have the money to cover their positions. The major complains about Banks then, was the sharp practices by operators. That has now changed to accusations of greedy Bankers. The lack of capacity for the market particularly the lack of liquidity to underwrite the market and trade it is the principal reason why the Capital Market cannot play its role.

It is therefore a welcome step for the National Assembly joint Committees on the Capital Market to be doing a two day conference to explore ways to make the market play its role. Our Capital market and its size to GDP is one of the lowest when compared to other markets. The major issue is liquidity, and only the CBN has the size and the system to deliver it. Securities trading is a sophisticated activity and requires the right leverage to make the market work. Through the arrangement now in place with FMDQ, there will be a smooth process for Universal Brokers/ Investment Banks to crisis cross the money and the Capital markets for either underwriting or trading liquidity. All other issues will be addressed when there is liquidity for the market. The Listing market will always be moribund unless there is sufficient capital to underwrite the securities issued and sufficient liquidity to also support its trading in the secondary market. Any recommendation coming out of the conference without making liquidity provision the high point will be a waste of time and resources.

We congratulate the leadership of the National Assembly for understanding that the Capital Market is in the heart of development. We must do everything to make it work for all us. Spending money to bail out market operators after crashes is not the way to go. Put a proper funding in place for the market and it will always correct itself when it goes to extremes.

VICTOR OGIEMWONYI