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1.0: INTRODUCTION
The performance of an economy is dependent largely on the efficient
performance of its financial markets, since they facilitate the financing of
productive activity and hence national output and economic growth. In this
paper, the key roles and functions of the financial markets are highlighted
with the thrust of the discussion on the core issue of how the market works;
directly and indirectly.
The paper is divided into five sections. The current introduction is
identified as Section I. In Section II, the conceptual issues of the process
of financial intermediation and the Nigerian financial system will be
addressed, while in Section III, the structure and organisation
of the Nigerian capital market is considered. Section IV addresses other
contemporary capital market issues in Nigeria, while the paper is
concluded in Section V.
2.0: SOME
CONCEPTUAL ISSUES:
A. THE
FINANCIAL SYSTEM
The financial system refers to the arrangement or
mechanism by which the savings surplus units of the economy transfer their
resources to the borrowing deficit units for the purpose of enhancing
economic growth. It comprises
financial institutions, financial instruments and financial markets. Generally, the institutions that
operate in the financial system can be categorized on the basis of their
source of funding and by the function that they perform. The Central Bank of most countries
operates at the apex of the financial system and thus regulate
and develop the system, in line with the economic goals of government.
Financial markets can be defined from the viewpoint of the
component parts regarding the tenor of the liabilities traded in them or by
the various transactional functions performed by the institutions
therein. Financial markets are
made up of two broad groups namely:
1. Financial
Institutions: who
intermediate between the surplus and deficit units in the economy and
2. Investors
(surplus units)
and Borrowers (deficit units) who facilitate the functioning of the
financial institutions.
Generally, financial institutions comprise two broad
groupings:
(a)
Financial
Intermediaries who transact in securities on their own account. They include bank and non-bank
financial intermediaries, and
(b) Brokers,
who transact in securities on the account of others. They include securities dealers and
investment bankers.
In appraising the financial markets from the viewpoint of
their major attributes, we can say that financial markets are comprised of
the Money and Capital Markets. The money markets trades only in
securities or debt-instruments maturing in less than twelve months, while in
the capital market, longer-term debt as well as equity instruments are
traded. The complimentary between the money market and capital market is
necessary for a balanced development of the financial system.
B. THE PROCESS OF FINANCIAL INTERMEDIATION
As stated earlier, financial markets provide a mechanism
through which economic activities are enhanced by bringing together the
savings surplus units of the economy and the borrowing deficit units. Figure 1 further illustrates this flow
of funds in the market.
SPACE FOR DIAGRAM
Figure 1: Flow of funds in the markets.
The lenders or savers provide funds for the market since
they spend less than their earnings while the borrowers spend more than their
earnings. The major groups
of lenders in the economy are the households and oftentimes governments while
the major users of funds or borrowers are primarily the business firms and
secondarily governments. Thus
flow of funds takes two different routes – direct and indirect.
By the direct
route, borrowers issue securities or financial instruments (which are
claims on the borrower’s income or future assets) and sell to the
lenders in exchange for cash.
These securities are assets to the lenders (who buy them) but
liabilities or an IOU or debt to the borrower or whoever issues it. The borrowers and the lenders only get
to transact in this business through the instrumentality of the securities
market or market for debt and equity.
The economy grows by this arrangement since those that usually have
business investment or opportunities or are actively involved in
entrepreneurial activities are not usually the savers in the economy. Thus, funds flow from those who do not
have investment opportunities to those that have. One common way to borrow directly from
the securities market is by the issuance of debt instruments (e.g. bonds,
etc), which are contractual agreements whereby the issuer or borrower is to
pay the holder or lender, fixed amounts (or interest payments) until a
specified future date (maturity).
The
other way of raising money directly is by the issuance of equities or common
stock, which are claims to partake in the profits (after tax) as well as the
assets of the issuer. Common stocks have no maturity dates and are hence
long-term securities. Periodic
payments or dividends are usually paid to holders of common stock or
shareholders, who are generally regarded as residual claimants to the assets
of the firm. They confer
ownership rights on the holders.
As
indicated previously, there are two levels of the securities market, namely:
the primary market and the secondary market.
In the
primary market, new issues of a security are sold to initial buyers by the
borrowing firm. For example, if a
firm offers its shares to the public for subscription, individuals or other
parties exchange cash for the issued securities through the mechanism of the
market. The secondary market is
the market where previously issued securities can be resold. They thus grant liquidity to the
holders who may want to dispose of their holdings for cash, as well as help
in determining on a regular basis, the price of the securities. The stock exchanges are examples of
the secondary arm of the capital market.
By the Indirect
route, a middlemen or financial intermediary is involved in the flow of
funds between the surplus units and the deficit units of the economy. The financial intermediary borrows
funds from the lenders or savers and then lends to the borrowers or spenders
at a cost or interest, to make a profit thereby. This is the process of financial
intermediation. Banks, insurance companies, finance houses and pension funds,
among others are all involved here.
This indirect method of funding in the economy, through an
intermediary is more critical, with far-reaching effects than the direct
route (or securities market), since small savers and borrowers are better served
here. The securities market or
direct route of financing in the economy is better suited for large borrowers
and lenders who deal directly with each other. The financial intermediaries or
indirect route of financing is thus a more important source of funding the
economy than the securities market.
Generally, financial intermediaries perform the following
specific functions in the economy.
1. Spread or diversification of
risks via managing a large portfolio of assets where the benefits of
economies of scale are enjoyed.
2. Providing liquidity to the
economy – by diversifying loans among different types of borrowers and
granting short-term loans as well as converting assets into cash easily. Also by trading in securities,
liquidity is provided the economy.
3. Enhancing the payments systems
– by issuing cheques and delivering cash for
transactions.
4. Creation of assets and
liabilities – by purchasing securities, bank create money while other
assets are created when non-bank intermediaries deposit cash at banks, among
others.
5. Financing production and enhancing
profitability for both lenders and borrowers.
C THE
CAPITAL MARKET AND THE ECONOMY
The Capital
Market
The capital market is made up of markets and institutions,
which facilitate the issuance and secondary trading of long-term financial
instruments. Unlike the money market, which functions basically to provide
short-term funds, the capital market provides funds to industries and
governments to meet their long-term capital requirements, such as financing
of fixed investment – buildings, plants, machinery, bridges, etc.
Therefore, the capital market plays a very vital role in stimulating
industrial as well as economic growth and development
Capital Market
Instruments
Achievement of the financing and
investment objectives in the capital market is attained through the issuance
and purchase of a variety of financial instruments (securities). The securities are initially issued in
the primary markets while the secondary market provides the vehicle for their
conversion into liquidity as and when necessary. The primary market involves the sale
of new securities for the first time by those needing funds (deficit unit) to
those with excess funds (surplus unit), while the secondary markets involves
the resale or exchange of securities already outstanding or held by
investors.
There are four
broad categories of capital market instruments
(i) Debt
instruments - these are long term loans raised by a company or government or
government parastatal for which interest is paid
and at a fixed rate. It has a nominal value and it is usually redeemable
(ii) Preference
shares – major source of long-term financing in which the holders are
entitled to a fixed percentage dividend before any dividend is paid to
ordinary shareholdings; and
(iii) Ordinary shares
– issued to owners of a company and have a nominal or face value.
(iv) Derivatives –
These are securities whose values are derived from changes in the prices of
underlying stocks, bonds, or commodities, etc. The popular derivatives in the
capital market today are Options, Swaps and Future contracts.
In the
absence of a capital market, industrial growth would be hampered, as the
money market is not designed to provide such funds. The availability of a
secondary market (stock exchange, for instance) is an important aspect of the
capital market, as investors are much more disposed to placing funds in the
primary market if their holdings are easily convertible into cash. Hence, the
stock exchange is at the core of capital market development in any country.
An
efficient capital market mobilizes savings and allocates a greater proportion
to those companies with the highest prospective rates of returns after giving
due allowance for risk. This allocative function is
critical in determining the overall growth of the economy. If capital
resources are not provided to those economic areas, especially industries,
where demand is growing and which are capable of increasing production and
productivity, the rate of expansion of the economy inevitably suffers.
Also,
the pricing mechanism of the market makes it a reliable economic indicator.
The stock exchange presents this feature and more in its regular operations
as a facility for the disciplined mobilisation and
allocation of capital for pursuing business expansion, modernisation
and growth.
This
awareness has propelled many economies to use stock exchanges as conduit for
channeling long-term funds to their productive sectors. In particular, with
the difficulties faced by many development finance institutions in developing
countries, the stock market route has become a credible alternative source of
supporting equity and long-term investment financing. These realities must
have informed the decision at the Abuja Summit of OAU Heads of States in 1991
that each country in Africa should set up a
stock exchange as a way of promoting a balanced financial system and also as
an element of the proposed African Economic Community. Today, there are
nineteen stock exchanges in Africa.
It
must be emphasized that the capacity to generate long-term capital does not
emerge spontaneously. Though potentially useful, capital markets take time to
nurture. The development of capital markets requires not just establishing
the right legal and regulatory framework, but it is also associated with the
building of an enterprising and flourishing private sector as well as
political stability. It also demands effective monetary and fiscal policy
management, including:
Enterprising Private Sector
The
role of a stock exchange within an economy as an engine for capital formation
is intertwined with finding a positive and constructive role for the private
sector in general. To achieve this, both the private sector and the capital
market must be integrated into the country’s overall development programme; both must know and be responsive to the needs
of the population as a whole.
Government
policies on credit, foreign exchange allocation and taxation as well as its
public expenditure and investment programmes
interact in numerous ways to constitute a regime of disincentives and
constraints or otherwise to private enterprise development. Examples of these
include:
·
fixed interest rates which reduce savings deposits and discourage
banks from lending;
·
foreign exchange allocation systems which tend to give priority to
public sector projects and programmes;
·
excessive government borrowing which tends to crowd out the private
sector;
·
relatively high corporate taxes which squeeze private sector profits
and hence limit the capacity to generate local investment funds.
Capital
markets can only be effective if there is a vigorous and healthy private
sector within the economy. Identifying this is not an easy task and cannot be
taken for granted. It involves the tricky problem of convincing the
governments, especially in developing countries, that private enterprises can
identify closely with the broader economic aims of the nation. Essentially,
fiscal incentives and sound macro-economic policies must be adopted to
promote private sector development and growth.
Broadening Ownership
A
great problem in establishing an equities market is the reluctance of many
family-owned companies to list on the stock exchange and to sell an adequate
proportion of their equity capital to the public (i.e. dilution of
ownership). The owners want to retain absolute control and absolute
independence of action. They value their privacy and quite a number declare losses
year-in year-out, but continue to exist. They prefer to forego more rapid
expansion if the price to be paid is the public issue of securities with all
its requirements for disclosure of information. But, truly, the Nigerian
experience shows that public issues do not result in the loss of family
control. It does however reduce independence of action because management is
accountable to a potentially questioning set of shareholders and the media as
well as to the family.
Fiscal
incentives can be employed by taxing the profits of such publicly quoted
companies at sufficiently lower rate than that of privately-held companies to
induce them to go public. Such tax incentives have been used successfully to
stimulate companies to go public in certain countries, notably Brazil, Indonesia,
Iran (under the Shah) and South Korea
and/or for individuals to invest in the publicly quoted securities.
Rational Fiscal and Monetary
Policies
Such policies should be conducive
to both savings and investments to ensure greater confidence in the stability
of the economy. Policies must ensure attractive yields for equities in
comparison with other domestic and foreign investment alternatives. Frequent
devaluation and negative real rates of return force investors to move to other
less risky assets or countries (capital flight). Therefore, countries should
adopt realistic exchange rates and positive real interest rates to inhibit
capital flight. Also in many countries, notwithstanding otherwise favourable conditions, investors shun the stock market
when tax on dividends and capital gains are punitive compared to taxes on
interest income from savings alternatives such as bank deposit or treasury
bills. Specifically, fiscal incentives for listing may include reduction in
corporate tax, capital gain tax and low withholding tax on dividend. It is
gratifying, therefore, that four years ago the
Federal Government finally acceded to sustained private sector demand for the
abolition of capital gains tax on equity investments.
Institutional Framework
Capital
markets cannot function without an effective system of intermediation,
including brokers, dealers, merchant (investment) banks and underwriters.
These intermediary activities may be performed by the banks as the market is
beginning to develop but should become independent as soon as financial
intermediaries become viable.
Institutional
framework must have an adequate infrastructure for efficient communication,
pricing of issues, marketing of equities, efficient deliveries and
settlements. Communication facilities must be adequate to relay information
between buyers and sellers. Introduction of an institutional system for
transmitting information regarding price, market, and quoted companies to the
public is necessary for instilling confidence and knowledge about companies.
Pricing of issues must be reasonable as companies consider the all-in cost of
funds in evaluating funding alternatives. In addition, there must be a corps
of practicing corporate lawyers, quality audit firms and reporting
accountants.
Legal and Regulatory Environments
The purpose of regulation is to protect
investors and in the process, increase investor confidence. Regulation is
also necessary to ensure a fair and orderly securities market. To this end,
company laws must be modernized, the conditions for granting listing to
companies seeking quotation must be clear and positive. There must also be
adequate rules and regulations for the brokers, underwriters and other
operators of the stock market. In addition, there must be code of conduct for
brokers, directors and managers of the stock exchanges, stockbroking
firms and quoted companies. There should also be provision for an adequate
flow of accurate and timely information on the performance of companies and
economic development. In essence, there must be provisions requiring
high standard of financial reporting, disclosure and general transparency
assist stock markets and their operators to gain the confidence of investors.
Savings Structure
The
size and structure of savings are also vital to flourishing capital markets.
Savings pattern however depends on the level of distribution of income and
profit, the returns on savings or interest rate, social attitude to savings
and existence of reliable and acceptable savings institutions. It should be
noted that the development of stock exchanges in South-East
Asia was influenced by the very high savings disposition of the
people. For example in Taiwan,
the savings ratio was over 20 percent for over two decades leading to its
very dynamic and liquid stock market.
While many developing countries
may not be able to meet the high level of savings in the short run, we can
start by promoting more savings institutions, especially those that can also
serve as investors through our stock market. Thus, the Pension Reform and the
resuscitation of Unit Trust Schemes (Mutual Funds) in Nigeria have
been welcome developments in our financial markets in recent times. The
impact on the capital market has been salutary, to say the least.
3.0: THE STRUCTURE
AND ORGANISATION OF THE NIGERIAN CAPITAL MARKET
Nigeria has a formal and active capital
market. Before 1961, almost all formal savings and deposits went through the
banking system while the then colonial masters invested major capital
balances for the country on the London Stock Exchange. However, following the
establishment of the Central Bank of Nigeria in 1959, it was logical
to have a stock exchange; hence the incorporation of the then Lagos Stock
Exchange in 1960, which commenced operations in 1961. Thus, the foundation
was laid for the operation of the Nigerian capital market. Earlier in 1959,
the Central Bank of Nigeria
had floated the first Nigerian Development Loan Stock, which was listed
overseas. Subsequent issues in 1961 and thereafter were listed on the new
local exchange.
The Nigerian Stock Exchange
The Stock Exchange is a private,
non-profit making organization, limited by Guarantee. It was incorporated via
the inspiration and support of businessmen and the Federal Government through
the CBN, but owned by about 300 members. The membership includes financial
institutions, stockbrokers and individual Nigerians of high integrity who
have contributed to the development of the Stock Market and the Nigerian
economy.
The Council Members (Board of
Directors) of The Stock Exchange are elected at each Annual General Meeting
by Members of The Exchange. The tenure of the Presidency is limited to one
three-year term. The Council is responsible for policy-making but the
Director-General and her team of Executives administer the day-to-day affairs
of The Exchange. The Council members, management and staff of The Nigerian
Stock Exchange as well as Stockbrokers are subject to a stringent regime of
codes of conduct, which calls for a high degree of integrity, discipline,
sacrifice and a high sense of patriotism.
Dealing Members of The Stock
Exchange are the stockbroking firms licensed by The
Exchange to buy and sell shares on behalf of the investing public. There are
over 200 of them at the moment.
The Exchange is a Self-Regulatory
Organisation (SRO), making and enforcing rules
for its members. In 1977, The Exchange was reorganized and renamed The
Nigerian Stock Exchange. Today, The NSE has 11 functional trading floors in
different parts of the country, namely: Lagos,
Abuja, Kaduna,
Port Harcourt, Kano, Onitsha,
Ibadan, Yola, Benin, Uyo, and Ilorin.
Companies listed on The Exchange cut across the economic
sectors of Nigeria and include local affiliates or subsidiaries of
multinationals, such as Mobil, Total, Guinness, Unilever, GlaxoSmithKline,
Dunlop, Cadbury, Schweppes, Chevron, Texaco, Nestle and Coca-Cola, etc.
Securities
and Exchange Commission
The Nigerian capital market, like elsewhere, is a
regulated market. Apart from the regulatory actions of The Exchange as an
SRO, government oversight on the capital market in Nigeria is achieved through the
operations of the Securities and Exchange Commission (SEC). The role of the
Commission as the apex regulatory body for the nation’s capital market
can be broadly grouped into two categories: regulatory and developmental
roles.
SEC registers all financial instruments that are offered
to the public for subscription. Also, it registers the Stock Exchange and its
branches, registrars, investment advisers, securities dealers and their
agents, controlling and supervising their activities with a view to
maintaining proper standards of conduct and professionalism in the securities
business.
It maintains surveillance over the securities market to
ensure orderly, fair and equitable dealings in securities, protecting the
integrity of the securities market against abuses arising from the practice of
insider trading.
It creates the necessary atmosphere for the orderly growth
and development of the capital market. It also undertakes other activities as
necessary or expedient for giving full effect to the provision of the decree
establishing it.
From the foregoing functions, it is obvious that the
primary responsibility of the Commission is dual in nature - i.e. protection of investors and
acceleration of capital mobilization and formation process.
The Nigerian capital market is served by a network of over
200 active stockbroking firms, 69 Issuing Houses
(most of them banks), 32 practicing corporate law firms and more than 30
quality firms of auditors and reporting accountants, in addition to a Central
Securities Depository (CSCS Limited) and Registrars.
- Instruments and the
Sub-division of the Market:
The four broad categories of financial instruments or
financial assets identified in the capital market at the beginning of this
paper are available in the Nigerian capital market.
However, the Derivatives Market is not fully developed.
But plans have reached advanced stage to commence trading in derivatives.
Besides trading in Rights, the only financial derivative product in our
market is the Nigerian International Debt Fund, which is listed on our Daily
Official List and invests in Nigeria’s
sovereign debts traded in the international capital market. In 1998 The
Exchange introduced Rights as one of the instruments that could be traded on
The Exchange.
Until 1998, Shareholders who could not exercise their
rights received nothing and those who had no shares in a company making a
Rights Issue could not use the opportunity of the issue to buy into the
company. However, with the trading in rights on The Exchange, both
shortcomings of the market have been fully addressed.
They supply funds to businesses and governments by
acquiring debt and equity instruments with their savings in return for the
expectation of dividend, interest and capital gain. The availability of
savings is dependent on certain key factors varying with the different
classes of investors.
Investors in Nigeria are generally a mix of
institutions and individuals. The institutions include insurance companies,
pension funds, and mutual funds. According to the CSCS Limited, there are
about two million investors currently using the facility for investment in
listed securities.
Issuers of securities in Nigeria are businesses and
governments. Corporate recourse to the capital market got a boost from the Indigenisation Programme,
Deregulation of Interest Rates, Privatisation Programme, and the recent Banking Sector and Insurance
Industry reforms. Today, a total of 315 securities worth about N14 trillion
are listed on The Nigerian Stock Exchange. In 2007, some of these issuers
raised more than N2 trillion from the market through the offering of new
securities, as against N1.6 trillion in 2006. Table 1 shows the top five new
issues in the Nigerian market in 2007.
Table 1: Top Five New Issues in Nigeria In
2007
S/No Issuer Amount
(N) Type
of Issue
1. First
Bank of Nigeria Plc. 250
billion Hybrid:
Public & Rights Offers
2. Oceanic
Bank International Plc. 174.6
billion Public
Offer
3. Zenith
Bank Plc. 129.6
billion Hybrid:
Public & Rights Offers
4. Guaranty
Trust Bank Plc. 114.6
billion Global
Depository Receipt (GDR)
5. Afribank Nigeria Plc 100.0
billion Public
Offer
Source: Nigerian
Stock Exchange Annual Review 2007
Central Securities Clearing System (CSCS)
CSCS operates an
automated clearing and settlement system for transactions on The Nigerian
Stock Exchange and the Over-the-Counter (OTC) market for Federal Government
bonds, including operating a central depository. The totality of its
operations defines the clearing and settlement system, which is a major
consideration in any investment decision in modern stock markets.
The clearing and settlement system has clear implications
for the risk profile of stock markets. For instance, it is an acknowledged
fact in the marketplace that the longer it takes to conclude a transaction,
the higher the risk associated with the deal. It was in recognition of this
that the World Federation of Exchanges (WFE) stated in its membership
criteria that the clearing and settlement facilities provided by the
Exchange, its subsidiaries or others must provide for the efficient, safe and
prompt settlement of transactions within the internationally accepted
standards, or be better. The Nigerian Stock Exchange has achieved this
condition through the operation of the CSCS.
Before CSCS, clearing and settlement was a manual process,
which was cumbersome and very laborious. Even though the transaction cycle
was T+14, not a few trades took longer time to be concluded. For an emerging
market that, among other things, contended with narrow investor base and
thirsted for foreign investment, this was not good for investor confidence
because rather than attract investors, it discouraged participation in the
market.
The CSCS procedure emphasizes immobilization of
certificates, which is recognized by SEC. This implies that there are
currently legal provisions to the effect that certificates will not be the
only evidence of share ownership in companies. Thus, SEC has recognized CSCS
statement of stockholdings as evidence of stockholdings in the CSCS system.
The process of dematerialisation
involves the following: Share
certificates are presented by investors through their stockbrokers. These
investor claims (i.e. certificates and transfer forms) are verified/ authenticated
by the Registrars through the stock broking firms. The Registrars send the
verified certificates and the signed transfer forms to the depository of the
CSCS within 48 hours. The dematerialized certificates are re-cycled to the
relevant registrars within 48 hours also. CSCS, as sub-registrar, regularly
sends data information of the changes that have taken place through buying
and selling of shares to the registrars who then update their registers with
the stock movement details. Dividends are paid to shareholders whose names
appear on the register a day before closure date.
The CSCS
has through its operation in the Nigerian environment proved that market
infrastructure can make the difference between successful and unsuccessful
capital markets.
Successful markets are those that provide enhanced
opportunity for price discovery, offer liquidity, and are deep enough to meet
the financing needs of corporates and government at
competitive rates. These conditions are in various ways dependent on the clearing
and settlement system deployed in the market, which the Economic Development
Institute of the World Bank said could make or break the viability of markets
through its impact on public confidence in the home country and among foreign
investors. “Some emerging markets have great difficulty in reaching the
level of activity necessary for them to be financially self-sustaining
because inefficiencies in the settlement system discourage active
trading,” the Economic Development Institute further affirmed. It is
not any wonder, then, that the CSCS has been pivotal to the growth of the
Nigerian stock market in the years following its establishment; it provides a
service without which the operations of the market would be inhibited and
growth constrained.
Following
the success of the CSCS, in 2004, the Securities and Exchange Commission and
The Nigerian Stock Exchange approved the introduction of electronic
bonus (e-bonus) shares in the Nigerian capital market. E-bonus refers
to the electronic form of bonus shares. It means that when a quoted company
declares scrip or bonus issues, rather than issue physical bonus share
certificates to investors,
they are converted to electronic form and credited to the investor’s
stock account in the CSCS depository under the investor’s stockbroking firm account with CSCS and a credit advice
sent to the investor.
Also,
SEC and The Exchange have announced that from next year, the market will
fully adopt e-IPO, which refers to the allotment of shares to
the CSCS accounts of subscribers to new issues (primary market share
offering), without the use of share certificates as currently obtains.
Furthermore,
e-dividend is to become the norm in our market. E-dividend is the
payment of dividend direct into the bank accounts of shareholders without the
use of dividend warrants. For this to be operative shareholders are expected
to operate bank accounts, and provision has been made in Public Offer
subscription forms for shareholders’ bank account information.
4.0: OTHER
CONTEMPORARY ISSUES
According
to Demirgue-Kunt and Levine (1993), capital market
development is characterized in three distinct ways namely-:
i. Traditional
characteristics
ii. Institutional
characteristics and
iii. Assets-pricing characteristics
Further
elaboration of these and their application to African capital markets is
provided in Emenuga (1999).
Traditional
characteristics measure the basic growth indices, such as number of listed
companies, liquidity and market capitalization. Institutional characteristics
encompass the regulatory and legal rules in the market, as well as its
information disclosure and transparency requirements, market barriers and
trading costs, while asset pricing characteristics relate to the efficiency
of a market in pricing risk.
Stock
market liquidity by which is meant the ease to buy and sell shares is an
important index of economic performance. It has demonstrated that the link
between stock markets and economic growth is through liquidity of the stock
market. Liquidity is said to be important for a number of reasons. Investors
abhor illiquid markets since exit is difficult at the desired time
The
more liquid a stock market is, the more it commands investor interest, since
resale of shares is assured. Furthermore, quoted firms have more access to
debts and equity in a liquid market, and in an economy with a liquid stock
market, shares become easily acceptable as collateral for bank lending and
this boosts credits and investment.
The
purpose of regulating securities markets is to ensure fair play and
transparency in market operations. The existence of effective regulatory
agencies enhances the quality of regulation and supervision of the capital
market and boosts the confidence of internal and external investors in the
capital market.
Full
disclosure of information and observance of accounting standards are
necessary for stock market development. The flow of information can make and
unmake capital markets. Thus, companies are required to publish reports of
their operations and in many cases these are the only published document on
these firms. However, with globalization and increased investor activism,
many publicly traded companies are beginning to go beyond basic statutory
reporting requirements to issue detailed periodic information on their
operations. Companies quoted on The Nigerian Stock Exchange are further
driven in this direction by the annual President’s Merit Awards and the
Facts-Behind-The-Figures and programmes, among
other initiatives by the authorities of The Exchange.
In
recent times, the process of developing domestic capital markets, in part,
entails the dismantling of existing barriers to foreign participation. In the
process of opening up, some countries have gone as far as revoking previous
legislation that restricted the participation of foreign investors.
In
1995, the Nigerian Enterprise Promotion Decree of 1989 and the Exchange
Control Act of 1962 were replaced with the Nigerian Investment Promotion Commission
Decree No.16 and the Foreign Exchange (Monitoring and Miscellaneous
Provision) Decree No 17 of 1995, as part of the economic liberalization
policy of the Federal Government. This has worked to allow unrestricted
foreign investment in Nigerian companies and accorded foreigners and
resident, the same rights, privileges and opportunities of investment in the
Nigerian Capital Market, among others.
Following this development, there has been increased
foreign participation – both as operators and investors in our market
processes. In 2007, foreign investment flows accounted for about N250 billion
out of the N2.1 trillion turnover recorded by The Exchange for the year.
Foreign investors now account for about 47% of The Exchange’s total
market capitalization, and the figure is expected to grow as the economy is
further integrated with the global capital markets.
Foreign
participation in our market processes comes with a bundle of benefits for the
market and the larger economy. Apart from the transfer of skills that will
come with the process, the capital inflow will work to supplement the lean
domestic savings in the economy, enabling the financing of the many projects
needed for sustainable economic development. As a result of the availability
of the window for foreign investment and the existence of The Nigerian Stock
Exchange, foreign investors were able to inject a total of US$654 million in
Nigerian banks between 2005 and early 2006 under the banking sector
consolidation programme. There is no gainsaying
that the success of the programme is in significant
part attributable to this inflow.
Earlier
in 1998, United Bank for Africa Plc, a quoted company, had taken advantage of
the opening of the market to issue a Global Depository Receipt (GDR) in the
international capital market. Even though the UBA issue did not entail the
raising of capital, Nigerian companies quoted on The Exchange are today using
this instrument to boost their capital. Last year, three banks obtained
approval to execute Global Depository Receipts (GDR) valued at N186.23
billion. Two of them, - Guaranty Trust Bank Plc and Diamond Bank Plc –
have successfully concluded their issues and are listed on the London Stock
Exchange. There will be more in subsequent years.
In the
wake of the internationalisation of the Nigerian
capital market, Nigeria
is today leading a move to integrate the capital markets of the West African
sub-region. The policy of integrating our capital markets has been made part
of the wider push within the region towards lowering the barriers to the free
movement of people, goods, services, and capital. The integration of the
sub-region’s capital markets would reinforce the Fast Track plans
on monetary union and common currency in the sub-region, in addition to
pooling the resources of the sub-region’s small and fragmented capital
markets to boost their ability to mobilize local and international capital
for private sector and infrastructure development.
- Automation of Trading System
The
trading rules and market infrastructure have direct impact in the pricing of
assets in the markets. Where the Call Over system is used in trading,
movement of share prices are largely restricted and
subjectively fixed, even if unintentionally, unlike in the Automated Trading
System (ATS), which The Nigerian Stock Exchange adopted in 1999. By simple
definition, the ATS is trading in listed securities through a network of
computers connected to a server.
The ATS
is at once a progression on the computerisation of
processes at The Exchange and a response to changes in the environment of the
market, including Deregulation and Internationalization. Internationalization
demanded a benchmarking of our market processes and practices with
international standards if Nigeria
must achieve her objective of attracting foreign investment as a supplement
to domestic savings.
ATS has
enabled our market to leverage on the known advantages of automation to
improve the pricing efficiency of the market and the speed of order
execution, while its tightly-coupled interface with the CSCS Limited has
facilitated the implementation of a shorter (T+3) transaction cycle in the
market, in addition to obviating the risk of failed trade that may arise when
a seller is unable to deliver security for which payment has been made. For
cash settlement, failure by a buyer to effect payment for purchases on due
date is comprehensively addressed in favour of the
seller through the operation of a Trade Guarantee Fund. The Trade
Guarantee Fund is a pool of fund to which Dealing Members of The Exchange (stockbroking firms) have made equal contributions for the
purpose of settling trades where a Member is unable to discharge its
obligation to the seller.
5.0: CONCLUSION
In this
paper, an attempt has been made at articulating the basic concepts and issues
in the Nigerian capital market. The paper has appraised the basic structure
and organisation of the capital market with the
respective roles of SEC and The NSE, issuers, investors and facilitators in
perspective. The paper, in evaluating the operation of the market observed
that tremendous reforms have taken place over the years, with Deregulation, Internationalisation, and Automation, among others. This
has enhanced the vibrancy of the market, such that the Nigerian capital
market is acknowledged as one the fastest growing among the emerging markets.
Going
forward, the International Monetary Fund (IMF) projected a lower global GDP
growth rate of 4.75% for 2008, compared with 5.2% in 2007. It attributed this
to recent financial turmoil and trade imbalances. Sub-Saharan Africa is expected to grow from 6.1% in 2007 to 6.8% in
2008. However, IMF was more bullish on the growth prospect of the Nigerian
economy, projecting a growth rate of 8%, though lower than the 11% specified
by the Federal Government. Nigeria’s
growth was predicated on the coming on stream of new production facilities in
the oil and gas sector.
The
capital market will play a major role in attaining the above objectives.
However, the envisaged growth would only be achieved if the current
macroeconomic stability is sustained and supportive economic infrastructures
are provided at optimal levels and, more importantly, when the problems in
the Niger Delta area are resolved.
Over
time, The Exchange has brought to the fore challenges militating against
capital market development in the country, chiefly among these being the
issue of multiple tax regimes on businesses and limited product offering in
the market. The Exchange is hopeful that the National Assembly will expedite
actions on Bills on Tax and Capital Market Reforms currently before it.
The Federal Government’s sustained issuance of bonds
through the Debt Management Office (DMO) is commendable. These bonds, because
they are in most cases long-dated have provided a reasonable depth to the
capital market. According to the DMO, the Federal Government intends to sell
bonds worth N600 billion in 2008 to fund infrastructure projects. However, for the purpose of
transparency and pricing efficiency, the DMO should migrate trading on the
OTC to The Exchange, which has the technology to deliver on transparency and
efficiency.
Overall,
the outlook for the Nigerian capital market is positive. The Primary Market
promises to be busy this year, as insurance companies further consolidate and
more companies take advantage of the benefits of going public to finance
their growth. The lingering challenge is that of the cost of transactions in
the market, which remains high in spite of recent fee reduction by SEC, The
Exchange, Issuing Houses, and Stockbrokers. Cost remains high because in 2006
the Federal Inland Revenue Services commenced charging Value-Added Tax on
stockbrokers’ commission and Stock Exchange/Central Securities Clearing
System Limited transaction charges.
High
transaction costs impact adversely on market liquidity, especially for large
transactions, and it is the expectation of the market that the FIRS will
review its stance on taxes in the market, which is also adversely affecting
the development of the corporate bond market in Nigeria.
BIBLIOGRAPHY
1. Demirgue-Kunt and Rose Levine (1995) Stock Markets,
Corporate Finance and Economic
Growth The World Bank Economic Review, 10(2). May
2. Emenuga C. (1999) African Capital Markets in the Global
Economy in S. Mensah (ed) African Capital Markets in
a Global context (pp100 – 113) Proceedings of the
International Conference of the African Capital Markets Forum 23 – 25
August
3. Mishkin Freederic S. (1992) The
Economics of Money, Banking and Financial Markets New York: Harper Collings Publishers Inc.
4. Nigerian Stock Exchange
2007 Annual Review
5. Nigerian Stock Exchange
2007 Factbook
6. Nwokoma, N. I. (2006), “The Growth of Non-bank
Financial Intermediaries in Nigeria”
in A. Adenikinju and O. Olaniyan
(edited) Applied Macroeconomics and Economic Development: Essays in Honour of Professor Sam Oladapo
Olofin. Ibadan: Ibadan University Press
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