The Nigerian Securities and Exchange Commission (SEC) launched the Capital Market Master Plan in November 2015, which charts a course to greater sophistication, liquidity and innovation in the country’s capital markets. The plan, which spans the period from 2015 to 2025, is divided into three key areas: capital market development, non-interest finance (which is how Islamic finance is referred to in Nigeria) and financial literacy.
Tackling everything from regulation to transaction costs and international competitiveness, the 216-page document is the result of two years of planning and consultation with sector operators. Kaodi Ugoji, vice-president of strategy and corporate services at FMDQ OTC Securities Exchange, told OBG, “SEC put in a lot of effort in developing the Nigerian Capital Markets Master Plan and key stakeholders in the markets were involved in this process to ensure that the plan was robust.”
Crucially, the Capital Market Master Plan relies on regular annual reviews and establishes a set of metrics to help ensure that the strategy’s targets are being met, and that, if needed, revisions to the framework can be made. Okon Onuntuei, acting head of strategy at the Nigerian Stock Exchange (NSE), told OBG, “This presents a very unique opportunity for Nigerian capital markets. It creates accountability, responsibility and key performance indicators, and it is the first time that anyone has detailed and created a framework that can be reviewed annually, pinpointing where the gaps are and how to create solutions for those gaps.”
However, the execution of the plan is likely to prove challenging, involving a variety of structural reforms to the markets and changes in corporate and investor behaviour. “Having put together a good plan, the next key focus should be towards timely implementation, and SEC has set up the Capital Market Master Plan Implementation Council to drive this process,” Ugoji added.
The master plan covers a host of topics that address weaknesses in the system and aim to make Nigeria a global destination for capital. The country is already the most populous in Africa at over 184m, and one in six Africans is Nigerian. Following the rebasing of GDP in 2014, it also surpassed South Africa as the continent’s largest economy, though arguably became second-largest in 2016 due to currency fluctuations.
One of the primary aspects of the plan is the incentivisation of domestic savings, which can be used to fuel a more robust capital markets system. Using Japan’s postal savings system and the national savings system in the UK as models, the programme envisions the establishment of a national savings strategy. Additionally, it considers the use of tax policy as a helpful tool to spur savings, for example, providing tax-exempt status for contributions to retirement savings accounts.
Ongoing progress in the government’s drive towards greater financial inclusion also falls within this general category. By bringing more individuals and small and medium-sized enterprises (SMEs) into the formal banking system, there will be additional capital created, which can be used to support the financial system as a whole.
Chief among the regulatory reforms identified by the document is a move from a rules-based supervision, as practised in the US, for example, to a hybrid approach, blending aspects of rules- and principles-based approaches. The SEC argues that this transition will allow for a “more dynamic and liberalised capital market”.
Other initiatives include streamlining the approval process for new financial products, updating technological infrastructure and driving down transaction costs, with the goal of bringing costs lower than its chosen benchmark markets, namely, South Africa and Malaysia. One specific goal in this regard is the removal of value-added tax and stamp duties for capital markets transactions, which the SEC estimates could alone result in a 12% reduction in cost.
In cooperation with the government, the SEC is also hoping to roll out a variety of tools, such as preferential tax treatment, free trade zones and targeted public investments, to push capital to critical areas of the economy. In line with the government’s stated priorities in the 2016 budget and elsewhere, the master plan specifically highlights infrastructure, agriculture, solid minerals and SMEs as key focal points.
Furthermore, the document also calls for the establishment of a government-sponsored investment fund for SMEs, which will provide seed funding for SMEs and more efficiently leverage existing government programmes that are focused on that segment of the economy.
To add more depth to equity markets and make those markets more representative of the Nigerian economy as a whole, the master plan encourages the listing of state-owned enterprises (SOEs) on the stock exchange. It also seeks to make it a requirement that in the event of privatisation, purchasers of state assets are required to list the assets on the NSE within five years of purchase. This was the policy followed during the recent round of privatisations of the power sector.
With a specific focus on shareholder rights, ethical compliance and investor protection, the master plan also seeks to encourage broader changes in corporate governance and investor behaviour, advocating for greater shareholder participation in company management decisions, encouraging more reliable financial disclosures, and sup porting more robust and active company boards. Similarly, with the rollout of minimum operating standards, the establishment of professional training platforms and ethics courses, and the promulgation of international certifications, the SEC aims to improve knowledge and capacity among brokers and investors. The regulator also plans to ramp up its capital markets literacy and awareness campaigns, both among firms and the general public, to encourage greater participation.
Additionally, a number of new product offerings are also outlined in the document. More specifically, securities lending and short selling – and the operational, regulatory and tax systems that are necessary to support those activities – are highlighted as part of the push to expand liquidity.
Similarly, in line with some of the country’s key natural resources – oil and gas, cocoa and grains – the SEC hopes to develop Nigeria’s commodities trading capacity, starting with enabling legislation to ensure that a portion of Nigeria’s crude oil sales are traded on local exchanges.
Finally, demonstrating its emerging importance, one of the three pillars of the master plan is devoted entirely to non-interest finance, or Islamic finance. The SEC is looking to establish Nigeria as a regional centre for non-interest finance through the development of sharia-compliant products, increasing non-interest finance to 25% of the overall capital markets system.
The push to expand Nigeria’s profile as a regional trading platform for sharia-compliant products forms part of a broader effort by the SEC to expand the country’s position as a financial centre. As part of this, under the master plan, the SEC will work to harmonise regulations and principles among other major global markets. Ideally, a trader in London, New York or Singapore should eventually be able to easily gain access to markets throughout Africa using Nigeria as an entry point.
Work In Progress
The 10-year programme dovetails with a number of initiatives already in place. One such process that is currently under way is movement towards the partial privatisation and listing of the Nigerian National Petroleum Corporation, slated for 2018. This will not only boost capitalisation and trading with Nigeria’s largest, and one of its most opaque, SOE, but also provide a roadmap for future asset sales.
The government has also taken steps towards its stated goal of growing non-interest finance to 25% of the overall capital market. Following the lead of Osun State, which issued the country’s first sharia-compliant sukuk (Islamic bond), for a total of N10bn ($31.6m) in 2013, the federal government is on track to issue a sovereign sukuk in 2017. The SEC is working with the FMDQ, a major fixed-income exchange in Nigeria, to develop rules to guide the process. This issuance is expected to build on the progress made by Osun State by increasing demand for and catalysing further development of the non-interest finance segment as a whole. The exchanges are working directly with the SEC in order to ensure the smooth approval of their eventual offerings.
Furthermore, NSE initiatives such as the West African Capital Market Integration Council and cross listing of exchange-traded funds in Johannesburg and Nairobi speak directly to the plan’s goal of internationalisation of capital markets.
In terms of efforts to encourage retail participation, Mounir Gwarzo, director-general of the SEC, told local daily The Guardian in July 2016 that the commission had already implemented certain initiatives, with a particular emphasis on e-dividend registration and direct cash settlement, as this will have immediate benefits for investors. He added that the SEC is working to rectify time limits on when investors can claim dividends after they are declared, and allow dividends to be in perpetuity.
One of the biggest impacts that the master plan is expected to have on Nigeria’s capital markets is in terms of liquidity. As with many emerging markets, liquidity and churn is low, with a large number of buy-and-hold institutional investors and only a handful of frequently traded companies.
However, several of the SEC’s initiatives should help improve the situation by bringing in more retail investors, opening the door for large pension funds to invest in a broader range of asset classes and incorporating non-interest financial products. This in turn should help increase the supply of capital in the system, thereby boosting valuations and concurrently lowering interest rates as more money chases existing issues. This process will help to create a more attractive overall environment for new listings and issues.
The push towards new product offerings will also help bring more tools and asset classes to the market, greatly increasing the options available to investors and corporations. These new products, ranging from commodity and foreign exchange futures to securities lending, coupled with ongoing investor education, should incentivise greater participation in the market from retail investors, large institutions and foreign funds.
The drive for greater internationalisation also has the potential to bring significantly more capital into the system by making it easier for investors from around the world to gain entry into Nigeria. Likewise, it makes the exchange a more attractive option for domestic corporations, which will be able to target potential offshore investors in their efforts to raise capital.
While liquidity itself is not specifically addressed, if well executed, the master plan could also have a profound effect on liquidity. By increasing the supply of capital and financial products available, the SEC hopes to create a virtuous cycle that encourages lasting growth and more competition.