While recent years have seen many more established capital markets in the red, Nigeria’s capital markets have shown positive growth. At the close of 2022 the Nigerian Exchange (NGX) had a 19.9% return on investment, earning it the fourth best-performing index in the world, according to the MSCI-All Country World Index which tracks the performance of some 3000 stocks in 48 developed and emerging market countries. This success has come despite a battery of international headwinds, starting with the Covid-19 pandemic in 2020 and the consequent global economic downturn, followed by the food and energy fallout associated with Russia’s invasion of Ukraine.
According to the Absa Africa Financial Markets Index 2022 released by Absa Bank, and the Official Monetary and Financial Institutions Forum, Nigeria had the third-most developed financial sector in Africa that year, after South Africa and Mauritius. The report’s sixth edition included 26 African countries, identifying the economies with the most supportive environment for effective markets. The rankings were based on six fundamental pillars: macroeconomic opportunity; market depth; access to foreign exchange; market transparency, tax and regulatory environment; capacity of local investors; and enforceability of financial contracts.
Developments
The NGX is moving forward with increased volumes and returns, along with new rules and regulations on digital assets and the first exchange-traded derivatives in Africa. In addition to the main and alternative boards of the NGX, Nigeria’s other capital markets include FMDQ Group, formed by the Financial Markets Dealers Association, and NASD OTC Securities Exchange, formed by the National Association of Securities Dealers. Both exchanges have been active, indicating healthy market capitalisation and trading levels. At the same time, fixed income continues to see activity on the corporate side, while the capital markets have become a focal point in the ongoing debate over how to finance longterm infrastructure projects (see analysis).
Nonetheless, challenges remain. The pandemic sparked a flight to safety by foreign investors, with overseas participation still below previous levels at the close of 2022. Issues over foreign exchange access also continue. The introduction of a capital gains tax for equities had an impact, as have new rules for pension funds. The debt market has also experienced some stress, as government borrowing continues to expand and debt servicing becomes more of an issue. Despite these challenges and the general risk-averse sentiment seen worldwide, capital markets in the country continue to make strides.
Structure & Oversight
The main regulatory body for Nigeria’s capital markets is the Securities and Exchange Commission (SEC). The SEC traces its history back to the 1962-founded Capital Issues Committee of the Central Bank of Nigeria (CBN), but took its current form and title in 1979. The exchange’s founding decree was updated in 1988, then again with the 1999 Investments and Securities Act (ISA), which came into force in 2007.
The ISA is still the governing framework of the SEC, however, there have been a number of amendments since its establishment. These include a new set of rules released in 2013 and a May 2021 update that allows state governments and the Federal Capital Territory to use the capital markets to raise funds, separately from the federal government, for infrastructure development. Another recent change came in May 2022 when the SEC approved its new Digital Asset Rules. These amendments provide regulations for the issuance of digital assets as securities, as well as the registration of offering and exchange platforms, custodians and providers for such e-assets.
These rules were still pending as of November 2022 as the issue of cryptocurrencies continued to be debated with the CBN having prohibited their use (see Banking chapter). Nevertheless, the NGX plans to launch a blockchain-enabled exchange platform in 2023, which would involve cryptocurrency usage.
The CBN also has an indirect role in the capital markets, as do a number of other institutions. These include the Corporate Affairs Commission, the National Insurance Commission, the Nigerian Communications Commission, the Federal Competition and Consumer Protection Commission, as well as government agencies such as the Federal Ministry of Finance, Budget and National Planning.
Main Players
The largest capital market in the country is the NGX. It is a wholly owned subsidiary of NGX Group, which also owns NGX Regulation (NGX REGCO) and NGX Real Estate (NGX RELCO). The activities under NGX REGCO include enforcing listing and trading rules in the capital markets, setting standards and ensuring equitable principles of trade. NGX RELCO operates as a property leasing, acquiring, hiring and part-exchanging company. NGX Group is also an investor in NG Clearing, which launched the first central counterparty (CCP) services system in West Africa in December 2021. NGX Group owns several OTC platforms and three fintech companies.
The FMDQ Securities Exchange, meanwhile, is part of the FMDQ Group portfolio. FMDQ Group is Africa’s first vertically integrated financial market infrastructure, with exchange supplemented by FMDQ Clear, FMDQ Depository, FMDQ Private Markets and the iQx Consult advisory. The FMDQ deals in fixed income, foreign exchange, derivatives and equities and had an average annual market turnover of $554bn between 2014 and 2022, according to company data. Its market capitalisation was $45.6bn in 2021, making it the second-largest capital market after the NGX, which had a market capitalisation of $74.1bn the same year.
The NASD OTC Securities Exchange is Nigeria’s third-largest capital market, with a market capitalisation of $1.2bn. This is the only OTC market in the country and facilitates trading of three types of securities. NASD Blue are securities that have a history of sound financial performance in terms of governance and reporting standards, as well as yields, while NASD Pink securities do not comply with SEC standards and NASD Red have not disclosed information to the NASD. As of November 2022 the NASD had a market capitalisation of N949.01bn ($2.3bn).
The Nigeria Commodities Exchange (NCX) primarily focuses on agricultural commodities trading and is majority owned by the CBN, which announced plans in January 2021 to restructure the NCX. Measures include a N50bn ($119.1m) lifeline extended by the CBN and the Nigeria Sovereign Investment Authority. In March 2022 the NGX signed a memorandum of understanding with the Central Securities Clearing System, Nigeria’s central securities depository, as part of the NCX’s modernisation and improvement plan. The country is also home to AFEX Nigeria – once known as the Abuja Securities and Commodities Exchange – established in 2014 and currently in the process of being revived as the first privately owned commodities exchange in the West Africa region. As of late 2022 AFEX traded six agricultural commodities; maize, soya, paddy, sorghum, cocoa and ginger.
In 2019 the SEC licensed the Lagos Commodities and Futures Exchange (LCFE), which began trading in 2021 and had its formal launch in July 2022. The LCFE trades commodity-backed debt instruments such as exchange-traded notes (ETNs), short-, medium- and long-term commodity contracts; and commercial papers, as well as agricultural goods, oil and gas, solid minerals and currencies. In addition, the LCFE began trading gold in July 2022 – the first time the metal has been offered on a Nigerian bourse.
Equities
The NGX consists of 18 indices, with the NGX All-Share, the NGX Premium, the NGX 30 and NGX 50 indices, joined by several sector-specific indices. These indices range from banking to oil and gas via consumer goods and the NSE Lotus Islamic Index.
There are also three boards: the Growth Board, the Main Board and the Premium Board. The first of these is aimed at small and medium-sized enterprises looking to leverage the capital market to raise longterm capital. Such outfits benefit from reduced NGX fees, less stringent listing criteria and post-listing obligations, and faster turnaround times. The NGX Main Board has the longest pedigree and lists the more established entities, while the NGX Premium Board is available for companies with a minimum market capitalisation of N200bn ($476.5m) on the date they apply for listing. They must also offer a 20% free float or free float worth more than N40bn ($95.3m) at the time of application. In addition, NGX Premium Board companies must follow strict reporting and other regulatory rules and score highly in the NGX’s corporate governance rating system.
Funds & Fixed Income
The NGX is home to a variety of mutual funds, including balanced funds, equity funds, US dollar funds, ethical funds, infrastructure and money market funds, sharia-compliant funds and real estate funds. There are also a number of exchange-traded funds (ETFs) and exchange-traded products (ETPs), as Nigeria is one of the largest ETF and ETP markets in the African continent. As of June 2022 there were 12 ETFs listed on the NGX, with a total market capitalisation of N7.6bn ($18m).
In April 2022 the NGX saw the first exchangetraded derivatives (ETDs) in West Africa, with NG Clearing as the CCP. This came after the SEC approved the listing of seven ETDs in December 2021, with four of these contracts listing at the April 2022 launch of ETD trading. Two were NGX 30 futures and two were NGX PENSION contracts. Some of the more popular ETFs in recent years have been gold-backed, with other commodity-backed ETPs and ETNs also active.
The NGX debt market provides access to a variety of sovereign and corporate bonds and sukuk (Islamic bonds) ranging from federal to green, and corporate to state. In October 2022 federal government bonds made up about half of those listed (45 of the 105), with the CBN issuing 12, available since the May 2021 amendment. State bonds accounted for six, issued by Lagos, Kogi and Bauchi states. The remainder were corporate, bonds with banks, real estate and construction companies the main participants.
In October 2022 the government announced that it would require approximately $2.3trn over the next 21 years to fund infrastructure development. As such, federal government bond and sukuk issues are likely to remain a pillar of the country’s fixed-income market going forwards. The government’s National Development Plan (NDP) 2021-25, meanwhile, envisages around 86% private sector participation in infrastructure build, heralding further corporate issuances from the construction sector in particular (see analysis).
Performance
In 2020 the NGX All-Share Index posted returns of 49.9% after registering a decline of 14.6% in 2019. In 2021 it posted a return of 3.8%, while in the first half of 2022 it posted 21.3%, making it the fourth-best-performing index worldwide, according to Bloomberg. The reasons behind these fluctuations are complex, with activity on the market partly the result of a major withdrawal of foreign participation. This occurred as a result of the global impact of the pandemic, the start of which saw oil prices plunge, triggering a move by the government to impose foreign exchange restrictions and support the naira, Nigeria’s currency. This move was seen to make foreign investors somewhat wary, given the difficulties it posed for transferring capital outside of the country – something occurring around the world as global investors looked for traditional safe havens.
The balance of foreign to domestic transactions was roughly split in 2019, with the total value of domestic transactions executed by domestic investors at N985bn ($2.4bn) and the total value of transactions by foreign investors at approximately N943bn ($2.3bn). That balance has shifted in the subsequent years. In 2020 domestic transactions totalled N1.4trn ($3.4bn) and foreign transactions N729bn ($1.7bn). In 2021 those transactions amounted to N1.5trn ($3.5bn) and N435bn ($1.04bn), respectively. By end-May 2022 domestic transactions accounted for approximately 87% of the year-to-date total, with foreign transactions comprising the remaining 13%.
As international players withdrew, more space was created for domestic operators to enter or expand existing stakes. Indeed, the first half of 2022 saw the All-Share Index’s market capitalisation post a 25% increase. This process was facilitated by an expansionist CBN monetary policy starting in 2020 that aimed to alleviate pandemic-related pressures.
The Finance Act 2021 was a further regulatory development, coming into force on January 1, 2022. The act amended laws on capital gains tax, introducing a flat 10% rate on capital gains from the sale of options, debts, stocks and shares, among other financial products. Furthermore, a new fee in the form of a 0.025% levy on all secondary market bond transactions began that month. This levy and the capital gains tax were aimed at raising government revenue, which had been negatively impacted by the low oil and gas prices in 2020-21.
Positive Yields
Despite these headwinds, some equities made notable gains from 2020 to 2022. As oil and gas prices recovered in 2021-22 along with overall economic fortunes, companies saw their performances improve – in the hydrocarbons sector in particular. Some of these outfits capitalised on their transnational listings to act as vectors for investors seeking overseas positions. Seplat Energy, for example, is listed on both the NGX and the London Stock Exchange, and saw considerable activity, with shares starting 2022 at N650 ($1.55) before plateauing at around N1430 ($3.41) in July and August of that year.
Elsewhere, food and fast-moving consumer goods leveraged their key role in the economy to record strong yields. One standout was BUA Foods, which listed in January 2022 at N40 ($0.10) and was trading at N55.5 ($0.13) on November 1, 2022. BUA Foods was the only listing in the first half of the year, however, with its 18bn ordinary shares adding N720bn ($47.7m) to the All-Share Index’s market capitalisation. There were also two de-listings in the period. The previous year saw three new entrants, including the Nigerian Exchange Group, which listed in October that year, while seven companies exited.
This listing and de-listing activity produced some net gains. The All-Share Index’s market capitalisation was up 25% year-on-year in the first half of 2022 and 18.6% over the first nine months of the year, rising from N22.3trn ($69.8bn) in January to N26.5trn ($63.02bn) by end-September. While the exchange awaits the return of higher levels of foreign participation, domestic players are seeing the market as a valuable place for raising capital and helping it record some solid growth. In the first nine months of 2022 the NGX All-Share Index rose from 42,716.44 points to 49,024.16 – a rise of approximately 14.8%.
Varied Offerings
One other group helping to boost the exchange’s fortunes is pension fund administrators (PFAs). There are four categories of retirement savings account funds on the exchange, all of which showed positive returns on investment in the first eight months of 2022. Additionally, PFAs increased their investments in equities by around 4.9% over the first six months of the same year.
To address the country’s housing deficit, in September 2022 the government introduced a guideline allowing pension fund account holders to access up to 25% of their balances for mortgages. This move was expected to have a limited impact on PFAs, with outflows expected to be easily manageable.
As for mutual funds, despite the CBN’s foreign exchange controls on transactions, several products performed well as effective means of capital exportation. “Some ETFs became a source of outflow for investors,” Muyiwa Oni, head of equity research for West Africa at Stanbic IBTC Bank, told OBG. “For example, an ETF would be bought and then moved to the Johannesburg Stock Exchange, where it would then be sold for rands, thus exiting the market.”
The CBN imposed restrictions on such practices, with ETFs subsequently declining in activity. Results for 2022 demonstrated this further. The overall size of the 12 ETFs listed on the exchange contracted from N6.99bn ($16.6m) at the start of the year to N6.7bn ($16m) by the end of September. Similarly, real estate funds decreased by 8.8%. Other types of funds did well, with US dollar funds gaining 23.1% from N272.2bn ($648.5m) to N335.2bn ($798.5m) in the same timeframe. Ethical funds also saw strong gains, from N2.5bn ($6.03m) to N2.9bn ($6.9m) – a rise of 13.7%. Moreover, the total number of funds increased by nine during the period to 143.
Bonds and sukuk were well represented, with the government and some states seeking funding while several corporates also made issuances. Regarding the latter, while interest rates were low, the commercial papers (CP) market became a more attractive go-to for raising funds. “Corporates were more willing to borrow from the market than from banks,” Oni told OBG. “As rates increased, this declined slightly.” Indeed, the CBN initially cut rates as part of its pandemic response package, keeping them at 11.5% until May 2022. At that point, it began a rapid series of hikes designed to combat accelerating inflation, which reached 21.5% in November of that same year.
Nonetheless, 2022 saw some major CP activity. Indeed, FMDQ Group reported that the first half of 2022 saw some N249bn ($593.2m) in CP issuances, a figure up 7% over the same period in 2021. Among the participants was telco MTN Nigeria, which held a two-tranche issuance in April and September of that year, worth a total N127bn ($302.6), with varying maturities. September also saw FMDQ Group approve a N100bn ($238.3m) CP issuance programme from Union Bank, along with a programme valued at N30bn by construction company Julius Berger.
Other major CP issuance programmes approved that month featured wire and cable manufacturer Coleman Technical Industries, based in Lagos, and agri-business Johnvents Industries, located in Ibadan. Much of the activity was the result of firms wishing to raise working capital rapidly and without the associated costs of equity issues. Meanwhile, sovereign bond and sukuk issues were largely driven by the need to fund the budget and future infrastructure rollout.
Outlook
As 2022 came to a close, turbulence in the bond and sukuk market showed that while Nigeria’s capital markets can provide a significant source for investment, it also requires careful and strict budgeting from the government. Going forwards, however, the market’s size and potential will continue to attract growing – and returning – foreign and domestic interest. New rules and tighter regulations will also help boost attractiveness, as will further moves towards digitisation and paperless transactions. The Nigerian capital markets already offer a wide selection of products and services, with further innovations likely to keep the market broadening and deepening. As such, the continent’s largest and most populous economy is likely to have plenty of activity ahead.
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