2014 – 2024
Capital Market
Transformation
Plan
Capital Market Master Plan Committee
TERMS OF REFERENCE
1. Review the implementation progress of “Nigeria’s Capital Market: Making World
Class Potential a Reality” and outline milestones yet unachieved.
2. Conduct a holistic review of peer emerging markets with a view to articulating the
requisite element, size and structure of a capital market that will enhance the
global competitiveness of the Nigerian capital market and catalyze Nigeria’s
potential to become the largest economy in Africa within the focused period.
3.
Examine successful growth strategies in other jurisdictions and articulate a
development strategy for the Nigerian capital market covering key areas such as
investor protection and education, professionalism, product innovation and
expansion of the role of the capital market in economic development.
4.
Consider relevant factors that impact market growth and develop a strategy for
robust governance for improved efficiency, transparency and enhancement of
market stability.
5.
Make necessary recommendations with clear and actionable quarterly and annual
milestones that will lead to a world class capital market which supports an
inclusive economy and improves the living standard of Nigerians.
Contextual Background
The committee’s mandate is to articulate a 10-Year (2014 – 2024) Strategic Master Plan
for the Nigeria Capital Market Industry.
Work done so far
 Conducted current position
assessment exercise along the
following areas:
- Market Structure
- Contribution to National
Economy
- Regulation and Oversight
- Competitiveness
Output
 Key Issues and Challenges of
the Nigerian Capital Market
 Implications and Strategic
Considerations
 2024 Vision and strategic
objectives
Summary of Issues from Current Position Assessment
4
Nigeria Capital Market Key Metrics
50.0%
Market Cap as a % of GDP
40.0%
247%
207%
Sectors as a % of GDP (2012)
38.2%
Sectors as a % of NSE Mkt Cap (2012)
30.0%
20.0%
14.8%
112%
7.0%
10.0%
0.1%
2.0%
Agriculture
Oil & Gas
27%
0.0%
Malaysia South Africa
250.0%
Brazil
188.2%
127.3%
150.0%
67.9%
50.0%
56.3%
114.5%
98.1%
51.0%
10.1%
0.0%
Brazil China
India Nigeria Russia South
Africa
US
BRICS
Avg.
Portfolio Amount Assets In Issue
(bn)
(bn)
3.2%
1.0%
Telecomms Construction /
Real Estate
2013 Equities Market Turnover Ratio (%)
200.0%
100.0%
Nigeria
0.5%
Asset Class
Portfolio Limit
% of PFA Asset
FGN Bonds
80 %
3,172
2,371
59.79%
State Government
Bonds
20%
793
205
5.17%
Corporate Bonds*
35%
1,388
83
2.10%
Supranational Bonds
20%
793
0
0.04%
Key Issues & challenges of the Nigerian Capital Market
Contribution to
National Economy
Regulation and
Oversight
 Limited size, depth, reach and sophistication of the Capital Market
 Liquidity constraints
 Structural challenges and regulatory constraints limit access to Pension Funds
that contribute significant portion of long term investable funds in the economy
 No national strategy (regulation and incentives) for long term savings and
investments
 Non-supportive policy making framework to facilitate growth of capital market
 Uncompetitive pricing (transaction costs and cost of funds)
 Processing time
 Restrictive regulation that does not support growth and is not flexible to keep
pace with changes in the capital market
 No clear regulatory/oversight themes around liquidity and risk
 Perception that regulator is administrative in orientation and focus on penalties
 Independence and autonomy of regulator
 Regulatory capacity, dearth of skills and knowledge, low level of technology is
limiting compliance and enforcement
 Absence of regulator driven market infrastructure standards for self regulatory
bodies
 Limited capacity for statutory oversight of Self Regulating Organisations and
Trade Groups
6
Key Issues & challenges of the Nigerian Capital Market
Market Structure
Competitiveness





Market fragmentation and scale
Limited market concentration - Predominantly equities market
Market capitalisation and activity concentrated in few economic sectors and stocks
Market practices and structures have not kept pace with development
Archaic practices – requirement for physical share certificates vs dematerialisation
of shares
 Suboptimal skills and low level of IT assimilation/ capacity to leverage IT to
transform and modernise operating model
 Uncompetitive pricing of primary and secondary market processes and
transactions
 Multiple transaction payment points
 Lengthy turnaround time for transaction applications; open-ended timelines
 Poor dispute resolution process / mechanism
 Quality and reliability of market research and information about securities
and corporate performance
 Adequacy of processes for identifying, terminating and correcting market
manipulation
 Weak transparency in trading practices of market operators (equity and
fixed income)
 Limited oversight and surveillance capability on electronic trading
platforms
7
 Quality and Enforcement of whistle blowing mechanism
Overall Strategic Considerations for Nigeria’s Capital
Market
8
Overall Strategic Considerations – Key themes
1. Increase Capital Market Scale, Economic Relevance & Sophistication
−
−
−
−
Fund critical transformation of Power, Infrastructure, Oil and Gas, telecommunications
Close gap in current proportion of capitalisation to GDP and keep pace with projected annual GDP growth
of +7%
From narrow to broad market
Diversify product offerings
2. Improve Market Competitiveness and Attractiveness
−
−
−
−
−
−
Borderless market to foster globalisation
Attractive and transparent market
Foster constructive competition
Improve cost competitiveness of transactions
Ease of access and cost of capital funds
Vibrant and competitive industry for savings and investment
3. Establish Market Enabling Regulatory framework
−
−
−
Risk based monitoring and supervisory framework
Regulatory framework focus on market development and modernisation
More effective integration among FS regulators
Overall Strategic Considerations – Key themes
4. Market Liquidity, Depth and Sophistication
−
−
−
Deepen source of funding the critical economic sectors and development
Innovative, market relevant product innovation and development
Strategic collaboration with global markets
5. Capability, competence and scale of Operators
−
−
−
−
Scale and Capacity of market operators
Skill and talent for innovation and competitiveness
Cost effective operating models
Modernise marketing, distribution and fulfillment channels
6. Modernisation of Market Infrastructure and Channels
−
−
World class Clearing and Exchange platforms
Attractive and transparent market processes and transactions
Overall Strategic Considerations – Key themes
7. Improving Processes and Efficiency
−
−
−
Efficiency of the trading, clearing and settlement
Automation of regulatory and transaction processes
Responsive regulatory processes and approvals
8. Growing long term savings investments
−
−
Market relevant savings and investment programs to encourage long term savings
Financial Inclusion and Financial literacy programs
Nigeria Capital Market 2024 Vision and Objectives
12
Vision Elements
Growth
Relevance
Robustness
Size
2024 Nigerian
Capital Market
Vision
Regulatory
Framework
Vision Statement
“To be Africa's most modern, efficient and internationally
competitive market that catalyzes Nigeria’s emergence
as a top 20 global economy.”
2024 Vision – Contribution to National Economy
Objective: Support and facilitate capital raising for sustainable national development
and transformation of Nigeria’s priority economic sectors.
 Functional size in terms of GDP, breadth of sectors, number of
SIZE
participants, listed instruments, corporate bonds and national savings
ratio targets
 Adequate and greater representation of all key sectors of the broader
economy
 Liquid and efficient market for the secondary trading of securities
 Inclusive plan to develop the corporate bond market as a preferred
source of funding for Nigerian companies
 Primary source of funding for infrastructural and high impact development
projects
RELEVANCE
 Strong framework for corporate governance and shareholder value
recognition
 Effective investment management industry and conducive environment
for investors
2024 Vision – Contribution to National Economy
Objective: Support and facilitate capital raising for sustainable national development
and transformation of Nigeria’s priority economic sectors.
 Strategic alliance with peer exchanges to exploit synergic advantages
 Leverage ICT to improve market operations and efficiency
 Product diversification to boost investment and cater to various riskSOPHISTICATION
return profiles
 Flexible business architecture and strategies for operators and
exchanges
 Robust market in terms of volatility rate
 Strong Derivative market – range of risk to cover and mitigate
2024 Vision – Capital Market Regulation and Oversight
Objective:An enabling and facilitative regulatory framework supportive of the
deepening and development of the Nigeria Capital market as well as increases the
level of investors’ confidence.
 Strengthen financial reporting and disclosure by firms in terms of ranking
REGULATORY
FRAMEWORK
(e.g. World Economic Forum)
 Develop a robust regulatory framework particularly in the areas of risks
(credit, liquidity, market and systemic risk
 Strengthen transparency of and compliance with its code of ethics and
the Code of conduct
 Flexible and facilitative regulatory framework which supports innovation
and development of the market
ENABLING
RGEULATION
 Implement strong enforcement and extensive surveillance of activities in
the Capital market
 To have a clearly defined regulatory scope reflecting the definition of
capital market
 Ease of doing business and turn around or processing time
2024 Vision – Market Structure
Objective:An enabling and facilitative regulatory framework supportive of the
deepening and development of the Nigeria Capital market as well as increases the
level of investors’ confidence.
EFFICIENCY
MODERN MARKET





Reduce market transaction costs
Defined regulatory model for market development and growth
Deepen market capacity
Turnaround time
Cost of doing business
 Modernize the practices and structure of capital market
 Market sophistication
 Develop a large pool of highly skilled investment management
professionals to foster greater innovation and competition – in terms of
number of certified professionals in the industry
2024 Vision – Competitiveness
Objective: World class capital market with competitive practices to ensure
transparency, efficiency and liquidity for effective mobilisation of local domestic savings
and investments, attract sustainable investments in the critical sectors of Nigeria’s
economy
 Investor access to vibrant and competitive investment industry – investor
confidence ranking
ATTRACTIVE MARKET
 Develop an attractive and transparent market
 Higher competitiveness ranking
 Straightforward, efficient and strong investor protections
Next Steps
• Incorporate comments and feedback from CMPC
• Refine strategic objectives and define performance measures
• Organise 3-day Technical retreat in April for technical committee and representatives
from CBN, DMO, PENCOM, NAICOM, 4-5 banks (investment/merchant banks)
− Cascade strategic objectives to measurable targets
− Define programmes and initiatives towards the achievement of objectives
• Document retreat outcomes and articulate the 10-year strategic plan for the Nigerian
Capital Market
Appendix
Current State Assessment – Contribution to National Economy
Size
Small, weak and
insignificant for the
needs of the
economy
Narrow,
Unsophisticated
offerings
Uncompetitive
Pricing
- Transaction Costs
- Cost of Funds
 Current size limits relevance and role in the national economic
development
Average size of
 Only a fraction of the GDP – 27%
the capital
markets of peer
 Limited representation on the NSE of the key sectors in the broad
economies
relative to GDP
economy – Telecommunications, Oil and Gas, Agriculture
 Not positioned and does not have the scale to be relevant in the key sectors
critical for economic development – Infrastructure, Power, Real Estate
 Limited product offering particularly to support infrastructural development
projects
 Lack of a derivatives market to provide the desired economic functions of:
risk management, price discovery and transactional efficiency
 Inadequate fund management capabilities to drive investment funds like unit
trusts
 High cost of primary as well as secondary processes– transaction
fee for both equities and bonds are relatively high
 Risk free return rate (MPR above single digit) reduce attractiveness
of corporate bonds for both issuers and investors
Average
Transaction fee
in peer
economies
22
Current State Assessment – Contribution to National Economy
Liquidity
 Limited market liquidity
 N145.7B CIS funds grossly inadequate to drive liquidity in the market
Average daily
trading volume
Banking Sector
Dominance of
Financial Services
Industry
 Ability to competitively attract and grow long term savings and
investments
o
o
o
Banks are the primary repository of savings in the country
Tiered KYC for financial inclusion
Bank deposit remain viable investment outlets for both retail & institutional
investors in Nigeria
 Relative Ease of access to Bank Funding
 Deeper relationships and industry knowledge
Cumulative
bank loans to
the private
sector
Bond mkt cap
(excluding FGN)
 Length of time it takes to bring an issue to the market
Processing Time
o
o
New debt issue takes an average of 6 months from appointment to closure of transaction
Time lag is usually due to SEC’s procedures and sometimes, lack of organization on the
part of the issuer
 The prolonged transaction time has led to Issues being susceptible to:
o
o
o
Significant changes in market condition which could make the issue unattractive
Issuers often lose interest in the transaction and seek alternative sources of funding
Banks are able to convince issuers to take on loans rather than rely on bond issuance
23
Current State Assessment – Contribution to National Economy
Opportunities in
Pension limited by
current regulations
 Structural challenges and regulatory constraints which limit access to
Pension Funds that contribute significant portion of long term
investable funds in the economy
 Limitations in sophisticated products that appeal to pension capital
market investments
 Poor incentives to encourage capital market investments especially for
new entrants into pension accounts i.e. high risk capacities
Average daily
trading volume
24
Strategic Considerations – Contribution to National Economy
How can the Capital Market achieve the necessary scale and sophistication to
be relevant in the transformation of the economy and achievement of
national developmentaspirations?
- Size relative to GDP
- Contribution to Priority Economic Sectors
- Funding Structure and Cost
- Product Sophistication
- Liquidity and Depth
- Cost Competitiveness
Current State Assessment – Capital Market Regulation and Oversight
• Rules Based Framework
-
Current rules and regulations are restrictive and burdensome
Rules have not adapted and is not flexible to keeping pace with changes in the capital
market and clear regulatory/oversight themes
• Perception that SEC as regulator is administrative in orientation and focus on
penalties
“revenue and earnings’priority vs market development and enablement
• Regulatory effectiveness is lagging
World Economic Forum (2013 )
Regulatory Effectiveness Assessment
Score
-
10
9
8
7
• Regulatory capacity, dearth of skills and
knowledge, low level of technology is
limiting compliance and enforcement
6
5
4
3
2
1
0
Strength of auditing
and reporting
standards
Nigeria
Regulation of
securities
exchanges
Malaysia
India
Strength of investor
protection
S/ Africa
26
Current State Assessment – Capital Market Regulation and Oversight
• Rigour of and regulatory capacity vary and financial system regulators operate in
silos with limited information sharing
-
Different methodologies for supervisory activities
Limited effectiveness of cross-regulator oversight
• Financial services companies with cross sector operations potentially pose
regulatory complications as Nigerian regulatory institutions are not strong and
sophisticated enough to undertake joint and complementary regulation
• Absence of regulator driven market infrastructure standards for self regulatory
bodies
• Limited capacity for statutory oversight of Self Regulating Organisations and
Trade Groups
27
Strategic Considerations – Capital Market Regulation and Oversight
How can the regulation and oversight regime facilitate enabling environment for
growth and world class capital market?
- Regulatory and Oversight Framework
- Responsiveness to market specific context and clear regulatory themes
and guiding principles
- Effectiveness of regulatory surveillance and compliance
- Effectiveness of cross sector regulation
- Capacity for compliance, enforcements and surveillance
- Standard, enforceable conduct code
- Technology leverage for improved surveillance and compliance
Current State Assessment – Market Structure
Operators
Market Practices
and Structures
Market
Concentration
 Market capacity and liquidity constraints due to fragmentation and capacity of
market participants
 Low level of IT assimilation/ capacity to leverage IT to transform and modernise
operating model
 Suboptimal skills
 Practices and structures have not kept pace with development
 Archaic practices – requirement for physical share certificates vs dematerialisation
of shares
 Limited portion of shares in issue are transferable
 Registrars and issuing houses
 Predominantly equities market
 Market capitalisation and activity concentrated in few economic sectors and
stocks
29
Current State Assessment – Market Structure
Dearth of Product
Offerings
Exchanges and
Market
Infrastructure




Low level of and unsophistication of Financial intermediation
Predominantly equities market
Debt securities and other offerings-derivatives are under developed
Limited success of Collective Investments / special investment offerings
 Evolving model of Exchanges for listing and trading activities
o
o
o
o
Equities
Debt Securities –Federal Government vs State Government + Corporates
Currency
Commodities
 Absence of regulator defined industry standards for exchanges, market
infrastructure and Operators’ Capabilities
Technology
Leverage
 Limited use of technology for innovation and development of specific value-added
areas/content
 Capacity of operators to invest in technology
30
Strategic Considerations – Market Structure
How can the Capital Market transform practices and structure to modernise
and deepen capacity?
- Sophistication and breadth
- Capacity of operators
- Market Diversification
- Market and Exchange Infrastructure
- Market practices and processes
- Platform and Oversight for Trading Government Securities
- Financial Inclusion
- Dematerialization of Shares
- Technology Leverage and Standards for Exchanges and Operators
Current State Assessment – Competitiveness
Pricing
Capital Market
Processes
 Uncompetitive pricing of primary and secondary market processes and
transactions
 Multiple transaction payment points
 Lengthy turnaround time for transaction applications; open-ended timelines
 Manual and cumbersome filing process: requirement for multiple physical
documents.
 Lengthy trade settlement process
 Poor dispute resolution process / mechanism
 Completeness, reliability and timeliness of disclosure of material information
Transparency
including Director and Director Related Activities, significant shareholdings visibility of direct and indirect holdings
 Quality and reliability of market research and information about securities and
corporate performance
 Adequacy of processes for identifying, terminating and correcting market
manipulation
 Weak transparency in trading practices of market operators (equity and fixed
income)
 Limited oversight and surveillance capability on electronic trading platforms
 Quality and Enforcement of whistle blowing mechanism
32
Current State Assessment – Competitiveness
Governance
 Oversight and enforcement of compliance with corporate governance code
 Regulatory oversight and capacity for enforcement of rules
 Lack of coordination among regulators – SEC, NSE, CBN, PenCom, NAICOM and
FRC
 Low technology leverage and ability to invest in technology to improve productivity
Capacity and
Operating Models
by market operators
 Relative absence of disaster recovery and business continuity systems (operators)
 Predominantly physical channels
 Absence of market infrastructure service providers
 Unsophisticated, manual operating models
33
Strategic Considerations – Competitiveness
How can the Capital Market become more competitive and diversify to meet the
intermediation requirements of the nation’s growing economy by improving
mobilisation and allocation of funds within the domestic market, and attract
global investors to Nigeria?
- Transaction pricing model for primary and secondary processes
- Technology standards and technology enabled processes
- Cost of Capital and Debt
- Reliability of market information and reporting
- Market survellanceand enforcement capabilities