2014 – 2024Capital Market Transformation Plan

Capital Market Master Plan Committee

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.

TERMS OF REFERENCETERMS OF REFERENCE

Work done so far

Conducted current position assessment exercise along the following areas:

-Market Structure

-Contribution to National Economy

-Regulation and Oversight

-Competitiveness

Contextual Background

Output

Key Issues and Challenges of the Nigerian Capital Market

Implications and Strategic Considerations

2024 Vision and strategic objectives

The committee’s mandate is to articulate a 10-Year (2014 – 2024) Strategic Master Plan for the Nigeria Capital Market Industry.

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Summary of Issues from Current Position Summary of Issues from Current Position AssessmentAssessment

Nigeria Capital Market Key Metrics

Asset Class Portfolio LimitPortfolio Amount

(bn)Assets In Issue

(bn)% 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%

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Contribution to National

Economy

Key Issues & challenges of the Nigerian Capital Market

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

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Market Structure

Key Issues & challenges of the Nigerian Capital Market

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 Quality and Enforcement of whistle blowing mechanism Lack of coordination among regulators – SEC, NSE, CBN, PenCom,

NAICOM and FRC

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Overall Strategic Considerations for Nigeria’s Capital Overall Strategic Considerations for Nigeria’s Capital MarketMarket

Overall Strategic Considerations – Key themes

− 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

1. Increase Capital Market Scale, Economic Relevance & 1. Increase Capital Market Scale, Economic Relevance & SophisticationSophistication

− 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

2. Improve Market Competitiveness and Attractiveness2. Improve Market Competitiveness and Attractiveness

− Risk based monitoring and supervisory framework

− Regulatory framework focus on market development and modernisation

− More effective integration among FS regulators

3. Establish Market Enabling Regulatory framework3. Establish Market Enabling Regulatory framework

Overall Strategic Considerations – Key themes

− Deepen source of funding the critical economic sectors and development

− Innovative, market relevant product innovation and development

− Strategic collaboration with global markets

4. Market Liquidity, Depth and Sophistication 4. Market Liquidity, Depth and Sophistication

− Scale and Capacity of market operators

− Skill and talent for innovation and competitiveness

− Cost effective operating models

− Modernise marketing, distribution and fulfillment channels

5. Capability, competence and scale of Operators5. Capability, competence and scale of Operators

− World class Clearing and Exchange platforms

− Attractive and transparent market processes and transactions

6. Modernisation of Market Infrastructure and Channels6. Modernisation of Market Infrastructure and Channels

Overall Strategic Considerations – Key themes

− Efficiency of the trading, clearing and settlement

− Automation of regulatory and transaction processes

− Responsive regulatory processes and approvals

7. Improving Processes and Efficiency7. Improving Processes and Efficiency

− Market relevant savings and investment programs to encourage long term savings

− Financial Inclusion and Financial literacy programs

8. Growing long term savings investments8. Growing long term savings investments

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Nigeria Capital Market 2024 Vision and Objectives

Vision Elements

Vision Statement

“To be Africa's most modern, efficient and internationally competitive market that catalyzes

Nigeria’s emergence as a top 20 global economy.”

Objective: Support and facilitate capital raising for sustainable national development and transformation of Nigeria’s priority economic sectors.

2024 Vision – Contribution to National Economy

SIZESIZE

Functional size in terms of GDP, breadth of sectors, number of 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

Strong framework for corporate governance and shareholder value recognition

Effective investment management industry and conducive environment for investors

RELEVANCERELEVANCE

Objective: Support and facilitate capital raising for sustainable national development and transformation of Nigeria’s priority economic sectors.

2024 Vision – Contribution to National Economy

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 risk-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

SOPHISTICATIONSOPHISTICATION

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.

2024 Vision – Capital Market Regulation and Oversight

ENABLING ENABLING RGEULATIONRGEULATION

Flexible and facilitative regulatory framework which supports innovation and development of the market

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

Strengthen financial reporting and disclosure by firms in terms of ranking (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

REGULATORY REGULATORY FRAMEWORKFRAMEWORK

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.

2024 Vision – Market Structure

EFFICIENCYEFFICIENCY

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

MODERN MARKETMODERN MARKET

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

2024 Vision – Competitiveness

ATTRACTIVE MARKETATTRACTIVE MARKET

Investor access to vibrant and competitive investment industry – investor confidence ranking

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

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SizeSmall, weak and

insignificant for the needs of the

economy

Uncompetitive Pricing

-Transaction Costs-Cost of Funds

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

Current State Assessment – Contribution to National Economy Current size limits relevance and role in the national

economic development Only a fraction of the GDP – 27% Limited representation on the NSE of the key sectors

in the broad 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

Narrow, Unsophisticated

offerings

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

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Limited market liquidity N145.7B CIS funds grossly inadequate to drive

liquidity in the marketLiquidity

Banking Sector Dominance of

Financial Services Industry

Ability to competitively attract and grow long term savings and investments

o Banks are the primary repository of savings in the country

o Tiered KYC for financial inclusiono 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

Processing Time

Length of time it takes to bring an issue to the marketo New debt issue takes an average of 6 months from

appointment to closure of transactiono 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 Significant changes in market condition which could make

the issue unattractiveo Issuers often lose interest in the transaction and seek

alternative sources of fundingo Banks are able to convince issuers to take on loans rather

than rely on bond issuance

Current State Assessment – Contribution to National Economy

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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

Opportunities in Pension limited by

current regulations

Current State Assessment – Contribution to National Economy

Strategic Considerations – Contribution to National EconomyHow can the Capital Market achieve the necessary scale and sophistication to be relevant in the transformation of the economy and achievement of national development aspirations?

-Size relative to GDP

-Contribution to Priority Economic Sectors

-Funding Structure and Cost

-Product Sophistication

-Liquidity and Depth

-Cost Competitiveness

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• 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 capacity, dearth of skills and knowledge, low level of technology is limiting compliance and enforcement

0

1

2

3

4

5

6

7

8

9

10

Strength of auditingand reporting

standards

Regulation ofsecuritiesexchanges

Strength of investorprotection

Sco

re

World Economic Forum (2013 )Regulatory Effectiveness Assessment

Nigeria Malaysia India S/ Africa

Current State Assessment – Capital Market Regulation and Oversight

• Regulatory effectiveness is lagging

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• 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

Current State Assessment – Capital Market Regulation and Oversight

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

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Operators

Current State Assessment – Market Structure

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

Market Practices and Structures

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

Market Concentration

Predominantly equities market Market capitalisation and activity concentrated in few

economic sectors and stocks

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Evolving model of Exchanges for listing and trading activities

o Equitieso Debt Securities – Federal Government vs State Government +

Corporateso Currencyo Commodities

Absence of regulator defined industry standards for exchanges, market infrastructure and Operators’ Capabilities

Exchanges and Market

Infrastructure

Current State Assessment – Market Structure

Technology Leverage

Limited use of technology for innovation and development of specific value- added areas/content

Capacity of operators to invest in technology

Dearth of Product Offerings

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

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

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Pricing

Transparency

Completeness, reliability and timeliness of disclosure of material information 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

Current State Assessment – Competitiveness

Uncompetitive pricing of primary and secondary market processes and transactions

Multiple transaction payment points

Capital Market Processes

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

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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

Governance

Current State Assessment – Competitiveness

Low technology leverage and ability to invest in technology to improve productivity 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

Capacity and Operating Models

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 survellance and enforcement capabilities