10 Problem of the Nigerian Capital Market and Possible Solutions

Introduction:

What Is The Capital Market?

According to Oxford Dictionary, the Capital Market is part of a financial system, which deals in raising funds, which could be in form of Shares, Bonds and other long term Instruments.

Also stated by a Popular Magazine, Economic Times, it is a market consisting of buyers and sellers, engaging in trade of Financial Securities like Bonds, and Stocks. Mostly Individuals and Institutions, are participant of this trade.

According to a 2008 paper, titled ‘Opportunities in the Nigerian Capital Market’ presented by Securities and Exchange Commission, (SEC) states it as a market where medium and long term securities, are sold. These are in form of Ordinary Shares, Preference Shares, Bonds, and Debentures.

Capital Market activities in Nigeria started in I946, with the first stock of £300,000

(Three hundred thousand pounds), issued during the Colonial Administration. This was until Central Bank of Nigeria (CBN) was established in 1958. The Ministry of Finance and CBN soon established Securities and Exchange Commission (SEC), and other instruments that operates in the Nigerian Capital Market.

The Nigerian Capital Market is an important part of the Nigerian Financial System. Other Sectors within the system, include the Money Market, the Insurance and the Pension. The Money Market which consists of Deposit Money Banks, and other Financial Institutions, like Macro-Finance Banks (MFB), and Purchasing Managers Index (PMI), is being regulated by CBN. The Nigerian Insurance Commission regulates Insurance Companies, Pension Committee regulates Pension Fund Administrators and Pensions Fund Custodians. Securities and Exchange Commission regulates the Nigerian Capital Market. The Commission helps the Capital Market to protect investors from any form of shady dealings, arising, during trade.

Insurance and Securities Act 2007(ISA) states the functions of Securities and Exchange Commission is to be in charge of Registration, Market Development, Investigations of any kind, Complaints Management, Monitoring and ensuring effective Compliance, for smooth operation in the Nigerian Capital Market.

Instruments In the Nigerian Capital Market

Companies or Governments need stable funds to execute projects. Economists Experts have claimed that Companies need stable Capital to function more effectively in the business world. The Governments need funds to construct roads, water pipes, electricity lines, or even set up Educational Facilities. These stable funds cannot be provided from the Money Market. Funds are issued in form of instruments. There are Equities (Ordinary Shares), Debts Instruments, i.e. bonds, debentures, or Preference Shares.

1. Equities

These are called Ordinary Shares or Common Stocks, which is used to sell to a Potential Investors, as part of itself. This is to raise Funds for development and Expansion. Investors who buy become part of the Company, and can share in Profits i.e. Dividends and Bonuses. The Company can issue in form of Ordinary Shares through initial Public offers (IPO), or just offer to existing Shareholders, who are already part of the Company.

2. Debt Instruments

When Companies did not want to dilute their ownership interest, result to using Debt Instruments to raise funds from the Capital Market. Governments usually use this to fund infrastructural Projects. Example of Debt Instruments is the Preference Share.  This is the Share issued by Companies, where shareholders do not want to dilute their ownership Interest, giving opportunity to participate in further additional Dividends, under which conditions are met. Ordinary Shares usually have fixed return of interest, when issued. Preference Shares can be converted into Ordinary Shares. Shareholders of convertible Shares can also become part-owners of a Company.

3. Collective Investment Schemes

This allows Companies or Governments, to be allowed to raise capital for their projects, by way of investing in equities, debts or other investments. Investors source for Money, and placed under a Professional Manager. It enables investors to buy much stock with very small Capital. Cost is reduced when commissions are paid by the Professional or Fund Manager in Large deals.

Types Of Capital Market

There are two types of Capital Markets. This is the Primary Market and Secondary Market. The Primary Market is concerned with fresh issue of securities by Companies, which needs funds for Business. Governments may also need funds for Infrastructural development. Companies wishing to raise funds, from the Public, in the Capital Market, must get approval from its Board of Directors. It must pass then pass a resolution, before commencing.

Secondary Capital Market is for buying and selling of shares which the investors have already bought. The proceeds from sales, go to Shareholder, and not Company where Shares is being traded.

Benefits Of The Nigerian Capital Market:

• Companies, Governments, or Institutions are able to gain Capital, through the funds obtained from the Stocks, Shares, Bonds, or Debt Instruments.
• Companies will have cheaper access of Funds that would not be raised from Financial Institutions.
• Companies can invest in their Capital to yield better returns from the Capital Market.
• Companies that participate in the Capital Market have better reputation in the Business World.
• Capital Market enable for Companies to showcase their Products.
• Governments whether Federal or State, gain funds in which they use to improve the Economy, through providing Employment, by carrying out Infrastructure Development and generating tax Revenues for Government.
• In Capital Markets, Investors receive returns in form of Dividends. This share of Profit from a Company, for a Financial Year. The Profits are normally declared at the Annual General Meeting of the Company.
• Companies normally expect to see their Capital Appreciate, when there is sale of Stock over a period of time.
• Capital Market issues bonuses by getting issued new Shares, to existing Shareholders.
• Capital Markets have provided Career opportunities for Lawyers, Stockbrokers who are licensed to trade at the Nigerian Stock Exchange Market, Fund Managers who specialize in managing Investments, Accountants, Engineers, Registrars who help in maintaining Shareholders, Dividends, distribution of Annual Reports, Accounts and sending out notice for Companies’ Meetings.

This Essay is focused on discussing about the Problems of the Nigerian Capital Market and giving Recommended Solutions. Firstly, there is need to talk about the Problems.

Problem of The Nigerian Capital Market

1. Unstable Market

The Nigerian Capital Market has been facing Fluctuations, for the Price of Stocks. This has not proven favourable to Investors, in the Market. For example, Nigeria Capital Market along with others around the World, crashed during the Global Financial Crisis of 2009. In 2017, Nigeria also recorded another Economic recession, making it the worst in Country’s history in 29 years. This had proven that the Markets are largely risky and unpredictable for Investors.

2. Industry Risk

Nigerian Companies in the Nigerian Capital Market, operate in the same Industry. This is ranging on export trade of Primary Commodities like Raw Materials. However, Nigerian Companies face the issue of stiff Competition Problems, and this might adversely affect booming Profits. This does not promote Protectionism of National Products or Services. For example, Nigeria operating a free trade at the Capital Market with zero tariff on Cement, will attract Foreign Companies, preforming better at cheaper costs, making the Domestic Market vulnerable. There are going to be Business problems in the Capital Market Industry, as a result of Political issues, Climate change, and Oil prices rising or falling.

3. Regulatory Problems in the Nigerian Capital Market

The Nigerian Capital Market faces difficult in properly laying down proper implementation of the rules and guidelines, for Operations. Shady dealings in the Markets done by Stock Brokers and Top Officials in the Markets, could go on unchecked. Surplus amounts of Funds, are not properly accounted for or claimed due to lack of monitoring due to no co-ordinated System or Laws. This has resulted in Investors, losing a lot of Profits.

Endless Corruption among Top Officials in the regulatory body like Securities and Exchange Commission, has also crippled the Nigerian Capital Market. There was a recent suspension of the Securities and Exchange Commission Director General,  Mr Munir Gwarzo by the Nigerian Minister of Finance, over an alleged shady dealings with Oando PLC, a Multinational Oil Company. He had been alleged to have used Public funds without Government’s Approval. There has been issues of implementing proper investigations and effecting Prosecution, of erring Offenders, in the Nigerian Capital Market. This is due to lack of regulatory Implementation and Enforcement, of laws for smooth operations.

4. Operational Shell Banks Or Institutions

There are scams popularly known as the Ponzi scheme, calculated to deceive the unsuspecting Individuals of their money. The Scams promises Investors of abnormal returns of Cash which is far Obtainable from the normal Banks.  The money collected is not used for any Productive venture, like the Capital Market. It is the money collected that is used to pay back the investors. Unfortunately, there are at present not effective laws or regulatory guidelines to check mate the schemes. The Investors in the Nigeria Capital Market, still participate in these scams, at their own risks.

5. Limited Knowledge About Nigerian Capital Market

People in Nigeria, find it difficult to understand the Nigerian Capital Market. This is due to lack of information. Nigerians need to understand the basic knowledge about Shares, Debentures, and Bonds to trade or invest in the Capital Market. There is a great misconception that the Capital Market that disadvantaged persons cannot access financial services like the banks and the Capital Market. There is need for proper education of Individuals on how to engage a licensed Stock Broker or investment Adviser on matters of Capital Market.

6. Market Size Problem

According to Securities and Exchange (SEC) 2015-2025 Master Plan Report on Nigeria Capital Market, the Country has not been well positioned, and has not equipped to be relevant in some key areas-sectors of the Economy. The Report has also stated that the Nigerian Capital Market, is not big enough to source out Funds for elaborate long term Projects. An example of which not facilitated by the Nigerian Capital Market, is the 2.52 US Billion Project for the Privatisation of Power Sector. Companies who were interested in the Power Sector, was expected to have been in the Capital Market, five years before acquisition of Shares.

7. Savings Setbacks Problem

There are no Regulations or Initiatives to drive long term Savings or Investments. According to SEC Master Plan 2015-2025 Report says that as of December 2013, Nigeria had low National Gross Saving rate at 10.79%. The Report said that countries like Malaysia had about 32% of National Gross Savings Rate, and average for the World, was 18.95% at the same Period.

8. Lack Of Technology

There is the low level of Information Technology Assimilation and capacity in the Capital Market. There is need to modernize and transform Operative Models, the capacity and encourage smaller operators to invest in Technology. There is limitation for Innovation and specified value added content. Technology brings about a more Productive and Effective Capital Market for Investors.

9. The Capital Market Over Concentration

The Nigeria Capital Market has more influence in sectors of the Economy than others. In the Capital Market, banks are the major valuable assets for investors. Few sectors in addition like Consumer and Industrial Goods. Nigeria’s other Sectors like Infrastructure, Oil, Gas, Mining, and Telecommunications.

Possible Solutions to Problem of The Nigerian Capital Market

1. The Need For More Sophisticated Products To Be Introduced

The Nigerian Capital Market has been based centrally on Shares, debentures, bonds and other Instruments to trade. More Products can be introduced to broaden the size of the Market. With the introduction of new Products like over the Counter (OTC) exchanges i.e. FMDX (Financial Marketers Dealers Association) and NASD (National Association of Securities Dealers), there has been improvement in the Market.

2. Elimination Of Shell Financial Banks

Scams like the Ponzi scheme, which set out to deceive Investors into bringing their Capital to raise funds, need to be scrammed or abolished from the Nigerian Capital Market. This will make it difficult for Operators under this scam to be operative in the Capital Market. This can be done by creating a legal framework for implementing and enforcing Laws, seeking for Operators or Investors engaging in this Scams, to be prosecuted either by Jail Imprisonment, or by heavy Fine Penalty.

In the Country’s National Assembly, Proposal has been made for a new amended Legislation known as the Banks and other Financial Institutions Act 2017(BOFIA). Central Bank of Nigeria has called for abolition of Shell Banks, saying that they serve as a means of Money Laundering. The Regulatory Body claims that these Shell Banks carry out activities in the Nigerian Capital Market which are not approved or licensed. The Central Bank of Nigeria through this amended legislation is seeking to have the power to revoke licenses of any Banks, and the ability to inject money to any failing Bank in order to encourage equity participation in the Capital Market. This is to ensure a sound Financial System.

Other Banks or other Financial Institutions, who engage in these fraudulent scams, should not to pay fines, but also compensation sums of Money to their unsuspecting victims. This should be in accordance with the amount put in by that Investor. Banks who knowingly engage in these scams should be made to lose their license and no longer allowed to operate.

Stiffer sanctions and punishment is very necessary to ensure that corrupt offenders prosecuted for non-compliance with the guidelines and regulatory laws in the Capital Market. The BOFIA Legislation proposes stiffer sanctions of Offenders by way of Jail term or Fine. For Example, it was proposed that the sum of 10 Million Naira will be fined against any Director or Manager who fails to keep accurate Accounts or publish Reports, for its Annual Meetings. It also suggested that the fine of over 20 Million Naira over Banks that fail to comply with the rules and guidelines set up in their Licenses, while operating. It is hoped that if the Law is passed, proper Regulatory framework will be effected to ensure better financial systems for an effective Capital Market.

3. Better Complaint Management Enforcement

Matters of concern and unresolved issues at the Nigerian Capital Market is being reported to the Regulatory Body, known as the Securities and Exchange Commission (SEC). However, due to the allegations of Corruption and lack of Accountability issues among the Officers in the Regulatory body, SEC, there is a need for a way to enforce avenues to enable investors, to report suspected illegal dealings or foul play operating in the Nigerian Capital Market. Under the proposed BOFIA Act 2017, there was a suggestion for a financial task force which will help to investigate any fraudulent transactions operating in the Market. This could help SEC operate more effectively if aided, by a taskforce who could trace Offenders and possibly make arrangements to ensure immediate prosecution by the Law.

4. Information Literacy About The Capital Market

Problems faced in the Nigerian Capital Market is the lack of Information, given about its operation to the Public. This can be corrected by organising Seminars, Educational Workshops or even Television and Radio Talk Shows, mainly to educate on the key players on the Market. Curriculums in Schools, in the Nursery, Primary, Secondary and Tertiary Institutions can be set up to teach Students at the early stage, on who to invest for business or Projects. It can also inform them of the Career opportunities in the Capital Market. Once there is adequate information, there will be increase in participation in the Nigeria Capital Market.

5. There Is Need For Better Transparency And Effective Compliance In The Capital Market

Transparency means that leadership in the Capital Market must adhere to the rules and guidelines. Complete Compliance to the regulatory frame work of the Capital Market will ensure confidence of Investors. Disclosure of materials for Corporate Information, from Companies must be done as when due. The disclosure of such materials such as Directors activities, Shareholders visibility whether is a direct or indirect holding must be reliable and accurate for investors to access for effective trading. Records collated must be accurate, reliable, and complete for proper information. This can be done by giving proper public hearing workshops. Also, publishing   accurate Annual Audit reports, from the Capital Markets, to be released for Public is also necessary. This is to boost the imagery of the Market among Investors.

Effective transparency and Compliance can be strengthen by the use of Corporate Governance Codes which could enhance regulatory bodies in the Capital market i.e. CBN, SEC, PENCOM, to work more effectively.

6. Creating Better Investment Saving Scheme For Investors

The Capital Market in Nigeria has been able to source out surplus funds for Investment. Investors have claimed that there is no regulatory system that ensure that surplus funds are accounted and claimed for. Nigeria’s Senate has made amended the Investment and Securities Act 2007, and the enactment of unclaimed funds 2008. The Legislation is to give access to surplus Funds, to enable for national development for the economy. Section 385 of Companies and Allied Matters Act 2004 says only for duration of about 12 years for shareholders to come forward to claim dividends declared by the Company.  There seem not to be a regulatory framework on unclaimed funds. Ensuring that there are concrete laws on ensuring that unclaimed funds are claimed. It will go a long way to ensure savings for the Capital Market.

Conclusion

Nigeria Capital Market needs to grow by introducing more Products, introduction of Technological innovations and Models to strengthen the Financial System. There is need for the Nigerian Public, to have more information about the Capital Market. This can happen if there is better platforms, through providing educational Facilities, Seminars, Radio, Televisions to teach the benefits and gains of the Capital Market.

An effective Capital Market makes it possible to attract Investors, who are willing to ensure economic growth and development, in the Nation’s Economy.

KEY WORDS: CAPITAL MARKET, MONEY BANKS, ISA 2007, BOFIA 2007, CBN, SEC, NAICOM, PENCOM, EQUITIES, DEBT INSTRUMENTS, SHELL BANKS, COLLECTIVE INVESTMENT SCHEME, PRIMARY MARKET, SECONDARY MARKET, DIVIDEND,  BOND, SECURITIES, PRODUCT, CAMA 2004, CORPORATE GOVERNANCE, TRANSPERENCY, COMPILANCE, INVESTORS, INVESTMENT, SHAREHOLDERS, FUNDS, COMPANIES, GOVERNMENTS

REFERENCES:

ITODO YEMI, SENATE AMENDS CAPITAL MARKET LAWS, DISCOVERS N10.4 BILLION TRUST FUND, DAILY POST NIGERIA, DATED 28^TH FEBUARY 2018.

OKOGBA EMMANUEL, CBN WANTS SHELL BANKS ABOLISHED IN NIGERIA, DATED 14^TH FEBUARY 2018, VANGUARD NEWS, >VANGUARDNGR.COM

SECURITIES AND EXCHANCE COMMISSION REPORT, OPPORTUNITIES IN THE NIGERIAN CAPITAL MARKET, HTTP://SEC.GOV.NG/WP-CONTENT/UPLOADS/2015/10/OPPORTUNITIES-IN-THE-NIGERIAN-CAPITAL-MARKET.PDF ACCESSED ON> 28^th FEBRUARY 2018.

SECURITIES AND EXCHANGE COMMISSION REPORT, MASTER PLAN 2015-2025,HTTP://WWW.SEC.GOV.NG/FILES/MASTERPLAN-WEB.PDF ACCESSED ON> 28^TH FEBRUARY 2018.

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