In November 2015, the Nigerian Securities and Exchange Commission (SEC) mapped out a 10 year plan for the development of the Nigerian capital market (the Master Plan). The Master Plan was developed by a committee inaugurated for that purpose by the Director General of SEC on 9 September 2013.
The core objective of the Master Plan was to map out strategies for the improvement of the Nigerian capital market in key areas such as investor protection and education, professionalism, and product innovation, and for the expansion of the capital market’s role in Nigeria’s economy.
The committee devised strategies to:
(i) drive capital-raising to fund critical sectors of the economy such as infrastructure, agriculture, SMEs and solid minerals;
(ii) align the market structure, capabilities and competencies to the requirements of the economy;
(iii) improve the competitiveness and attractiveness of the capital market; and
(iv) create a conducive legal and regulatory framework for deepening and developing of the Nigeria capital market.
In this article, we highlight some of the initiatives which are to be implemented by the SEC in collaboration with various stakeholders in accordance with the Master Plan.
B. Strategies for development of the Nigerian capital market
Broadening of investors’ understanding of capital market products
Investors will be sensitized through workshops and other targeted forums organised by the SEC on the products which are available in the capital market. The intention is to boost investor confidence by reducing the perception of risk which comes with a lack of familiarity of sophisticated products.
Developing non-interest capital market products (NICMPs)
Capital markets worldwide are evolving to meet new funding and investment needs and the emergence of NICMPs as a viable and efficient channel for resource mobilization is gaining prominence across the world. Non-interest finance, also known as Islamic finance, refers to a method of finance which does not permit the charging or receipt of interest and is compliant with the tenets of Islamic law. The vision of the SEC is to grow the Nigerian non-interest capital market to contribute 25% of the total market capitalisation, which in turn will boost the overall strength of the economy.
It is interesting to note that since the publication of the Master Plan, the Sokoto and Kebbi state governments have indicated an interest in issuing Sukuk bonds. Also the SEC has released a statement confirming an impending collaboration with the DMO for the issuance of Nigeria’s first sovereign Sukuk.
Developing the commodities exchange ecosystem
Following the recent decline in crude oil prices, Nigeria’s earnings from the oil sector have drastically reduced. The need to grow alternative sectors of the economy has never been more pressing. One initiative in this regard is develop the commodities exchange ecosystem which includes the Nigerian Commodities Exchange (NCX). The NCX was introduced as a means of diversifying the economy and expanding the scope of export commodities, with particular emphasis on the agro-economy. However, primarily due to lack of funding there has been little trading activity on the NCX in recent years. The NCX is currently being privatised, which in addition to SEC’s move to reduce cost and regulatory bottlenecks for commodities exchanges, should improve the operations of the NCX and the growth of other sectors of the Nigerian economy outside of crude oil and petroleum products.
Improving the savings culture to increase availability of investment funds
The committee recommended implementing initiatives to improve long term savings by the public, providing funds that can be channelled towards the capital market. This method has been adopted in other jurisdictions in forms such as National Savings & Investments in the United Kingdom and the postal savings system in Japan under which depositors funds are used as a source of financing government schemes. The appeal of such savings systems is that the investor’s funds are 100% government guaranteed and as such the public are encouraged to leave their funds in the system.
The Masterplan also recognises that a favourable tax regime will boost the volumes of capital market transactions. There is currently a value added tax (“VAT”) exemption on commissions paid for stock market transaction for a 5 year period expiring on the 24th of July 2019. It is anticipated that the SEC, in collaboration with the Nigerian Stock Exchange (NSE), will extend the duration of the VAT exemption and also review the stamp duties payable on transfer on and dealing with securities with a view to encouraging more trading in securities.
Encouraging investment of pension funds
According to projections, pension fund contributions, currently estimated at ₦5.2 trillion will be instrumental in funding critical sectors of the economy. To encourage pension fund participation, the SEC intends to facilitate the creation of a national monoline financial guarantor to provide guarantee insurance against defaults in a bond issuance programme. This will enhance the creditworthiness of issuers or an investment project to meet with the minimum investment criteria of pension fund administrators. The SEC intends to collaborate in this regard with the Nigerian Sovereign investment Authority which announced in 2013 its intentions to establish monoline insurance to ensure the participation of PFA’s in riskier levels of investments.
Exposing the real sector of the economy to funding from the capital markets
The SEC intends to increase capitalisation of the real sector of the economy which comprises agriculture, industry, building and construction, wholesale and retail distribution and the services sectors, by engaging with key stakeholders to promote channelling of capital market funding to these sectors. An example of such a policy is the requirement, under the 2013 privatisation process of the Power Holding Company of Nigeria, for private investors to float purchased successor companies on the NSE upon receipt of a notice to that effect from the Bureau of Public Enterprises. The SEC seeks to implement a similar measure by requiring that companies in the real sector list on a recognised exchange as a minimum license requirement, providing them with access to a larger pool of funds available on the capital market.
Encouraging retail investment
To grow the capital market, there must be products available which can be accessed by retail investors. The SEC intends to encourage the pooling of funds by the public through collective investment schemes, mutual funds and linked notes. This will in turn increase the investor base and amount of capital accessible by businesses seeking equity or debt investments.
Enhancing the capital market procedures
To make investment in the Nigerian capital market attractive to investors, capital market transaction prices must be competitive in comparison to other jurisdictions. Also processes which eliminate delays in transaction processing must be put in place. The SEC has identified the key to the remodelling of the capital market, which is a favourable regulatory framework and proper corporate governance initiatives which are required to facilitate an enabling environment. Out of 140 countries, Nigeria is currently ranked 47th on the World Economic Forum Global Competitive Index 2015-2016 for regulating its securities exchange and 55th for the strength of our investor protection measures. However, it is 109th for the burden of regulation. These rankings, particularly that of our regulatory environment, will need to be improved to boost investor confidence and increase the number of sizeable investments made through the capital markets.
It is anticipated that with the implementation of the Master Plan will catalyse the Nigerian Capital market is “to be Africa’s modern, efficient and internationally competitive market that catalyses Nigeria’s emergence as a top 20 Global economy”.The coming years are certainly full of possibilities for policy changes and an increase of investments in critical sectors of the economy. As with all plans, the success of the Master Plan will be determined by the actual implementation of the initiatives put forward by the SEC.