Market access: Nigeria

Kedu… Sannu… Bawo ni Nigeria

Nigeria is the largest economy in Africa and Nigeria’s capital markets are ranked third after South Africa and Mauritius¹. Typically, market access is measured by both the breadth of issuers able to meet their funding needs in capital markets and the existence of instruments that transfer risk from debtors to creditors².

Both these dimensions have been policy priorities in Nigeria in recent years and as a result of on-going efforts to improve the attractiveness of the market, both local and foreign portfolio investors in Nigeria have access to investments in equities, corporate bonds, government bonds, foreign exchange swaps, currency futures, climate aligned bonds, exchange traded funds, and options. Derivatives are largely traded on a bilateral basis between international banks and major Nigerian banks.Regulatory environmentA mature and robust regulatory environment supports this product diversity. The Investments and Securities Act, 2007 (ISA) is the primary legislative instrument in the securities services regulatory framework and among other arrangements, it makes provision for the establishment of the Securities and Exchange Commission (SEC). The SEC is the main regulatory organ of the Nigerian capital market and was responsible for the Securities and Exchange Commission Rules and Regulation, 2013 – considered the market’s ‘bible’. To the extent that these companies and corporate bodies are participants in Nigeria’s capital market, The Companies and Allied Matters Act (CAMA) is the next significant legislative instrument of reference in Nigeria.

¹Absa Africa Financial Markets Index 2019
²Bank of International Settlements Committee on the Global Financial System Papers No 62 Establishing viable capital markets

Foreign investor participationForeign investment in the Nigerian capital market enjoys the same regulatory treatment afforded to local investment. Foreign issuers are permitted to issue, sell or offer for sale or subscription, securities to the public through the Nigerian capital market. Securities may be denominated in naira or any convertible foreign currency³.The SEC has the discretion to exempt foreign issuers from certain securities registration obligations under the SEC rules if it is “in the public interest” and where reciprocal agreements exist between Nigeria and the country of the issuer, or the issuer’s country is a member of the International Organisation of Securities Commissions⁴. New Nigerian Stock Exchange (NSE) Rules allow foreign issuers to apply for the listing of their sukuk and debt securities on the NSE. The SEC Rules require portfolio investors to appoint a custodian and to file a copy of the letter of appointment of the custodian with the SEC within 10 working days of making the appointment⁵.

³ SEC Rules, Rule 414
⁴ SEC Rules, Rule 416
⁵ SEC Rules, Rule 409

Access to foreign exchangeNigeria maintains a floating exchange rate and foreign exchange transactions are regulated by both statute and the Central Bank of Nigeria through regulations, circulars and directives including the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 12 (the FEMM Act) and the Foreign Exchange Manual (the FX Manual). There are no regulatory restrictions on foreign investment in the capital market, however, a foreign investor must ensure that foreign currency inflows are imported through an authorised dealer. The FX Manual also permits authorised dealers to issue an electronic certificate of capital importation (eCCI) to the investor. The eCCI guarantees “unconditional transferability of funds, through an authorised dealer in freely convertible currency, relating to dividends or profits (net of taxes) attributable to the investment”. Foreign investors may also use local currency balances to purchase foreign currency from the Nigerian Autonomous Foreign Exchange Market and this can be freely repatriated from Nigeria without any further approval.

General considerations

The Nigerian capital market offers strong investment performance by regional standards and its ability to attract foreign portfolio investors relies on, in addition to above stated considerations: Nigeria’s tax system, which has performed well in encouraging and facilitating financial market development⁶, the robust account structures, and the use of key financial master agreements such as ISDA, GMRA and GMSLA, which are all recognised in Nigeria.

⁶Absa Africa Financial Markets Index 2019

Nigeria in numbers

400%

Oversubscription of Nigeria’s first 30-year government bond issued in 2019

14

ratified tax treaties and
6 in the pipeline

>25

corporate ratings

USD290 mn⁷

average daily turnover of horizontal repos

50.87%

Contribution of foreign portfolio investments to total transactions on NSE

56%

Contribution of institutional investments to total transactions on NSE

20%

Net portfolio investments to foreign exchange reserves

⁷ Absa Africa Financial Markets Index 2019

Our view – current highs and lows

Improvement in access to foreign exchange

Nigeria has moved towards unifying its various exchange rates, bringing its foreign exchange fixing rate (the rate at which it sells dollars to certain local companies) closer to the Nigerian autonomous foreign exchange fixing rate used by foreign bond and stock investors.

In 2018, Nigeria signed a currency swap agreement with the People’s Republic of China, its second largest trading partner, to increase trade and ease pressure on the naira-dollar rate by reducing Nigerian importers’ reliance on dollar transactions. This is also expected to improve foreign exchange availability in the market.

Focus on product diversity
The Nigerian Government has pioneered the issuance of new products in the market since late 2017. These include:

Nigeria is one of the leaders in the continent with 3 issues of sovereign sukuk bond issued between 2017 and 2019⁸.

A five-year NGN10.69 billion sovereign green bond (SGB), which is the world’s-first Climate Bonds Certified sovereign bond issued in December 2017, Nigeria’s second green bond issue was also oversubscribed at 220 per cent.

In 2019, the NSE and the Luxembourg Stock Exchange (LuxSE) agreed to cooperate in promoting cross listing and trading of green bonds in Nigeria and Luxembourg.

SEC and the NSE have also proposed different rules to guide the trading of derivatives. While the NSE’s rules will govern trading of derivatives on the NSE, the SEC rules will govern both OTC-traded derivatives and exchange-traded derivatives.

In May 2018, the Senate of the National Assembly passed the Companies and Allied Matters Bill (the Companies Bill), which seeks to amend the CAMA. The Companies Bill includes provisions on the validity of netting arrangements in certain contracts, including derivative contracts.

⁸ Central Bank of Nigeria, Financial Markets Department Half Year Activity Report 2019

Restrictions

Nigeria has lagged in respect of the quality of insolvency laws, the efficiency of bankruptcy and reorganisation processes, the time and cost of resolution, and the recovery rate for claimants⁹.

Multiple exchange rate reporting requirements weakens Nigeria’s investment posture, but this situation is improving¹⁰.

The exclusion of local banks from buying government bills at an open market auction in July 2019 to encourage banks to lend more to the private sector has had unintended adverse effects on the market.

The uneven application of ISIN codes on exchange-traded financial instruments has created administrative and record-keeping challenges for portfolio investors and custodians.

⁹ IMF Ease of Doing Business 2019
¹⁰ Absa Africa Financial Markets Index 2019

Supporting clients in Nigeria

Standard Chartered opened its Nigerian Securities Services business in 2011, and in six years has grown its market share to 18 per cent becoming the second largest custodian in the country. In a market where there are six custodians, this represents a definitive confidence in our brand name and capability.

Introducing Adeyemi Odubiyi, Head of Securities Services, Nigeria

Adeyemi joined Standard Chartered in late 2019 with more than 12 years of experience in Securities Services. In addition to his role at the Bank he is also Chairperson for the sub-committee under the Association of Assets Custodian of Nigeria (AACN), and a key member of The Certificate of Capital Importation Dematerialisation project (ECCI) during the launch of securities lending In Nigeria.

Adeyemi is part of a team of specialists in sales, product management, client management, operations, relationship management and risk management, blending local market expertise and experience with the global capability. Market intelligence and advocacy is central to servicing clients in the Nigerian market and Standard Chartered is a market leader in Nigeria in lobbying the Nigerian market to achieve best practice globally. The bank is currently the General Secretary of the Association of Assets Custodians of Nigeria (AACN).