As is the case in most of Africa’s capital markets, trading activity in Nigeria tends to be dominated by institutions. Retail traders and investors once played a more active role in the country’s capital markets, but the market drop following the 2008 margin lending crisis affected participation from that grouping.
“In 2008 retail investors got burned in the market and it has taken them a long time, perhaps longer than expected, to return. They are highly unlikely to come back in a big way anytime soon,” Uwadiae Osadiaye, equity research analyst at FBNQ uest, told OBG. However, reversing this trend and increasing retail participation are key aims of the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE) and the FMDQ OTC Securities Exchange.
Bonds offer perhaps the most viable entry point for first-time and smaller retail investors. With the interest on Treasury bills (T-bills) topping 15% and offering extremely low risk, and the NSE All Share Index falling each year since 2014, there are limited incentives for the average Nigerian to invest in the equity market. The government has set aside a minimum of N50m ($177,000) for investment in T-bills, which the retail community can access indirectly through mutual funds. “Mutual funds are becoming more popular. Some allow you to invest with just N5000 ($17.67), that is accessible even to students. Most people have at least that initial level of savings,” Kingston Nwosu, equity research analyst at FBNQ uest, told OBG. “Returns are usually paid quarterly, and the principal is guaranteed for most. There is also the option of early redemption prior to maturity, which means funds can serve as a viable savings or investment option.”
The government has recognised this potential, and is seeking to attract more smaller retail investors with its issuances. Federal government savings bonds were introduced to the NSE in March 2017 following a year-long development plan in conjunction with the Debt Management Office, the Central Bank of Nigeria and the SEC. This was supported by a second offering in April. The first offering totalled N2.1bn ($7.4m), and featured a 13% coupon with quarterly payments and a bullet payment at the end of the two- or three-year maturity period. The minimum subscription of N5000 ($17.67) placed the bond within the means of the average Nigerian, and the maximum of N50m ($177,000) guaranteed that the entire issue could not be snapped up by a handful of investors.
To highlight the potential benefits of these kinds of investments to retail and non-professional investors, in November 2016 FMDQ launched the FMDQ Academy, a set of online courses aimed at helping improve familiarity with fixed-income, derivative and foreign exchange products. Kaodi Ugoji, vice-president of strategy and corporate services at FMDQ, told OBG that the academy was developed “to address the observed knowledge and skills gaps in the Nigerian financial markets, ensuring that capacities are aligned with the rapid market transformation and product innovation in global financial markets”. FMDQ intends to expand its offerings to eventually include more detailed and advanced courses.
FMDQ has launched a new class of traders, entitled Dealing Member (Specialists), also known as DMS. Similar to stockbrokers, DMS traders will buy and sell bonds, commercial paper and T-bills on behalf of retail clients. The DMS class would be able to buy securities in bulk, either directly or from banks, and then divide the issue among their clients. To support this effort, FMDQ has also introduced Q-Deal, a proprietary trading platform exclusively for DMS traders.
The introduction of DMS is the first major plank of FMDQ’s retail strategy, which is expected to be fully rolled out in the coming years. “We want to make FMDQ’s markets available to varied stakeholders,” Ugoji told OBG. “The DMS category will generate additional liquidity in the Nigerian fixed-income market, serving as avenues for retail participation in the market.”