This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.
Nigeria’s capital market overview
The Nigerian Stock Exchange (NSE) is the second biggest in Sub-Saharan Africa in terms of market capitalization. The total market cap of NSE is now at around $70bn. There were 197 companies on the exchange at the end of 2014.
The market crashed in 2008 and a lot of efforts have been put to create new reforms and make it more appealing to the investors. The market is way more diversified in 2015 than it was in 2008, but it still only represents a small fraction of what the Nigeria’s economy has to offer. For example, the big industries, such as telco and oil, are quite underrepresented in the market. There is not a single telecommunications company on the exchange.
The stock market is a great investment option, since it has the most liquidity Nigeria can offer. You can jump in and out of the markets, it’s quite common for people to trade in multiple developing world stock markets or African exchanges. The Nigerian market is liberal – funds can be moved out without too many restrictions, compared to other developing countries.
The low oil prices and Naira devaluation made some investors exit the market in 2014. For the most part, foreigner investors are still sitting on the sidewalks. The ones who hold stocks are trading actively – foreigner versus domestic trade volumes are at around 50/50, yet foreigners hold only about 25% of the stocks.
The domestic investors have a tendency to buy and hold the stocks for a long time. The capital markets don’t see much benefit in terms of liquidity from such domestic investors like pensions funds, as they simply hold the stocks for a long time. There is also a lot of interest in fixed assets by the domestic funds, as they have high returns, resulting in decreased activity in the equities markets.
There are 242 registered brokers, but the trading is dominated by the top tier of brokers – the top 10 brokers accounted for 43% of the trades in 2014. The SEC have greatly increased the minimum capital required for the brokers, while the NSE requested new technological standards to match international standards.
Transactions costs for trading in the capital markets are very high – 1.855% when buying and 2.2% when selling imposed by the NSE and the SEC has a 0.03% levy on trades. The NSE fees will be reviewed and the SEC fees have already gone down from 0.06%.
Concerns in the exchange
While the stock market offers liquidity compared to the other investment options in Nigeria, liquidity still remains a major concern in the market. Out of the 197 companies, only about the top 40 see some liquidity for their stock. The lack of liquidity is driven by the domestic investors either holding their stocks and not trading or paying most attention and investments at the fixed income assets.
The equities market could see a lot more liquidity if the interest rates went down, as the high interest rates are generating fixed income assets. The foreigners sitting on the side-lines waiting to see the developments of the market, are also limiting the liquidity potential of the equity markets. Once the foreigner investors fully return to the market and make their investments, the liquidity is expected to increase.
While the stock market is a great opportunity for the foreigner investor to invest in Nigeria, it doesn’t really fit well with the business landscape of the country.
The NSE is working hard to increase the corporate governance of listed companies, yet the majority of the entrepreneurs in Nigeria are not used to corporate structures. There is a business culture of getting things done, there is no time for structured protocols. This is not the case with just small or medium companies. The telecom companies are resistant to listing on the stock exchange due to them having to become a lot more transparent, this in turn gives them less of a competitive advantage. A listed companies books are a lot more transparent, this attracts the government taxation agents. There are also general costs involved with being a listed company.
Overall, there are simply many disadvantages for a company to list and some of the multi-nationals simply don’t have a need for capital, so they don’t list.
The NSE is becoming more regulated and demanding better corporate governance, yet it also wants to list new companies. This surely is great for the exchange and the nation in long term, but considering the Nigerian landscape, these goals contradict each other in the short term.