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Facilitating Listings in Nigeria’s Capital Markets: The Quick-win Solutions

Listing provides companies with a tradeoff between liability, high-interest rate, capital repayment, and equity ownership. It is also one of the top contributors to the performance of capital markets. The fastest-growing markets between 2021 and 2022, including Nasdaq-US, Shanghai Stock Exchange, Euronext, and Tel-Aviv Stock Exchange, are also among the largest hosts of listed companies. As of March 2022, each maintained a high record of 3,767, 2074, and 1,997 and 548 listed companies, respectively. Based on the latest statistics, the market capitalization of listed domestic companies as a percent of GDP in the US is 193 percent, 83 percent in China, and 63 percent in Israel. This performance is even more impressive among the fast-growing emerging economies like Hong Kong, 1,777 percent; South Africa, 311 percent; and Singapore, 189 percent.

In Nigeria, market capitalization as a percent of GDP is 37.5 percent. Growth in the number of listed companies in Nigeria’s capital markets raises a big concern for the economy. Over a decade, between 2010 and 2022, the number of listed companies dropped from 217 to 157. There has been slow growth in new investors’ participation, particularly individual retail investors, which has been under six percent of the adult population, grossly below the proportion of household retail investors holding shares in the US and European Union: 35.6% and 19%, respectively.

Globally, the effectiveness of the corporate sector is linked to the number of listed companies, which by statutory requirements, adopt the best-in-class standards in corporate governance, management practice, corporate social responsibility, and the business’s day-to-day operations. With more listed companies, a nation can maintain a robust, healthy, and supportive corporate sector. This comes with increased economic benefits, including contribution to GDP, employment, tax revenue, and, in many instances, forex inflow. Therefore, increased listing is one of the ways to stimulate economic growth. It can also be used for the activation of a sector’s growth, as in the case of bank consolidation and recapitalisation in Nigeria, which led to an avalanche of banks successfully approaching the Nigerian Stock Exchange via IPOs (initial public offerings) and secondary issuances. As in banking, this approach will be foolproof for insurance, pension, oil & gas, real estate, mortgage, telecommunication, and Fintech sectors. Listed companies also typically have increased international visibility and attract global investors. Besides access to liquidity and a large investor base, non-financial benefits like exposure to expert analyst coverage impact corporate brands and revenue.

Going by basic economic theory, one effective way to drive sustainable growth and promote listings in the capital markets is through policies that address key fundamental macroeconomic issues such as exchange rate, inflation, interest rate, etc. Improved macroeconomic indices provide a friendly economic environment for the growth of existing companies and the establishment of new ones. When companies have a growth history in the operating country or region, a “consideration to list can be taken as a business strategy”. The success footprint in the growth market serves as leverage to promote valuation and access liquidity for business expansion. Once a market (country) has become part of the company’s growth strategy, the decision to list has been simplified.

Still, on the benefits of an improved macroeconomic environment, it is worth noting that increased market participation is driven by the market’s attractiveness, which is a function of the country’s macroeconomic conditions and the overall health of the economy. Addressing the most significant macroeconomic issues to facilitate improved capital markets’ growth in Nigeria might, however, require sustained efforts over the long term because of inherent structural problems. In the immediate, therefore, the starting point would be to promote the growth of the capital markets by exploring quick-win solutions.

To this end, recommended policy options include the following:

1. Accelerate issuers’ participation

a. Facilitate the establishment of small-medium-sized companies: create adequate SME funds that target financing feasible business ideas. Access to seed funding would be conditioned on the scalability of the business to move from a small to a medium-sized company within a definite time. The growth trajectory of the select companies will be closely monitored and supervised. At the growth stage, the companies would be required to raise additional funding from the capital market for business expansion.

b. Encourage and incentivise PPP initiatives: establish partnership arrangements between governments and the private sector for laudable projects requiring significant funding through capital markets. Such partnerships should target large organisations/establishments with record performance and credibility.

c. Privatise/commercialise public assets: privatise government assets for efficient service delivery. The expansion strategy by new investors must require significant investments, and part of the investments will come from the capital markets.

d. Reactivate sector growth through recapitalisation: industry regulators should encourage growth by mandating companies to recapitalise. This policy approach can be applied in the insurance, pension, oil & gas, real estate, mortgage, telecommunication, and fintech sectors. As part of the funding strategy, companies are likely to approach capital markets for funding.

e. Support the efforts of capital market stakeholders to create a regulatory framework for SMEs’ capital raising exercises: this effort will spur additional listings from other private companies that need finance to grow and remain in business.

f. Simplifying listing requirements: simplifying and streamlining listing requirements can make it easier for companies to go public. This will require improved efficiency and might entail lessening the regulatory burden, minimizing administrative costs, improving the transparency of the process, and reducing the time it takes to complete listings.

g. Create tax and other incentives: offering tax incentives, such as reduced tax rates, to companies that list on the capital markets can be an effective way to encourage listing.

2. Expand the investor base to enhance market liquidity

a. Support sustainable projects: with increasing interest among investors, particularly international investors, to invest in projects with ESG (Environmental, Social, and Governance) mandates, both private and public sectors should embark on sustainable projects that can be funded via capital markets.

b. Encourage capital inflow: governments should institute policies that will motivate local and foreign investors. These should include an optimal FX regime, ease of capital/profit repatriation and significant tax incentives/reduced transaction fees or other benefits for retail and institutional investors.

c. Develop innovative products: regulators and operators should collaborate to develop products that are consistent with trends and attractive to the digital native and younger generation. Investment options should also be more accessible regardless of the investor’s level of income.

d. Intensify investment education/promotion: regulators and operators should support investor education programmes and awareness targeting all investor classes. In addition to increased education, adequate investment promotion will also be needed locally and internationally.

e. Ensure technology adoption: deployment of tech solutions will lead to introducing new products and innovative market functioning. RegTech/SupTech solutions will enhance the efficiency of regulatory practices, improve surveillance & market processes, and increase compliance. This will strengthen the market’s attractiveness to both local and international investors.

f. Continuously revamp the regulatory mechanism: as new products are introduced and new trends drive the markets, the regulatory framework and approach will need to evolve for adequate supervision. This will ensure that investors are adequately protected and that erring intermediaries are appropriately sanctioned, thereby improving investor confidence.

Capital markets play an essential role in the transformation of globally successful economies. Nigeria will gain more economic benefits from the capital markets with improved support from governments, policymakers, regulators, and operators. There is no better time to act than now.