Building a vibrant domestic bond market in Nigeria
8 October 2014
Arunma Oteh, Director General, Securities & Exchange Commission, Nigeria
As early as the 1940s the Colonial Government was issuing fixed income securities in Nigeria with the first issuance of a three percent £ 300,000 ‘Government Loan Stock’ in 1946. However progress was slow, leading to more reliance on banking-sector funding of the real economy. Considering the massive funding gaps in Nigeria and across Africa, there is greater awareness today of the importance of building vibrant domestic fixed-income markets. The Federal Government of Nigeria (FGN) and the Securities and Exchange Commission (SEC) of Nigeria have therefore made the development of Nigeria’s bond market an important part of on-going reforms. Starting in the year 2000, the SEC took the initiative by setting up the “Mobolurin Committee” to conduct an extensive review of the bond market and that effort was quickly followed by the Federal Government’s commitment to setting up the Debt Management Office (DMO) to oversee the FGN bonds segment. Since 2003, the DMO has overseen the FGN bond market while the SEC leads the development of the other segments of the bond market in Nigeria.
Within the last five years, the SEC redoubled efforts to hasten the emergence of the kind of dynamic bond market that would supply affordable medium-to-long term capital to governments and businesses in Nigeria. We began by getting support from a Resident Bond Advisor who was sponsored through the Efficient Securities Markets Institutional Development (ESMID) program, which is hosted by the International Finance Corporation (IFC). We were able to implement the following reforms:
i. Streamlining Bond Issuance Procedures: A wholesome analysis of the approval process within the SEC was conducted including the quality of submissions made by issuers and issuing houses. The transaction approval-monitoring tool within the SEC was then developed providing a more a robust management tool.
ii. Book-building: We introduced rules on book-building allowing public companies (including Special Purpose Vehicle (SPV)), State/Local Governments, and Multilateral/Bilateral Institutions to offer securities by way of book building process, but with the prior approval of the Commission. For corporate bonds, we amended our rules to consider banks as institutional investors in the book building process. Rules were also issued covering private placements for bonds, while templates were designed for the market on Pricing Supplement and Bond Prospectuses.
iii. Shelf Registration: Allowing shelf registration for bonds is an important step in spurring activity from issuers. We started with an initial lifespan of two years for shelf programs and recently the Board of the SEC eliminated the shelf-life for programs by Multilateral Institutions.
iv. Reducing Transaction Costs: The SEC reviewed transaction costs in the primary and secondary segments of the bond market to make issuance competitive for issuers and reflective of value for investors. By streamlining the issuance procedures time and cost are effectively saved from the issuers perspective. Before these reforms, about 50% of issuance cost was paid to the Issuing House as underwriting fees. Since the introduction of Book-building however, the issuer effectively saves 50% since that fee no longer accrues to the Issuing House.
v Advocacy: The SEC also led advocacy initiatives aimed at eliminating legal impediments to bond issuance and transactions, including investment regulations and tax issues. For example, the SEC successfully pushed for the elimination of tax discrimination on different categories of bond investors i.e. those investing in FGN bonds and those investing in Corporate/Sub national bonds.
The results of these initiatives have been encouraging. Today the domestic bond market capitalization is about NGN 5.90 trillion (USD 36.42 billion) comprising FGN, State and Corporate bonds. In support of deepening domestic bond markets in Nigeria, two important triple-A rated multilateral financial institutions have also issued Naira-denominated bonds. The World Bank’s private sector arm—the International Finance Corporation (IFC) issued a USD75 million bond in 2013 and has signified interest in registering a medium-term note (MTN) program of about USD 1 billion. Similarly, the AfDB has registered its USD 1 billion MTN program with the SEC and has already raised about USD 80 million already in the inaugural tranche.
What is more noteworthy is the increasing interest in the bond market shown by Nigerian companies and State Governments. Since 2010, State Governments have issued bonds worth about N600 billion (USD 3.71 billion) and the amount of corporate bonds raised from 2010 to date is more than two and half times all the bonds issued by corporations from 1960 to 2009 in nominal terms. The funds raised by the State governments are mainly channeled into infrastructure projects including road constrution, housing development, water projects as well as building of schools and hospitals. The right regulatory framework is in place to support the bond market to do much more in supplying the long term capital needed to close Nigeria’s infrastructure gap which has been estimated by AfDB at USD350 billion over the next 10 years.
Further reforms to hasten this outcome will focus on better coordination with monetary and fiscal authorities, creation of credit enhancement for corporate issues and the development of a vibrant secondary market to boost liquidity. SEC is making progress in this regard following the licensing of the FMDQ platform sponsored by the Financial Markets Dealers Association of Nigeria. We believe the FMDQ and the Nigerian Stock Exchange (NSE) will complement each other to enhance liquidity, transparency and efficiency in the secondary market for bonds. Nigeria’s growing domestic institutional investor base will leverage these organized over-the-counter platforms to actively trade in fixed income securities over the coming years.
In addition to our initiatives in the conventional bond markets, we consider Islamic Finance as an important tool for financial inclusion as about half of Nigeria’s 170 million people are Muslims. We have therefore released rules on Sukuk issuance in Nigeria to encourage the development of Islamic finance products like the Sukuk which is particularly suited for infrastructure finance. In 2013, the State Government of Osun successfully issued Nigeria’s first Sukuk worth USD69.14 million to finance social infrastructure. The award-winning issue was oversubscribed showing that there is indeed an apetite for non-interest securities in Nigeria. We are further encouraged to catalyze the growth of this important part of our market and have created an entire Division within the SEC called ‘Non-Interest Finance Division’ to lead this effort. The Islamic Finance segment of the Nigerian capital market is an exciting space to watch in the coming years and will certainly attract more issuers domestically as well as investors from the Gulf.
Following the rebasing of Nigeria’s GDP, the local currency bond market now represents only 7.2 percent of GDP compared to 220 percent of GDP in Japan, 50 percent in China and over 52 percent in South Africa. The signs point to room for growth for the Nigerian bond market even as it gears up to be a major source of long-term capital for the entire West African region. The move to integrate capital markets in the region has reached advanced stages as rules are being harmonized across the region to allow cross-boder issuance, listing and trading of securities. When achieved, this will be phenomenal for the entire region. It will eliminate major obstacles to cross-border investment, simplify the process of capital-raising across the region, enhance liquidity and reposition West Africa as the prefered investment destination.
While the Nigerian bond market has enjoyed remarkable progress so far, it is nevertheless yet to attain its full potential. A lot remains to be done. That is why at the SEC, we set up industry-wide committees to work on three ten-year master plans; one for the entire capital market, one for financial literacy and the other for non-interest capital market products. All three master plans will be diligently implemented in a coordinated manner that will give filip to our efforts aimed at building world-class capital markets in Nigeria. The domestic fixed-income market is a very important part of that market whose growth and development will mean better access to long-term finance for tackling Nigeria’s major challenges including infrastructure deficit, unemployment, economic inclusion and social cohesion.
Arunma Oteh became the Director General of the Securities and Exchange Commission (SEC), in January 2010. Prior to joining the SEC she was Executive Vice President, Corporate Services, from 2006 to 2009 and Group Treasurer from 2001 to 2006, at the African Development Bank Group (AfDB).
In addition to her work at the SEC, Ms. Oteh currently serves as Chairman, Africa Middle East Regional Committee (AMERC) as well as board member of the International Organization of Securities Commissions (IOSCO). She is a member of the Nigerian Economic Management Team (NEMT) chaired by the President of Nigeria and a Director of the Boards of the National Pension Commission and the Asset Management Company of Nigeria.