Using stock exchanges to formalize Africa’s informal capital: The case of Nigeria. #Africa #Nigeria #Finance

By Rafiq Raji

Estimates of illicit flows out of the Africa over four decades to 2009 range from USD1.2 trillion to USD1.8 trillion. The continent also has capital that remains hidden (or undocumented) in ubiquitous safes in the homes and offices of its elites. The other dimension of Africa’s hidden or informal capital relates to numerous sums that continue to be kept under pillows, in ceramic wares and cupboards in African households. Apart from South Africa and Mauritius, the percentage of adults with an account with a formal financial institution in Africa is less than 50%. It is as low as 2-6% in countries like Niger, Democratic Republic of Congo and Senegal. With increasing success, mobile banking is becoming the consensus solution towards bridging this gap and thus increasing financial inclusion on the continent. The World Bank reports 16-20% of adult Africans now use their mobile phones for paying bills and receiving money. It is higher in Kenya; with at least c.70% of its adults using mobile money. There are other strategies that could be adopted as well.

TPSDDNSE iii

Source: Central Bank of Nigeria (N.B: Data points as at January of each year; USD:NGN = 150)

The market capitalization of the Nigerian Stock Exchange (NSE) rose to NGN12.5tn (c. USD83bn) as at the end of February 2008 from NGN247.6bn (c.USD1.65bn) in January 1999. This was the period the NSE experienced its most bullish run till date; which reached its peak on the 5th of March 2008. In that period, the NSE All Share Index (ASI) grew more than ten-fold. In the same period, total private sector deposits in Nigerian banks grew to NGN5.5tn (c.USD36.4bn) in February 2008 from NGN421bn (c.USD2.8bn) in January 2000. As the above graph shows, the stock market bull run helped formalize some of Nigeria’s hitherto informal capital. Private sector deposits rose in pace with the market capitalization of companies listed on the NSE up until 2003. From 2004, NSE market capitalization began to rise faster than deposits and would be twice as much at the height of the stock market bubble in January 2008. As a check, total deposits (both public and private) in the Nigerian banking system as at February 2008 was NGN5.9tn (c. USD40bn), still 48% of total market capitalization of companies listed on the NSE. The wide gulf between these two metrics point to flows into the stock market between 1999 and 2008 that came from outside the banking system.

Since the bearish turn in March 2008, there has been decreasing domestic participation on the NSE, however. In the first quarter of 2014, the Nigerian domestic investor only accounted for 35% of the total transactions on the NSE. Ironically, the bearish domestic investor sentiment is a far contrast to increasing foreign inflows into the Nigerian bourse. In the six years that foreign participation in Nigerian equities rose by 36% to NGN1.04tn, local investors interest has waned by about the same amount. According to the NSE, foreign portfolio inflows rose 65% to USD2.2bn (NGN356.5bn) in the first quarter of 2014. As the Nigerian primary equity market has been stagnant of late, increased domestic participation is not likely in the short to medium term. It is also quite curious why none of Nigeria’s big telecom and upstream oil producer firms are listed on the NSE. A major reason is likely a reluctance to go through the onerous disclosure requirements of the listing process. Some CEOs of these companies have also complained about the costs of the listing process in Nigeria. Another major issue for Nigerian entrepreneurs is the fear of losing control.

The more critical question is this: What would make a company want to list on the Nigerian Stock Exchange? The main reason any company lists on an exchange is usually to raise capital. A rebuttal to that thesis could be that once a company’s shares start to trade in the secondary market, whatever value-add therefrom is transferrable not to the issuer of the security being traded but to the trader. That argument is flawed. The raison d’etre for listing on an exchange is to raise capital at an optimal cost; both equity and debt. When a company is listed, it is easier to secure loans from banks because due diligence is easier. Also, sentiments about a company are easier to read from the movements of its share price. Of course, this assumes that the integrity of the listing process is not in doubt. So what has been responsible for the listing stagnation on the Nigerian Stock Exchange? Why did telecom reforms not translate into increased listings by the sector’s big corporates like was the case for the banking industry? Simple: the costs outweighed the benefits from these companies’ perspectives. And insofar as this continues to be the case, these big corporates are not likely to list on the Nigerian Stock Exchange without being incentivised.

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