For Nigeria to invest heavily in its infrastructural development with long term funding, its debt market has to be deepened and participation of local investors has to increase. OLUSHOLA BELLO writes.
With the current high level of infrastructural deficit in the country, which suggests corporates, federal and state governments by extension will increasingly access debt capital markets, there is need for increase in retail investors.
Stakeholders have noted that high costs of leading in the banking sector has paved the way for lower issuance and funding costs, reduced stress on the banking system and increased investment opportunities for wholesale and retail investors.
They are of the view that this trend will only continue, if local markets enhance their liquidity and depth across the product spectrum, broadening investment appeal to a wider range of participants and ensuring a larger portion of savings from retail and institutional investors within the region.
A debt issue is a fixed corporate or government obligation, such as a bond or debenture. A debt issue is a financial obligation that allows the issuer to raise funds by promising to repay the lender at a certain point in the future and in accordance with the terms of the contract.
In Nigeria, Nigerian Stock Exchange (NSE) and FMDQ Securities Plc provide access to a range of fixed income securities from local and international issuers. Through their vast network of Dealing Member Firms and integrated trading platform, they provide institutional and retail investors access to one of the most liquid bond markets in Sub-Saharan Africa.
The DCM consists of corporate bond offerings (plain vanilla bonds, Tier II capital for banks, among others); commercial paper issues; government bonds; convertible securities; debt underwriting; debt buy-back and restructuring; structured bonds (infrastructure bonds, project bonds, credit linked notes).
The number of adult Nigerians participating in the Market is still low when compared to the population of the country. About three million retail investors, are currently captured in the Nigerian capital market, this represents three per cent of the Nigerian adult population, the country itself has a population reportedly over 190 million people.
Challenges in the Nigerian Debt Capital Market (DCM)
According to FMDQ Securities, the Nigerian DCM is faced with significant challenges that hinder its growth and we in collaboration with the DCM stakeholders, is positioned to begin to address some of these challenges.
It stated that “The challenges faced by the Nigerian DCM can be attributed to macro-economic instability; low issuance of corporate papers, bonds and notes and thin product range; lack of a diversified issuer base; high issuing costs; limited investor base; weak market governance and illiquid spot market; ineffective price discovery, imperfect market knowledge and information dissemination; slow development of repo and hedging instruments; lack of integration between trading and settlement systems and inadequate risk management controls in market operations.”
Regulators Effort In Deepening Retail Investors’ Participation In DCM
The Debt Management Officer (DMO) has over the years worked to develop well-functioning debt markets to bridge the long-term financing gaps in the expenditure outlays of the federal government at cheaper and more sustainable costs.
The DMO launched the first savings bond in March, 2017 in an effort to diversify funding sources for the government and deepen the savings culture in the country. The bond is targeted at retail investors and gives an opportunity to contribute to the growth and development of the nation.
The FGN Savings Bonds are currently issued for two-year and three-year tenures and pay coupons quarterly. They are tax-free and are backed by the full faith and credit of the Federal Government.
Through the issuance of the FGN Savings Bonds, the DMO has raised over N7 billion from the domestic market since March 2017. The $1.5 billion, 30-year, FGN Eurobond and the $1.5 billion, 10-year FGN.
The past director-general, DMO, Abraham Nwankwo hinted that government’s plan for the market was to democratise its activities in the bond market by making it easily accessible to most Nigerians so as to ensure continuous development of the domestic market and to bridge infrastructure deficit constraining economic growth.
He further said, by promoting retail participation in the bond market, the goal is aimed at encouraging participation in investments and driving financial inclusion in the country will be further enhanced, saying that this represents an opportunity for investors to harness the huge benefits derivable from the retail bonds.
The chief executive officer of NSE, Mr. Oscar Onyema said that from the beginnings of listing and trading Federal Republic of Nigeria (FGN) Development Stocks in 1961, the Exchange is delighted to have revolutionized into a multi-asset hub with a N12.47 trillion debt market providing investors access to a wide range of investment opportunities in the domestic and international capital market through the listing of sovereign, sub-national, corporates and supranational debt issues.
He added that the NSE partnership with the DMO towards creating investment opportunities for retail investors in the Debt Market dates to the launch of the NSE Retail Bond Market in 2012; when the DMO appointed a government stockbroker to provide liquidity in FGN bonds on the Nigerian bourse.
He stated that “With the launch of the NSE Retail Bond Market, the Exchange sought to promote financial inclusion, while stimulating retail investor participation in the Nigerian Debt market. Prior to that time, investing in listed debt instruments had been dominated by institutional investors trading in wholesale denominations.
“In March 2017, the Exchange in collaboration with the DMO launched the FGN Savings Bond having recognised the opportunity presented by the Nigerian demographic to diversify Government’s funding sources as well as enhance national savings culture.
“Since its debut issuance of N2.067 billion, retail investors from across the six geo-political zones and the diaspora have invested in the FGN Savings Bond with the DMO raising over N13 billion from two-year and three-year bond maturities as at July 2019.”
He stated that “Despite these teeming efforts, only about three per cent of Nigeria’s adult population currently participate in the Nigerian capital market; an indication that there is need for increased collaborative efforts in promoting higher levels of financial inclusion in Nigeria.
“In achieving our strategic vision to become the preferred Exchange hub in Africa, we will continue to pursue initiatives that seeks to increase domestic participation in capital market through increased access to investment solutions, as well as support government to achieve inclusive growth and sustainable development.”
According to Onyema, the Exchange promises to continue its collaboration with the Government and market stakeholders to collectively enhance market depth and domestic participation in the Nigerian capital market.
The managing director of HighCap Securities Limited said that “0The bond market plays a central role in the deepening of financial markets not only for the diversity of products it offers the market but essentially its role in improving diversification of funding sources and increasing access to credit markets.
“It is therefore the right time to ensure that proper structures are in place to ensure the development of a deep and expansive bonds, loans and derivatives market in Nigeria.”
Adonri noted that “To sustainably develop Nigeria, reliance must be shifted from ‘owners’ capital’ and short-term funding from commercial banks to long-term capital from the DCM.”
He urged government to ensure that all interventions and assisted funding must be issued in bonds, note form, and subsequently listed on the NSE and FMDQ platform.
On increasing retail investors participation, he said that there is need to encourage more trading in securities through tax incentives, deepen the use of Islamic finance/non-interest capital market products, broaden understanding of capital market products, reduce over-concentration of trading, including geographically, and improve focus on data and innovation, develop the bond market, especially micro-savings bonds and municipal bonds, reduce the average transaction costs of issuing equity and debt securities, relax the complex legal, regulatory and listing requirements, broaden the capital market’s idea of financial inclusion being seen as only corporate social responsibility.
Chief executive officer, Chapel Hill Denham, Bolaji Balogun, argued that government must be strategic to fast-track Nigeria’s economic growth, and stimulate activities in the market.
He argued that there was the need to transform the market from primary commodity market to a robust debt capital market to develop the country and secure its future.
According to him, the country can witness a reasonable level of growth if government compelled firms receiving concessions or subsidies to float initial public offerings (IPOs) in the market within three years.
“Government must privatise all major government-owned assets, and list them in the market to grow this economy in a sustainable manner. The economy had witnessed unprecedented drag over the years. Infrastructure in Nigeria needs to be financed largely in local currency because the U.S. dollar trail risk for Nigeria to price everything in dollar denominated currency is huge.”
Chief executive officer of Sofunix Investment and Communications, Mr. Sola Oni said that “Investment in the debt market provides a veritable income generation for all stakeholders in the ecosystem.”
He stated that in order to increase retail investors in this segment, the real bond yield should be attractive and competitive. There must be a single digit inflation rate while exchange rate should be stable.
He added that this should be reinforced with strategic publicity to attract investors across the globe.
According to Oni, over the years, Nigeria’s debt market has remained attractive because of its high return on investment (ROI). In order to deepen the debt market, bond derivatives can be introduced, corporate entities should be encouraged to raise certain percentage of their financing needs in debt capital while legislation can be made to allow the use of highly rated bonds as collaterals.
In conclusion, providing long-term financing for the country’s economic development is very important and the development of an organized bond, loans and debt market would help diversify investment options and boost economic activities in the country. More importantly, is the increase of retail investors’ participation in the market.