Sonola: Addressing Challenges in Real Sector Will Boost Capital Market

The President of the Association of Asset Custodians of Nigeria, Mrs. Taiwo Sonola, in this interview speaks on the role the association has over the years played in promoting and attracting foreign investors into Nigeria. She also spoke about other issues in the market. Nume Ekeghe presents the excerpts:

The Association of Asset Custodians of Nigeria (AACN) was established 10 years ago. A decade later, how would describe the journey so far?

The journey has been quite interesting and fulfilling. When the founding fathers formed the association, our influence was very limited. Majority of the capital market operators did not understand the role of a custodian. Today, we have come a long way. Most foreign as well as local clients use our services, we also facilitate a significant portion of investment transactions in the market and through our market advocacy initiatives, we have contributed to the development of the Nigerian capital market in general. Looking ahead, we intend to continue to contribute our quota. We have lined up several initiatives we intend to push with regulators, financial market infrastructures and market operators for the benefit of investors and the country as a whole. This will ensure we remain relevant in the scheme of things.

I understand there are eight-member banks of AACN out of about 24 banks operating in the country. What steps are you taking to attract other banks?

You are right; we have eight members. As you know, this association is for only banks that offer custody services. We can confirm that all custodian banks have formally joined the association. We are not resting on our oars though as we will be more than pleased to welcome more banks as they join the business of custody.

Your eight Annual Nigerian Investors Day in London was a very successful outing. Can you tell us what you set out to achieve with the organisation of the series?

Foreign investors are key to the Nigerian economy. They contribute toward improving liquidity in the capital as well as money markets. In addition, they are a major supplier of foreign exchange which contributes toward the stability of the naira. No doubt with Nigeria being a frontier market, the financial market infrastructures are still developing. We the custodians see ourselves as ambassadors of Nigeria and as having the responsibility to protect the interests of these investors in the market and what appeal to such investors are better regulations and development of market infrastructures that result in better asset protection, automation and straight through processes. Our intention for this year’s conference was to bring the regulators and market operators face to face with the investors to present their scorecards on improvement that have been made in the market since the last conference a year ago as well as the market’s plan for the future. I dare say this was achieved with a high degree of success.

Looking at the themee of this year’s conference, ‘Nigeria: The Economics of the Capital Market,’ can you explain to us what that means and what factors that underscored your choice of the theme?
The theme sought to highlight the various crucial aspects of the capital market in terms of their current states, topical issues, developments, action plans going forward, among others. The choice of this theme was informed by the increasing appetite that foreign portfolio investors are showing in the Nigerian capital market and the need to listen to them, keep them informed and further boost their confidence. Various presentations, panel discussions and fireside chats at the conference were all centered around the theme. Our very resourceful speakers/panelists did justice to the theme, I must say.

In what ways is the AACN collaborating with other bodies, especially the regulatory agencies, to strengthen and develop the Nigerian capital market and the economy?

The AACN is very deeply committed to collaboration, not just with regulators, but also with other market participants with the intention to benefit the entire capital market ecosystem. Speaking specifically of the central bank, the association is in conversations to commence ISIN issuance for OMO treasury bills. We believe this will significantly increase Straight Through Processing (STP) rates for treasury bills. We are also collaborating with the CBN in their efforts to better regulate the market. Specifically, we helped fine-tune as well as provide periodic reporting to aid the regulator in its supervisory function of banks on investment levels in government securities.

With SEC, we are collaborating on rule drafting and issuance. The most recent being rules guiding nominee companies of market operators. Collaboration with the CSCS is an example of where we do it with other market participants and there are several examples here. I will cite two. The first is our collaboration on SWIFT usage by the depository and the second is on a possible change from the current dual account structure to a single depository account structure which is current global best practice. These initiatives will help automation as well as improve STP rates.

When we talk about investor and custodial services, the uniformed would think that this is an area reserved for foreigners and the rich. Can you speak more about your role in the market?

To be honest, some segments of the local market already understand the important role a custodian plays. This has been helped to some extent by the regulators who in their wisdom made it compulsory for banks (for non- proprietary assets) and fund managers (for registered funds) to use custodians to hold such assets. Outside of this, we also see some private funds as well as investors using custodians to safeguard their assets despite no regulatory pronouncement on this. This shows the level of sophistication of such investors. To put it simply, the custodian’s function is to separate investment decision making from custody and post trading activities in general. This is how investors (that use the services of custodians) ensure their assets are protected.

There is a glaring risk in allowing the investment decision maker to also be the custodian of assets. This can lead to unprofessional practices at the detriment of the investor. It is therefore important for all investors to use custodians for these investment activities and this is purely for their protection. Today, we see the insurance sector not using custodians for their investments but rather building their own investment operations team which basically do internally at a very high cost what a custodian would do for them more efficiently and at a far cheaper cost. The market needs to understand the benefits we provide in safeguarding investments.

Inadequate publicity is often a reason why awareness about certain sectors of the economy and even products and services are very low. What steps is AACN taking to ramp up awareness about portfolio investment and custodial services in Nigeria?

The AACN firmly believes that a good product should be given the required airtime to reach the persons it is intended for. That is the reason why we do some of the things we do. The annual investors’ conference which we organise in the UK is one of the activities we organise to create awareness, not just targeted at investors and intermediaries, but also among regulators and other market operators who participate actively in the event. Another example is our 10th anniversary commemoration which we just concluded.

Aside this, we also have several one to one engagements with market operators and regulators which are focused on enlightenment about some of the services and developmental initiatives we provide to the market. For example, we are a part of the SEC’s financial literary initiatives. We also work with the NSE in ensuring that new brokers are knowledgeable about custody before being granted their trading licenses.

Competition in the Nigerian financial services industry is quite intense. How is AACN able to deal with the issue of conflict of interest considering that its members are from different financial institutions?

I think the moral ethics of the institutions that make up the AACN is a key contributor in maintaining good professional conduct. The member institutions are reputable entities with well entrenched internal governance structures and individual conduct processes which ensure we are able to compete in a healthy manner. Additionally, with guidance from the SEC, we have developed our internal conflict resolution procedure which we have all committed to adhere to as members. We are collaborating competitors.

Nigeria is frequently described as having vast economic potential which have largely remained untapped and have not translated to economic prosperity. What do you think the country should do to be on the path of sustainable growth and development?

The capital market cannot be independent of other sectors of the economy. If there is no depth in the real sector, then the capital market cannot thrive, and this is our situation. So, what do we need for sustainable capital market growth? It is quite simple. Stable power, good transport system, sustainable foreign exchange liquidity and availability (for raw materials import), clear and predictable tax regime across all strata’s, suitability qualified manpower, etc. This is not rocket science. For example, the federal government has dominated the debt market at the expense of long-term corporate debt. We also know the challenges with the equities markets.

If the government can address some of the issues I have highlighted above, the real sector will naturally thrive. We will then begin to see manufacturing entities spring up and flourish. This will automatically create opportunities for capital market depth over time. It’s good to note though, that the CBN has been in the forefront of trying to stimulate the economy through real sector credit growth. The CBN has through various directives compelled bank to lend more to the real sector and we believe this should translate.

The return on investment in Nigeria used to be one of the highest in the world. Have you seen any signs that such an era would be back any time soon?

I presume you are speaking on the equities market because the debt market is still one of the highest returns in the market. Returns are closely linked with investors’ perception of risk. Considering the Nigerian market is still quite manual, I would think the high-risk classification is justified to an extent. Coupled with this is the non-linkage of custodians with the depository, dual account structure, lack of International Securities Identification Number (ISINs) for some instruments, lack of published insolvency laws, etc. there are many factors which impact on the perception of Nigeria as a risky market. We all want the capital market to return to the days of extremely high returns. It is however impossible for a market to have consistently high returns. To ensure we attract investors and investment capital to Nigeria, we need to focus on fixing the issues that contribute to its perception of risks. When this is done, investors will not be so fixated on extra high returns.

What goals have you set for the association over the next five years?
We have outlined several objectives we intend to achieve in the medium term. We intend to continue to work with regulators and market participants to develop the market. The key initiatives we are focused on include single depository account structure for custodians, ISINs for all market securities including OMO treasury bills, working with the depository to achieve true delivery versus payment for equities, published Insolvency laws for the country, and a few others we are still developing. Additionally, we intend to continue to enlighten the market of our role so that a significant portion of investors begin to use and benefit from our services.

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