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INTRODUCTION
A
major engine of economic growth and development of any nation
is its capital market. It impacts positively on the economy by
providing financial resources through its intermediation process,
for the financing of long-term projects.
The
projects could be promoted by governments or private sector institutions.
They are usually in such areas as infrastructure, agriculture,
solid minerals, manufacturing and other real sector areas. Hence,
without an efficient capital market, the economy may be starved
of the required long term funds for sustainable growth.
In
Nigeria, the capital market has over the years been performing
its traditional role. However, its efficiency and effectiveness
in this regards have been greatly limited by various factors notable
among which is the structure of the economy, which is dominated
by oil production. Yet, the oil producing companies are not listed
on the stock market. Also, whereas there are presently over 200
companies listed on the stock exchange, less than half can be
said to be operating directly in the real sector. The economic
reforms of the federal government, particularly those that have
taken place in the financial sector are therefore intended among
other objectives to impact positively on real sector financing.
The focus of this paper is to examine the performance of the capital
market in relation to the objective of better real sector financing.
THE
NIGERIAN CAPITAL MARKET
Role of the Capital Market:
The Nigerian capital market performs a lot of roles in the development
of the economy. The roles include providing:
-
opportunities for companies to borrow funds for investment purposes
-
an avenue for marketing of shares and other securities to the
investing public in order to raise fresh funds for expansion of
operations of companies.
-
opportunities for governments to finance their projects, including
infrastructure for socio-economic development.
-
needed seed money for venture capital and encouraging good corporate
governance by ensuring transparency, good accounting and management
practices. This is achieved through full disclosure requirements
of the market during and after accessing it. This requirement
facilitates rational investment decision making by investors.
It
is important to note that the capital market has performed relatively
well between 1999 and 2006 as can be ascertained from the following
indicators:
New
Issues
An
aggregate of N1.76 trillion was raised from the market between
1999 and 2006. Equities accounted for N983.64 billion or 55.78
percent while debt issues accounted for N779.76 billion or 44.22
percent of total new issues. In 1999, total new issues were N12.0
billion. By 2000, total new issues had risen to N17.2 billion
and by 2003, N180.1 billion. It rose to N552.8 billion in 2005
and N707.4 billion by 2006. The banking recapitalization exercise,
aggressive public enlightenment and improved market infrastructure
can be cited as the major reasons for the growth of new issues.
In
the debt segment, the federal government revenue bond of N150.0
billion issued in 2003 formed the major portion of funds raised
in the debt segment of the new issues market during the year.
It raised an additional N140 billion in 2005 and N411.76 billion
2006. Seven State Governments also came to the market to raise
a total of N37.5 billion during the period.
Market
Capitalization
Total
market capitalization of listed securities on The Nigerian Stock
Exchange appreciated impressively from N300.0 billion in 1999
to N764.9 billion in 2002. The figure was N1.4 trillion in 2003,
N2.1 trillion in 2004, and N2.9 trillion in 2005 and N5.1 trillion
in 2006. The percentage of market capitalization to GDP was 9.4
% in 1999, 9.6% in 2001, 19.8% in 2005 and 28.3% in 2006. The
figures show that the stock market is increasingly becoming more
relevant to the economy.
Trading
Volume and Value
In
1999, 4.0 billion shares were traded, 13.1 billion in 2003, 26.5
billion in 2005 and 36.7 billion in 2006. In 1999 trading value
was N14.1 billion, N113.8 billion in 2003, N254.7 billion in 2005
and N468.6 billion in 2006. The figures show increasing activities
in the secondary market.
Stock
Index
The
Nigerian Stock Exchange All-share Index appreciated remarkably
from 5,266.4 points in 1999 to 20,128.9 points in 2003, 24,085.8
points in 2005 and 33,189.3 points in 2006.
Listed Securities
From
268 in 1999, listed securities dropped to 258 in 2002 as a result
of some debt securities which matured during the period and were
de-listed. At the end of 2006, listed securities were 288.
The
upward trend in virtually all the market indices, especially in
relation to the GDP, shows the increasing relevance of the Nigerian
capital market to the economy and the real sector.
CAPITAL
MARKET REFORMS
The capital market’s capacity to contribute to the development
of the economy has been largely impaired by various inadequacies.
The market, over the years, has been characterized by:
- Lack of depth with few securities
- Poor liquidity, partly due to inefficiency
- Poor infrastructure for secondary market operations
- Basically an equity market, with a largely dormant bond market
- High transaction costs
- Lack of sophisticated products instruments. The market is mainly
dominated by traditional instruments such as bonds and equities
with limited derivatives.
- Unfavourable tax regime.
- Evolving legal/regulatory environment
- Unstable and largely inappropriate in macro-economic environment
As
a result of the above, the market was therefore not in the best
position to contribute maximally to economic growth and the real
sector. These inadequacies have made the reforms that have taken
place over the years imperative.
Highlights
of Recent Reforms In The Capital Market
To a large extent, the recent reform of the capital market started
with the enactment of the Investment and Securities Act (ISA)
No 45 of 1999 which replaced the SEC decree of 1988.
The
ISA enlarged the powers and functions of the Securities and Exchange
Commission for the attainment of a more efficient and virile capital
market that would meet the needs of the economy. The Act provides
that the Commission, among other functions, shall
- Regulate investment and securities business in Nigeria;
- Register and regulate securities exchanges, Capital Trade Points,
Futures, Options and Derivative Exchanges, Commodity Exchanges
any other recognized investment exchanges;
- Register securities to be offered for subscription or sale to
the public;
- Render assistance in all aspects including funding as may be
deemed necessary for promoters and investors wishing to establish
securities exchanges and Capital Trade points;
- Prepare adequate guidelines, organize training programmes and
disseminate information necessary for the establishment of securities
exchanges and Capital Trade Points;
- Register and regulate corporate and individual capital market
operators as well as capital market advisers and consultants such
as solicitors, accountants, engineers and surveyors;
- Register and regulate the workings of venture capital funds
and Collective Investment Schemes, including mutual funds;
- Register rotating savings schemes such as esusu and adashe for
statistical purposes;-? Facilitate the establishment of a nationwide
system for securities trading in the Nigerian capital market in
order to protect investments and maintain fair and orderly markets;
- Facilitate the linking of markets in securities through modern
communication and data processing facilities in order to foster
efficiency, enhance competition, and increase the information
available to brokers, dealers and investors.
The ISA provides for the Securities and Exchange Commission to
make rules and regulations for the market as the need arises.
In effect, the ISA widened the regulatory scope of the Commission
and strengthened its capacity to more efficiently perform its
traditional functions. It also provided for the establishment
of the Investments and Securities Tribunal (IST), which now ensures
that all capital market disputes are resolved within 90 days.
The IST is an equivalent of a Federal High Court. The ISA has
been further reviewed and a re-enactment is soon to be made.
Other reforms that have taken place in the capital market include:
- Review of minimum capital requirement for operators
- Reduction of transaction costs
- Introduction of a Code of Corporate Governance
- Reactivation of the bond market
- Introduction of market makers
- Introduction of shelf registration
- Development of a commodity market.
Some
of these reforms and their impact on the capital market are:
Review
of Fees: The Securities and Exchange Commission recently
took steps to reduce the cost of doing business in the market
in its effort to make the market internationally competitive and
investor friendly by authorizing a 40% downward review of fees
and commissions charged. This is aimed at making the market more
attractive to participants. In the wake of the recent banking
and insurance sector consolidation, the Commission also collaborated
with the Central Bank Nigeria and National Insurance Commission
on initial public offers, public offers, and mergers and acquisitions
necessitated by the exercise, giving concessions were necessary.
Recapitalization
of Capital Market Operators: To make operators contribute
more to the growth of the real sector, the minimum paid up capital
has been reviewed upwards. Issuing houses capital requirement
moved from N150 million to N2 billion; broker dealers from N70million
to N1 billion; clearing and settlement agencies from N500 million
to N1 billion and registrars from N50 million to N500 million.
Underwriters, who before now had a minimum capital base of N100
million, are now required to have N2 billion; fund/portfolio manager
from N20million to N500million, while corporate sub-brokers with
a current capital base of N5million are now to shore up their
capital base to N50miilion.
The
recapitalization of operators in the capital market is to strengthen
them financially for international competitiveness and more importantly
to match their capital with their exposure. This will also help
to weed out quacks from the capital market as the greatest cases
of irregularities and fraud are often associated with undercapitalized
operators who have little or no investments to loose. It is important
to note that this measure will go a long way to position capital
market operators to play new roles in the economy, including the
real sector.
Introduction of Market Makers: An on-going development
in the Nigerian capital market is the introduction of market makers,
whose minimum capital base is fixed at 2billion.
The Commission is currently collaborating with The Nigerian Stock
Exchange to introduce primary dealer market makers for the equity
sector of the market. This is in addition to the market makers
who already operate in the bond sector.
The infrastructure for stock lending and borrowing is also being
fine tuned to pave way for the take off of more robust trading
in derivatives. The implication of these measures is that the
market would be more vibrant and liquid; thereby, making its role
of financial intermediation more efficient.
Other
Capital Market Reforms and Their Impact on Micro and Agricultural
Financing are:
Capital Trade Points (CTPs): Capital Trade Points are conceived
by the ISA as mini stock exchanges through which small companies
can get listed and avail themselves of the opportunities offered
by the capital market. The Commission has therefore embarked on
sensitization of potential promoters of CTPs with promoters of
CTPs in five locations-Kano, Jos, Warri, Ibadan, and Akwa Ibom,
having signified their intention to register and operate such
exchanges . The Commission has gone a step further to hold interactive
sessions with the promoters in Ibadan, Jos and Benin.
Benefits of CTPs: When operational, Capital Trade Points are expected
to:
(a)
provide facilities for the quotation and ready marketability of
shares and stocks of small companies, thereby increasing liquidity
in the financial system;
(b) give opportunities for investors to invest in local companies
and benefit from any profit they make;
(c) provide local opportunities for borrowing and lending purposes
by companies;
(d) through participation and ownership, provide a healthy and
mutually acceptable environment for participation and cooperation
of indigenous companies ;
Commodity
Exchange: As part of the on-going reform of the Nigerian
capital market, the then Abuja Stock Exchange was converted into
a Securities and Commodity Exchange on August 8, 200. A commodity
exchange facilitates trade in commodities, as opposed to shares
and bonds.
The Abuja Securities and Commodities Exchange (ASCE) eventually
commenced operation on 25th July, 2006, trading manually in six
(6) selected grains. They include sorghum, maize, cowpea, Soya
beans, sesame seeds and millets.
Trading volume to date stands at 44,120 million metric tones,
while the following contracts are still outstanding: 5,000 million
tones of palm oil valued at N840 million (or $6.562 million),
60million tones of soya beans valued at N 3.18m, 300million tones
of sesame seeds valued at 17.7m and 18million tones of split ginger
valued at N 1.125m.
The exchange promises to be of immense benefit to farmers, agro
commodity processors and merchants as it serves as a veritable
platform for them to mitigate the inherent risks in agricultural
production and marketing while promoting commercial farming and
the growth of the agricultural sector.
Benefits
of the Commodity Exchange: The economic benefits of a commodity
exchange include the following:
-
Appropriate Pricing of Commodities: With many potential buyers
and sellers competing freely, commodity exchanges provide efficient
means of determining the best price level of a commodity and thus
provide incentives for productive activities in such sectors as
agriculture and mining whose products are traded on such exchanges.
This is unlike in unorganized markets where producers may not
get economic prices for their produce especially when there is
a glut.
-Risk Management: The market provides producers, processors and
users of commodities with a means of passing the price risks inherent
in their businesses to traders who are willing to assume these
risks.
-Improved Financing Terms: By reducing price risk, commodity exchanges
enhance the credit-worthiness of commercial enterprises in their
relationships with banks. This enables such producer’s access
to loan and at a lower interest rates and may result in higher
profits for the farmers and possibly lower prices for the end-users.
-
Dissemination of Market Information: Since commodity exchanges
are national or worldwide in scope. They act as collection and
dissemination centers for statistics on supplies, transportation,
storage, purchases, exports, imports, currency values, interest
rates and other important information that may be useful for other
future productive activities.
-
Effective Protection of Market Participants: Trading in a commodity
market is normally subject to specified rules and regulations,
which all market participants must comply with. The use of clearing
house also ensures that all transactions are settled as at when
due, thus assuring adequate protection for all market participants.
In
addition to the foregoing, commodity exchanges further impact,
albeit indirectly, on the real sector by:
- Deepening of the capital market
- Enhancing capital mobilization;
- Providing alternative investment opportunities;
- Providing arbitrage opportunities;
- Diversifying the revenue earning base of the nation;
- Ensuring food security;
- Increasing Industrial activity through availability of raw materials;
- Eradicating Poverty through employment generation;
Venture
Capital: Venture Capital refers to that initial fund or equity
capital made available more usually to start-ups but also to already
existing companies by high net-worth individuals, family friends,
corporate organizations, etc. to foster growth and development.
It is a high risk, high return investment in new enterprises and
companies in search of expansion and growth.
The venture capital firms, in most cases, arrange for the long
term financing of their investee companies and also assist in
developing the management team, provide advisory services, new
product ideas, strategic relationships and key customers and accounts.
Generally, a clear understanding of the business of Venture Capital
financing and the various relationships between the fund providers
and entrepreneurs, as well as the risk exposure for the business,
is desirable from the onset. This is very important since, like
any other business, the levels of returns on investment may not
be met indefinitely. It should also be noted that the growth of
the emerging enterprise can only be fully maximized as the Venture
Capital investors take both ownership interest and role in directing
the affairs of the firm.
Venture Capital is still an evolving business concept in Nigeria
with both operators and regulators still trying to build capacity.
Hence, its benefits may not be easily visible. However, the concept,
which is expected to receive more boost with the on-going reforms
in the capital market, could be a solution to the current scarcity
of short term funds for businesses with relatively long gestation.
Otherwise, the entrepreneur may not be able to repay the loans
within such short periods of time. Consequently, the original
intention of bringing a business idea to fruition or reactivating
an ailing business may not be realized due to the miss application
of loans.
Eight (8) Venture capital companies have been registered by the
Securities and Exchange Commission and more are still in the process
of being registered.
Review
of Existing Law: To strengthen SEC’s capacity to regulate
the market, a new ISA was signed into law on June 26, 2007.
New Products: The Commission is cooperating with other stakeholders
to promote the introduction of new products into the Nigerian
capital market. This is part of its effort to deepen the market
and provide investors with wider range of products as well as
keep pace with global developments. The Commission is also providing
the necessary regulatory framework for the operation of such products
and facilities in order to protect and boost investor confidence.
Such products include Mortgage-Backed Securities, Asset-Backed
Securities, Exchange-Traded Funds, ethical and Islamic products.
Only recently, the Commission formulated a set of rules and regulatory
requirements for Real Estate Investment Trusts (REITS).
On
Mortgage-Backed Securities (MBS), the Commission set up an in-house
committee in 2004 to complement the Federal Government’s
efforts at delivering decent and affordable houses to its citizens.
As a follow up to this, the Commission, in collaboration with
the Mortgage Banking of Nigeria (MBAN), held a national workshop
on mortgaged backed securities, where areas requiring reforms
to facilitate the introduction of mortgage-backed securities in
the Nigerian market were identified. The improved enabling environment
has resulted in the recent issuance of the N100 billion residential
mortgage bonds by the Federal Mortgage Bank of Nigeria and similar
issues in future. It is expected that this will have tremendous
multiplier effect on the real sector, especially the construction
sub-sector.
WHAT OPTIONS?
The capital market offers viable options for the development of
the economy. The capacity of the market for raising long term
funds has recently been put to test by the Jumbo offers of many
banks which ran into several hundreds of billions of naira in
value. The over subscription of most of these offers were instructive
as they suggest that the market can finance many more viable projects,
including those in the real sector.
While
many have expressed concern over the possibility of bank issues
crowding out manufacturing companies from the capital market,
such fears may be misplaced. While it is true that many recent
successful new issues have been in the banking sector, many viable
companies with impressive track records can also access the market.
A company in the real sector, as in any other sector, has the
option of sourcing for funds in the Nigerian capital market through
the issuance of equities which represent ownership stake in the
company. This can be in the form of an initial Public Offer (IPO)
or secondary on follow-up for companies that are already public.
The sale of new securities on the new issues market and its subsequent
listing and trading on the floors of a stock exchange, offer the
company many advantages. These include visibility and access to
cheaper funds, including bank loans.
A
company may also decide to source funds through the issuance of
debt instruments known as debentures. Debt instruments are particularly
useful where the company is unwilling to dilute its ownership.
The
capital market also offers various pools of funds through Collective
Investment Schemes that are usually invested in various companies
and professionally managed. Such schemes as Real Estate Investment
Trusts have been utilized for property and plantation development
in many countries, including Malaysia. The on-going reforms in
the market including new product development it is hoped, will
see the introduction of such products in the near future.
CONCLUSION
The Nigerian capital market has recorded impressive growth over
the years. It will, no doubt, receive greater boost to contribute
more to the growth of the real sector from the on-going reforms
in the market. The Securities and Exchange Commission is committed
to the reforms and will continue to collaborate with all stakeholders
towards repositioning the market to contribute its quota to the
country’s growth and development. This commitment has been
demonstrated by the various measures that it has taken in the
past facilitate the indigenization, privatization and the present
Economic Reform Programme of the Federal Government.
MUSA AL-FAKI
Director General
SEC
October,
2007
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