Nigeria’s capital markets are relatively shallow. Since the incorporation of the Nigerian Stock Exchange (NSE) in 1960, and the rise of other trading networks such as the National Association of Securities Dealers (NASD), and Nigeria Commodity Exchange, foreign investors, as opposed to domestic investors, have largely dominated the capital markets.
Additionally, according to data published by the Central Bank of Nigeria (CBN) and NSE in December 2013, there were only about 50 liquid stocks listed on the NSE and of the 58 bonds traded, federal government bonds made up 67% while corporate bonds made up only 2.8%. Recent efforts have thus been targeted towards broadening and deepening the capital markets.
Deeper capital markets will provide additional utility to companies and borrowers at all levels. Deep capital markets will provide Nigerian businesses with an alternative pool of funding outside traditional debt finance. It also provides the platform for foreign companies to create additional long-term investment opportunities for domestic investors. The Nigerian economy itself will benefit from successful and developed capital markets, which can only be built with increased consumer confidence in the system. The push towards a more robust capital market is therefore a key driver of business growth in the country.
However, commentators have identified certain obstacles which have hindered the growth of the capital markets and decreased investment in Nigeria. The Nigeria-United Kingdom Capital markets project released the first in a series of reports in March 2015, highlighting that investors had indicated the need for greater transparency and an eradication of manipulation in the capital markets. This is significant as foreign investors already find it difficult doing business in Nigeria. The World Bank Group 2015 report on ‘Ease of doing Business’ places Nigeria as 170th out of 189, behind other African nations like Ghana (70th) and South Africa (43rd). This amplifies the difficulties foreign investors face while operating in the Nigerian markets, and the urgent need for increased transparency in the capital markets.
Investors who face transparency challenges, or are not confident with the Nigerian capital markets are likely to believe they are disadvantaged in the market. They therefore find it harder to invest where information about a potential investment is inadequate, unevenly distributed between investors or only few insiders have access to material facts.
In tackling this problem, the Nigeria-United Kingdom report suggested an improvement in information disclosure and dissemination, an effort to deter insider trading or market manipulation and a concerted push to promote industry led transparency and a good governance culture. Subsequently, the report provided certain recommendations.
Firstly, the report recommended the creation of a central information repository from which the public can freely access data for public companies. While current NSE rules require that annual reports of listed companies are made available on the company’s portal and submitted in two national daily newspapers, there is no record of public companies whose shares are not publicly traded on an exchange. The report went ahead and therefore suggested the Corporate Affairs Commission, which is responsible for registration of companies and partnerships, should create a public database which can serve retail investors domestically, and foreign institutional investors.
Secondly, it has become difficult for many investors to know when listed companies will make their reports available to the market. Companies listed on the NSE are required to publish their financial statements within 90 days of their financial year-end date, but the rules have created a lacuna as the companies do not release individual timetables, making it difficult to know the exact point within the period that the reports will be released to the market.
Thirdly, certain financial institutions require the approval of primary regulators other than the NSE, such as the Central Bank of Nigeria (for banks) or National Insurance Commission (for insurance companies) before disseminating their financial statements. This creates a delay in the final publication when the approval periods are delayed. The resulting problem is that directors, or other persons with managerial responsibilities such as top executives, auditors, lawyers and financial advisers have access to insider information for protracted periods before it is made available to the public. This promotes a culture of dealing amongst those who have access to sensitive information.
Finally, the report argued that the focus on disclosure of market information has been incomplete as attention has only been paid to financial statements such as balance sheets and profit and loss statements. This excludes other corporate announcements such as managerial appointments and dealings with connected persons such as directors or associates of directors. While some of this has been addressed at NSE level in 2014 amendments on disclosure, there remains the need for other exchanges and the Securities Exchange Commission (SEC) to consolidate these rules.
Therefore, as Nigeria looks towards opening up its borders to more foreign investors, and encourage greater domestic participation in capital markets, the regulatory framework must be enhanced to allow timely and transparent data access to all investors, particularly foreign based ones. This will help plug information loopholes, and improve the integrity of the capital markets.