•Speaks on how to reposition financial markets
When the National Association of Securities Dealers (NASD OTC) platform was inaugurated in July last year, only a few players gave it any chance because of strong local apathy to equities business.
One year since Over-The-Counter (OTC) market – where shares of companies not listed on the Nigerian Stock Exchange (NSE) are traded in Lagos – was launched, the restless brain behind the project, Bola Ajomale, said it has been a huge success.
Beyond that, Ajomale (who worked in blue-chip companies including Ernst & Young, Augusto & Co., Canada Pension Plan, and several other companies abroad) reveals how Nigeria’s tottering financial markets could be repositioned.
Assistant Business Editor, KELECHI MGBOJI, engaged the stockbroker, chartered accountant, and NASD Chief Executive Officer (CEO) on a wide range of issues as can be gleaned from the excerpts below.
How to put financial market in proper perspective
Bola Ajomale
From the regulatory perspective, strong, quick and dedicated rule-making process is required to turn around Nigeria’s financial markets. The changes and growth that happened in Bovespa (Brazilian Stock Exchange) were as a result of strong, quick and dedicated rule-making process.
If you notice a kind of arbitrage that could damage your market, and the reason is that there was a loophole in the system, very quickly you come up with a rule to shut it down so that it will not fester.
Also, for a development that is neither illegal nor legal, but is positive and could support a certain sector of the economy to grow, you quickly come up with rules to give it a backing as long as it will have a very positive impact on the economy and the financial system.
For instance, the SME (small and medium-sized enterprises) sector lacks some kind of guaranty and backing necessary for it to grow. What the Brazilian authorities did was to come up with a rule on how to tackle the challenge; tax holiday, for instance, to enable SMEs grow.
Back home, when the SEC (Securities and Exchange Commission) moved to enforce the rule that all Plcs must register with the Commission, all the companies concerned jumped and very quickly started registering. That is the power of rule making and enforcement. It galvanises the primary and secondary aspects of the market.
If we have that strong, rapid and dedicated rule-making process, our financial markets will change significantly.
Another thing is the level of activities going on. You don’t have activities for activities’ sake. You have activities for the demand. Many economists and capital market observers know that the more developed an economy is, the more demand for its capital market instrument; the less developed an economy is, the more demand for banking products.
In advanced countries people turn to their capital markets for funding but in less developed countries, people go to banks when they need money. It is a matter of risk; it is a matter of the age and development of the market and the age and development of the economy as a whole.
How long term is the Nigerian economy? What is the tenor of the economy? You can raise a 30 year bond. There might be inflation in between but you know you will be collecting a certain percentage of interest. So, you can plan.
You are likely to go the capital market because you know that the market will be there in the next 30 years.
The Nigerian economy is short term in nature. It is only now that we are beginning to establish a yield curve for financial instruments. Two or three years ago, we didn’t have a yield curve for long term instruments. It is only now that you can plan and transact on a 10-year product and make projections.
If you are dealing with a short term situation, you are not likely to go the capital market. If the demand is not there, the product will not be there.
Because we are lengthening our tenor now, the length of time frame of our horizon, the further you look into the future, the more likely you have to develop the market. But if your vision is too short, the value will be on banks; you go to banks and borrow money.
Again financial policy affects the development of capital market. We have the policy of issuing a lot of paper money (fixed income instruments). And what it did was to crowd out the capital market and starve it of funds. All the funds that would have gone to the capital market find their way to fixed income.
What is the level of sophistication of the operators in the industry? Online trading and stuff like that in the secondary market are recent developments. Up till recently, we were still trading by the call-over system.
There is need for lots of sophistication in our processes. There is need for algorithmic trading. Without algorithmic trading, you cannot have high frequency trading. Because you don’t do algorithm trading and you don’t have high frequency transactions, you don’t have much risk to hedge. If you don’t have much risk to hedge, there is no need to introduce derivatives instrument.
Clearly, unless the market is sophisticated enough to require those products, if you create those products without the market demanding for them it will amount to an intellectual exercise.
CBN’s gradual reduction of interest rate
One important aspect of monetary policy is communicating intent. Sometimes when you signal the intent, you get the result without moving. A certain drop in interest rate overnight will panic everybody, and money will begin to fly out of the economy.
A lot of money in the country is foreign investment funds. The investors don’t just come because they love Nigerians. They come here because they are looking for investment opportunities.
Once there is a shock in our foreign exchange, the investors will move anywhere else they can find better opportunities. And before you know it, it can damage the whole economy just by the singular act of dropping interest rate suddenly.
But if you communicate the intent that over a period of time, you are going to drop interest rate, that the economy is no longer a high inflation economy, but is now a stable, low interest, low yield economy. And if all your communication is consistent with that, investors will gradually realign themselves.
This economy is no longer a high inflation economy; it has a stable outlook, this economy is dropping interest because risk is dropping. They are not issuing much paper. Then interest rate will gradually drop on its own.
If you do it suddenly overnight, people will wake up in the morning and notice that rates have dropped, off they go. Investors who do hold money in countries like Nigeria are rapid response people who have their fingers on the trigger. The very moment anything happens that they are not sure about, and might be negative to their investments they press the trigger and off they go.
How NASD platform lifts the economy
Investors buy shares as savings and when they need money they can sell the shares and realise their money. If you buy something and realise that when you need cash you can sell it and raise cash you will be encouraged to buy more.
But if you have tried and you did not get cash, you will not get back into such investment. So what we are doing is providing liquidity for investors who have invested. We are making it easy for them to get in and get out.
On the NASD platform, investors who bought shares of companies not listed on the NSE and therefore could not sell the shares are encouraged to bring them to NASD stockbrokers to get buyers to match the price shareholders set for their shares.
We are also making it easy for companies to raise capital. When companies are able to raise capital, they can do better, and that helps to improve the economy. NASD is providing liquidity for investors who have invested in non-quoted companies.
There has been trading going on over the years in unregistered securities. Nobody captured all that. What we are doing now is bring all that out in the open.
How companies on NASD platform can raise funds
Companies on this platform can raise funds by issuing initial public offers (IPO). But they will need to tell their shareholders that they can trade their shares over-the-counter on NASD OTC even if they do not list on the NSE. We will encourage and endorse it if by all means the company tells their shareholders from the outset, and register the shares with SEC.
We will assist the company trade their shares over the counter after the offer and fund raising but we cannot help them to raise the funds.
Relationship between NASD and NSE
The NSE is a shareholder in NASD. But the ownership of NASD is mainly capital market operators, stockbrokers. Largely, the shareholding belongs to stockbrokers and the rest NSE and another entity.
We share with the NSE its trading engine, X-Gen, which it acquired from NASDAQ. We are using it on lease. The engine is large and the NSE can never use it all. For that reason, it does not make sense to us to acquire another engine. We also share similar constituents as shareholders. So we make sure our calendar does not clash with that of the NSE.
We focus on equities primarily but as the market develops we do hope that other instruments will come on board. Because we do trade on equities just as the NSE, we have a strong understanding that we would not compete with each other.
So we have exclusive areas to trade on. We do not allow dual listing on the NASD and the NSE by the same company or securities. If a company is not listed on the NSE, we have the power to trade its securities on NASD OTC market, but if it is listed on the NSE the securities cannot trade on NASD OTC.
This is important so that we do not confuse issues by given two different prices on the same securities.
Prospects of securities expected on board
We have 16 securities trading on the NASD. We have five coming in next week; 29 just completed their registration at the SEC. But then every company that has a Plc tag on its name is a prospect as long as it is not listed yet on the NSE.
But again we do not have control over these companies. What we do is allow their shares to be traded on the OTC market. Now the investors can bring their shares to be traded on the market. So, what we are going after is not the company but the shareholders to bring their shares to be traded on the market.
Motivation for companies to come to NASD
It is not that management of the companies decided to list the shares on the NASD. Individual shareholders decide to bring their shares to the NASD, which is an open market. Once an individual shareholder decides to bring his shares to the NASD, he takes it to a stockbroker who notifies us and opens an account with the CSCS in that name. It is not the company that comes in, it is the shareholders.
We have minimal transaction charges; both on the buy and sale sides. We charge 0.3 per cent both sides of a transaction.
Status of SMEs
We intend to have SMEs on board with time. The sector is still in formation. It requires a lot of funding but we do not see that coming for now. They also require control, unlike Plcs which already have shareholders who invested in their own right without recourse to us for confirmation of anything.
Investors who may want to invest in SME firms may write to us seeking clarification and confirmation of one thing or another. We are not prepared to take such responsibility for the firms. Our role is that of a middle man, not an investor, or guarantor.
A lot of people want us to play in the SME sector, but we cannot guaranty the quality of SME issuer. Because of that we are very careful about going into the SME sector.
Diversification into fixed income and other instruments
We are concentrating on equities, but hopefully, by the end of this year, we would have opened another asset class. Fixed income instruments are currently being traded on the NSE. We are not likely to go into fixed income because of the understanding we have with the NSE.
There are so many other investment pipelines that need to be done in this country that are not being done yet; there are many gaps that need to be filled.
There are many other things to do but because they are not formalised yet, I will not go to that. But there are two asset classes we are looking at that will come out before the end of the year.
In addition, there are cross border asset classes that will come out early next year.
