Nigeria, often called the “Giant of Africa,” boasts a wealth of resources, a burgeoning youth population, and a vibrant culture. However, years of economic mismanagement has meant it has failed to fully achieve its potential. With a massive infrastructure deficit (approximately $3trn), underperforming real sector, seemingly insurmountable debt profile and strained fiscal position, the government alone cannot solve the array of economic issues plaguing the sleeping giant. However, according to a report by global consulting firm McKinsey & co., Nigeria has the potential to be amongst the top 20 global economies with a size of over $1.6trn by the year 2030. One of the ways to achieve this is by Nigeria looking to its capital market – a powerful tool that can be utilized to propel the nation towards economic prosperity.
This article will explore the economic importance of harnessing the capital market in Nigeria. It will delve into what the capital market is, its role in economic development, and how it can empower individuals and businesses alike. Hopefully, this will inspire a greater awareness of the transformative potential of Nigeria’s capital market.
Overview of the Capital Market
Before we dive into the economic significance, let’s first grasp the concept of a capital market. In simple terms, a capital market is a financial market where individuals, companies, and the government raise long-term funds by issuing, buying, and selling various financial instruments such as stocks, bonds, and derivatives. It is an important source of funding for economic development, and can play a significant role in boosting economic growth.
The Nigerian Stock Exchange (NSE) is the 2nd largest stock exchange in Africa by market capitalization and has over 200 listed companies. As of 6 September 2023, the NSE’s equity market capitalization was around $49 billion and bond market capitalization of around $35 billion. The NASD and FMDQ are also capital market exchanges in Nigeria focused on alternative securities not listed on the NSE.
The key moments in the history of the Nigerian capital market:
- Nigeria has a long history of capital market activity, dating back to the 1940s when the first securities exchange, the Lagos Stock Exchange (LSE), was established in Lagos. During this period, trading mainly revolved around government securities and a limited number of corporate bonds.
- With Nigeria gaining independence in 1960, the LSE officially became the Nigerian Stock Exchange (NSE). The NSE aimed to facilitate the buying and selling of stocks and bonds issued by Nigerian companies.
- The 1970s and 1980s saw the NSE expanding, with more companies listing their shares. During this period, the market primarily served as a platform for equity trading, with limited participation from retail investors.
- The 1990s marked a significant turning point for the Nigerian capital market. The government introduced a series of reforms and deregulation efforts aimed at modernizing the market and attracting foreign investment. The Securities and Exchange Commission (SEC) was established in 1999 to regulate and oversee market activities.
- In 2002, the NSE introduced the All-Share Index (ASI), a benchmark index that tracks the performance of all listed stocks on the exchange. The ASI provides a snapshot of the overall market performance and is widely used by investors and analysts.
- In a historic move, the Nigerian Stock Exchange underwent demutualization in 2019. This process transformed the NSE from a member-owned association into a public limited company. The demutualization was aimed at enhancing transparency, corporate governance, and attracting more foreign investment.
In recent years, there has been a growing emphasis on technology and innovation in the Nigerian capital market. Initiatives such as electronic trading platforms and mobile trading apps have aimed to make investing more accessible to a wider range of investors. However, the market has not yet reached its full potential. Like many emerging markets, the Nigerian capital market faces challenges such as market volatility, liquidity concerns, and regulatory compliance. However, it also offers significant opportunities for growth, given Nigeria's large and youthful population and its position as one of Africa's largest economies.
The Challenges
There are a number of challenges that need to be addressed in order to harness the capital market’s full economic benefits:
- Lack of investor education. Many Nigerians are not familiar with the capital market, and they do not understand the risks and rewards of investing. This can lead to uninformed investment decisions, which can ultimately harm the market. Consequently, this lack of investor education has also led to the exploitation of multitudes of investors via ponzi schemes and other unregulated investment offerings that offer exorbitant returns that are unsustainable and fraudulent.
- High cost of investing. The cost of investing in the capital market can be high, especially for retail investors (compared to keeping money in the bank). This can make it difficult for people to access the market. To illustrate, a N100,000 investment in equities (shares) will incur charges of around N1,455 (1.45%). The breakdown (Broker’s commission 1% = N1,000; VAT on commission 7.5% = N75; SEC fees 0.3% = N300; Stamp duty 0.08% = N80). Although, it must be noted that brokerage commission can be negotiated for higher volume transactions.
- Cost of Listing. The cost of listing a company’s securities (debt or equity) on the NSE is relatively high. This includes pre-listing costs such as audits and corporate restructuring. This can discourage potential entrants into the capital market. Although, the Alternative Securities Market (ASeM) and NSE Growth Board were launched by the NSE with more relaxed listing requirements to encourage small and medium scale enterprises (SMEs).
- Limited product offerings. The Nigerian capital market lacks in depth of product offerings, such as derivatives, commodities and foreign exchange. With inflation hovering above 20%, investors with riskier appetites often seek returns that would beat inflation and plain vanilla investments hardly provide that. Although, the SEC has encouraged the development of new financial products, such as exchange-traded funds (ETFs) and sukuk. These products make it easier for people to invest in the capital market.
- Political instability. Political instability can discourage investors from investing in the capital market. This is because political instability can lead to changes in government policies, which can affect the value of investments. The ASI has recently climbed to a 15-year high since the inauguration of President Tinubu. Largely driven by the sentiments that he will implement a more open, market-driven economy.
The Opportunities
Economic Growth and Job Creation: One of the primary economic benefits of a thriving capital market is its ability to stimulate economic growth and create jobs. When companies have easy access to capital through the issuance of stocks or bonds, they can expand their operations, invest in new technologies, and hire more employees. This expansion, in turn, contributes to increased production, consumption, and overall economic output.
Imagine a small Nigerian startup with a brilliant idea but limited resources. Through the capital market, they can issue shares to raise funds for research and development, marketing, and hiring talent. As the company grows, it creates jobs for engineers, marketers, and administrators, reducing unemployment rates and improving the quality of life for many.
Infrastructure Development: Infrastructure forms the backbone of any thriving economy. Roads, bridges, airports, and power plants are essential for business operations and overall economic development. The capital market plays a pivotal role in financing these massive infrastructure projects.
By investing in infrastructure bonds, individuals and institutions contribute to the development of vital infrastructure. Improved infrastructure not only enhances the quality of life for Nigerians but also attracts foreign investors, fosters trade, and lowers production costs for local businesses. This, in turn, drives economic growth.
Access to Finance for Small and Medium-sized Enterprises (SMEs): Small and Medium-sized Enterprises (SMEs) are the lifeblood of any economy, and Nigeria is no exception. These small businesses contribute significantly to job creation and economic diversification. However, many struggle to secure financing through traditional means like bank loans. This is where the capital market steps in.
Through platforms like the Nigerian Stock Exchange (NSE) and alternative investment markets (NASD & FMDQ), SMEs can raise capital by issuing stocks or bonds. This enables them to expand operations, innovate, and compete on a larger scale. As more SMEs thrive, the economy becomes more dynamic and resilient.
Wealth Creation and Financial Inclusion: A robust capital market also fosters wealth creation and financial inclusion. When individuals invest in stocks or bonds, they have the potential to earn dividends or interest income. This not only increases personal wealth but also encourages a culture of savings and investment.
Furthermore, the capital market provides an avenue for ordinary Nigerians to own a piece of major corporations. Owning shares in well-established companies allows individuals to benefit from the success and profitability of these businesses. This sense of ownership instills a sense of pride and financial responsibility among citizens.
Attracting Foreign Investment: Nigeria, with its vast resources and growing consumer base, has immense potential to attract foreign investment. A well-functioning capital market is an attractive proposition for foreign investors. It offers transparency, liquidity, and the opportunity to diversify their portfolios.
When foreign investors enter the market, they bring in capital, expertise, and access to global markets. This injection of foreign funds can boost economic growth, create jobs, and stimulate local industries. It also enhances Nigeria’s reputation as a favorable destination for investment, further attracting foreign capital.
Government Financing and Fiscal Discipline: Governments often rely on the capital market to finance infrastructure projects, budget deficits, and other development initiatives. By issuing bonds, the government can raise funds to invest in critical areas such as education, healthcare, and public services.
Additionally, the capital market encourages fiscal discipline. When governments must adhere to market forces and investor expectations, they are more likely to manage their finances prudently. This, in turn, leads to stability in the economy and instills confidence in both domestic and foreign investors.
Awaking the Sleeping Giant
The capital market is not just a financial institution; it is a powerhouse for economic transformation. Nigeria is at a pivotal moment in its history, poised to unlock the full potential of its capital market. By recognizing the economic importance of this market, we can inspire a wave of investment, innovation, and prosperity that will benefit all Nigerians.
As individuals, we can play our part by exploring investment opportunities in the capital market, educating ourselves about financial instruments, and advocating for policies that promote its growth. Businesses that are looking to scale can seek to list on the capital market to raise funding. As a nation, Nigeria can leverage its capital market to build infrastructure, create jobs, and drive economic growth that will secure a brighter future for all its citizens.
Envision a Nigeria where the capital market is a catalyst for economic empowerment, where entrepreneurs and investors alike thrive, and where the nation’s potential is fully realized. This vision can be a reality and can propel Nigeria towards a future of boundless prosperity. This sleeping giant must be awakened.