Despite Challenges, Capital Market Trudges On

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Goddy Egene writes that amidst several challenges, the Nigerian capital market has recorded commendable growth in the last 58 years

Nigeria was 58 years on Monday. Nigerians have been taking stock of the achievements recorded by the country over the years. A review of the economic sector showed a mixed bag of the good, bad and ugly. And the capital market, which is used to measure the performance of the economy, has recorded mixed fortunes in line with the general trend posted by the economy.

Coincidently, the establishment of the stock market began the same year Nigeria got its independence. The founding fathers of the capital markets signed Memorandum and Articles of Association that established the then Lagos Stock Exchange (LSE) in 1960. Those who signed the initial Memorandum and Articles of Association were Sir Odumegwu Ojukwu, Akintola Williams, C.T Bowring and John Holt Investment Company. The Exchange began operations as a private company limited by shares. But formal trading did not commence on June 5, 1961. After existing as the LSE for about 17 years, the exchange was renamed Nigerian Stock Exchange (NSE) in December 1977 and re-incorporated as a company limited by guarantee in December 1990. As a limited by guarantee not-for-profit organisation, the NSE thrives on the goodwill, reputation and integrity of its members.

The Early Days
The Nigerian stock market started operations with only four stocks, which were the Nigerian Tobacco Company (now British American Tobacco), John Holt Investment Company Limited Company (ordinary stock) John Holt Investment Company (preference stock) and the Nigerian Cement Limited. And for many years, the call-over system was used for trading. At the initial stages of the call over system, a clerk used a white chalk to indicate buyer and seller position. However, as more securities got listed and more operators entered the market, the system changed from a black board to a round table. Under the round table call-over method, a call over clerk would shout out and match bidding and selling orders.

However, the market represented by the NSE has undergone what historians call renaissance in the last 58 years in the legal structure, trading system, clearing, settlement and delivery, system, quantum of listed companies and securities, corporate governance and upward trend in deployment of Information and Communication Technology ( ICT).

The exchange at inception was operating like a silo under the obnoxious Exchange Control Act of 1962 which was later repealed and replaced with investor-friendly Acts that opened the market to the international community.
It was a turning point in 1997, when the market joined the global trend by transiting from manual clearing, delivery and settlement system to electronic one with the commencement of its central depository called Central Securities Clearing System (CSCS).

In 1999, the exchange also transited from manual system of trading called Open Outcry or Call-Over or Pit Trading to the Automated Trading System (ATS), the use of computers to execute transactions on the market. The initial manual trading system is the use of shouts and signals to convey trading information of bid and offer on the floor.
The exchange was highly instrumental to the success of the first phase of privatisation programme of the federal government. Besides, many States and Local Government Councils had at different periods utilised the market to mobilise long-term fund to execute landmark development projects.

Present state of the market
The Nigerian market has grown significantly over the years, hitting N11.962 trillion the preceding Monday. Also, the NSE All-Share Index (ASI), which is a value-based common index formulated in 1984 with a base of 100, closed at 32,766.37 on Monday. The market value had hit a peak of N15.67 trillion in first quarter of 2008 before the global meltdown affected the market. Apart from the growth in value of market, the trading system has evolved over the years. Specifically, the exchange acquired a new trading platform- X-Gen- which is a version of NASDAQ X-Stream developed by NASDAQ OMX System.

The trading platform is based on a number of leading technologies, including NASDAQ OMX’s XStream matching engine, and the NSE’s flexible and robust X-GEN Market Database, developed from scratch by the NSE and its technical partners. The exchange has also upgraded the trading engine and the market’s FIX order management system (OMS) to enhance efficiency and functionality of the trading system. Compared to the past, the OMS, which coordinates orders from scores of stockbrokers trading simultaneously from their remote or office locations and trading floors of the exchange, has also been made more flexible to accommodate various orders.

The current level of the market’s deployment ICT has enhanced information flow every second. Corporate governance has been expanded and a lot of initiatives put in place to encourage healthy competition among quoted companies.
The current management led by Mr. Oscar Onyema, has been faithful to the demutualisation project which commenced about 10 years ago. The project will become another turning point in the history of The Exchange.
The stockbroking firms have undergone transformation from low capitalised dealing members in the formative years to globally competitive ones. Prior to the meltdown, many stockbrokers made fortunes from the market. Today, their businesses are at the receiving end of market downturn as the market has not fully recovered from the shock occasioned by the 2008 global meltdown.

Boosting Economic Growth
No doubt, the capital market is yet to fully reflect the performance of the economy due to limited representations of all sectors. However, the market has contributed significantly to the growth of the economy.
Apart from government that has raised several billions of naira from the market through bonds, corporate have equally raised funds that run into trillions of naira in the past 58 years.

Commenting on the contributions of the market to the economy, the Group Chief Executive Officer of Emerging African Capital Limited, Mrs. Oluwatoyin Sanni said the market has come a long way in 58 years.

“It has raised significant sums for companies like the banks that were able to successfully recapitalise some which like Zenith Bank Plc and United Bank for Africa Plc are today market leaders. It has raised regional industrial giants like the Dangote Group that is gradually becoming a global company. It has attracted significant foreign portfolio investments ad built significant wealth for both domestic and international investors,” she said.

New Products and Changes
Over the years, the market has evolved. And unlike before when the market was strictly equities and bond-based, there are now exchange traded funds. Also, the capital market has witnessed the addition of two securities exchanges, the FMDQ OTC Securities Exchange , and NASD OTC Securities Exchange. While FMDQ is for the secondary trading of fixed income securities and currency, NASD Plc is an for the transactions of unlisted equities.

Challenges
Just like the economy, capital market not fully maximised its potential due to some challenges. Considering the population of the country, the market is witnessing low patronage. There are less than four per cent of Nigerians playing the market, leaving the foreign investors to dominate transactions in the market.
Besides, the market remains very shallow because most major companies in the wealthy oil and gas, telecommunication and infrastructure sectors are not listed on the exchange.
That is why it is believed that the absence of several major companies in key sectors of the economy undermines the role of the exchange as a barometer for the economy.
In the words of Mr. Sola Oni, who is a chartered stockbroker, the major challenge currently facing the market is uncertainty.
He said: “Foreign portfolio investors still dominate the market with their hot money and strategy of flight for safety after slight perception of instability. Unstable macroeconomic policies and unguarded utterances of politicians on what may happen in 2019 general election is building up country risk. Investors are nervous every day, dumping shares, causing downward valuation across broad spectrum of the market.”

Wooing Major Companies
As a way of encouraging more companies to list on the NSE, the Chief Consultant, ‘Biodun Adedipe & Associates, Dr. ‘Biodun Adedipe, said government should use incentives to drive listing on the stock market noting that people and companies behave in line with the economic maxim that people respond to incentives. He noted that the Indian government used deliberate incentives to woo companies and develop its information and communication technology sector.
“The more transparent, accountable and equitable a system is, the more confidence it inspires in the current players and the more attractive it makes the market become to prospective investors. The Nigerian capital market has the potential for the kind of capital formation required to drive an economy the size of Nigeria’s and trigger the much desired inclusive growth,” Adedipe said.

On its part, the Securities and Exchange Commission (SEC) said it is doing a lot in order to ensure more listings in the market.
“One, we are continuously reviewing our disclosure requirements and our rules and regulations so that issuers, whether foreign or local will have an easy way to come into the market. Secondly, we are also ready to give concessions in terms of fees for the big companies to list, despite our dire need for those fees to strengthen our operations. Clearly if there are more listings even lower fees could translate to higher income if volumes improve due to incentives.

“We have been trying to engage several stakeholders, particularly the telecoms and upstream oil & gas industry, offering certain concessions including the interface with our ministry and the Federal Inland Revenue for fiscal incentives so that companies from those sectors can list on the exchange. And the NSE is also in the vanguard of promoting listing of these companies. On our part, we will continue to create the enabling environment to make sure that the cost they will incur will be as small as possible in addition to making rules that encourage product innovation. We have also reduced our turnaround time.

We have a mandate that once an application is filed, if it is 100 per cent complete, on no account should that application be kept for more than two weeks. And this is the mandate we have given to the staff and they are keeping to it.”
Reviewing the performance over the years, a stockbroker, Mr. David Adonri of Highcap Securities Limited , said the Nigerian stock market was established to serve as long term investment outlet and platform for raising long term capital by fund users.

“The market has achieved these objective to a modest extent. If the economy is to adequately create wealth and generate productive employment, more is expected from the Nigeria’s capital market,” Adonri said.
Looking Ahead
Sanni said the Nigerian market is part of the global market place thus vulnerable to global market trends for good or ill.
“We look forward to a stable socio-economic environment and sustained pace of reforms for our full arrival as an emerging market of note,” she said.

To Oni, at 58, the market has demonstrated resilience and it holds promise for all classes of investors locally and internationally.
“But more has to be done by the government to stabilise the system, turn around the economy, encourage quoted companies to operate optimally and implement all financial inclusion policies to sustain investor confidence,” he said.