the Central Securities and Clearing System (CSCS Limited) April, 1997), the .... At the end of 1 997, the Stock Exchange had on its board 182 equities, two ...
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NIGERIAN CAPITAL MARKET DYNAMICS: THE CSCS OPTION BY BRIGGS A. E.; HARRISON I. H. AND A. MOMODU. ABSTRACT; ., -;;:' ' . : '; ... -~?; ..c:~r~.-:i~·-
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Th,e c.a~tal .•·.· ......,,' inpro)!idiit_·odinv(1stib_t·eJVf· k:nds to CQPt1'rl1 .WI ·'--~ •. it'. . r..· - market is-ext?Priencingtiib rv. -.r.·~ !!""!,. • r-organizations as well as the ordinary investors by its new support instrument ofCSCS. Over the years, trading had been very clumsy, fraud prone and unprofessional. We discovered that with the introduction/operation ofthe CSCS-the delivery and settlement subsidiary ofthe Exchange there is capability in aborting, blocking and reduction of fraudulent transactions. Indeed, forgeries and cloning ofshare certificates from the shareholders and registrars are inevitable, yet we discovered the CSCS processes share certificates within 24 hours, thereafter the shares as represented, become eligible for trading on the floor ofthe Exchange. Because the CSCS processes trades andforwards same to the settlement banks for settlement (returns/recycles all shares certificates received to registrars for scrutiny and retentions while being updated on the transactions for their application), transactions ofthe investor improved quite above the poverty line through a systematically), meaningful interpretation ofthe time value for money. Shareholders can access the status of th~ their holding through the CSCS phone in
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INTRODUCTION The Nigerian financial system is anchored on the money and capita/markets. The establishment ofthe Lagos Stock Exchange in 1960 and its commencement of operations in 1961, stand as the significant landmark and cornerstone for the building ofthe Nation's capital market development. Apart from the SEC (Apex regulatory authority), other operators ofthe system are issuing houses, stock broking firms, share registrars~ solicitors to issues/issuers, auditors, reporting accountants and underwriters. The capital market constituency is made up individuals, institutions, issuers, operators and regulators. Paramount in the objectives for establishing and developing the market is to enhance capital formation when some resources available during the prevailing period are directed towards the filling ofinventories of goods or towards creation ofintermediate goods which are intended to be consumed during the prevailing period. So capital is formed by postponing or possibly abandoning cons~ptio~ . The Authors are Leturers/Consultants in the Faculty of Mangement Sciences Rivers State University of . Science and Technology, Port Harcourt. Journal of Banking and Investment
35 So a capital market operates to offer enterprises, newand wider opportunities for obtaining funds: Acting as an avenue for exchanging securities at mutually agreeable prices and in the process creating liquidity through its pricing mechanism. Acting as_a means of ascertaining the prices of securities, it provides an easily accessible means of efficient trading in securities and acting as a means of allocating and rationing scarce funds among competing uses and users. Apart from helping the economy to increase capital formation (strong correlation between economic development and its capital market), it provides the necessary elements in managing financial risks; Indeed, it ensures corporate continuity long after the o~ers. And creates market discipline, improves for chances for success and aproof for social responsibility. The Nigerian capital market is a veritable forum where big medium and small (quoted) companies raise medium and long term funds via financial instruments (equity and debt): We approach the discourse in parts. Sections 2, 3, 4 relate the growth of the capital market, CSCS and the review of market capitalization. The issues of trading value and listing stock indices form sections 5, 6, 7. Subsequently, market regulation, dynamics and investor gain make up sections 8, 9, 10. CSCS as an instrument of capital market/shareholder lift up-tools form our conclusion.
GROViTH AND ACHIEVEMENT OF THE CAPITAL MARKET
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Over the years, the capital market has grown and expanded to cater to the investment and wealth creation capacity ofthe government, private sector investors and the general public. It has also served as a measure of confidence and, as an effective economic barometer for gauging the economy's temperature f:rqm ti:m~ tQJime..with~ew .to determioingnecessary adjustments. Contingent upon its power of pricing mechanism, the market provides management with some ideas of the prevailing cost of capital which goes a long way in the deterlnination ofthe levels and rates of investment in the economy. It has also acted as a reliable medium for broadening the ownership base from erstwhile family dominated firms. Apart from early enactment of the Income Tax management Act 1961, the Trustee Investment Act 1962, Exchange Control Actl 962, Insurance (Miscellaneous provision Act 1964, The Capital Issues commission (later the SEC), several other growth factors were recorded. These include the Second Tier Securities Markets (1984), geared towards enabling small and medium sized enterprises to access the capital tnarket for funds under more relaxed conditions. Apart from training manpower (stockbrokers), it also lists under a self-regulated NSE (Nigerian Stock Exchange). But the most significant milestone in the capital market development in securities trading is the Central Securities and Clearing System (CSCS Limited) April, 1997), the introduction of Automated Trading System (ATS-April, 1998) and the approval of the Abuja Stock Exchange: Also of note is the Investment and Securities Decree 4 5 of 1999, which harmonizes pasty provisions and consolidates authority as well as regulatory and investment powers.
Journal of Banking and Investment
36 HECSCS The CSCS is a company established within the capital market to make trading activities in -" e stock market efficient, transparent and investors' friendly. It has its directors as a Bank :epresenting the settlement Banks, the Association of Registrars of Quoted Companies, Investors ill general (A rep) and Representative stock broking firms. Their activities cover transactions in Industrial loans, Federal Govermrient/Development \ tocks, quoted Companies and the Derivatives sector of the market. The major objectives include facilitating early trading of securities after purchase, the reduction ofperiod for transfer of ownership of securities drastically to its present level of T + 3 days, effective March 2000, the introduction of the Automated Trading systems (ATS) effective April 1998. The ATS (an emerging market technological advancement) forms the final phase of the NSE's computerization oftrading facilities (a computer based system that replaced the manual trading system). As a market that covers shares, debentures, bonds, derivatives (swaps, options, hedges), it is also a network ofparticipants. Instruments and facilities also function in synergy to facilitate the flow of savings into long term investments foe socio-economic development. In essence, the market stocks products for both high and low income earners who can take advantage of its viability to earn more on their investment.
REVIEW OF EQUITY MARKET CAPITALIZATION In the ten years ended 1997, equity market capitalization witnessed a 55 fold or 5317.6 percent increase from 5.1 billion naira in 1988 to N27 6.3 billion in 1997. A look at the yearly position during this period showed that equity market capitalization rose steadily between 1988 and 1996, witnessing a drop only in 1997. The observed growth in market capitalization was driven by a number of factors viz: new listings (about 80 companies), bonus issues distributed by a sizeable number of companies and firm equity prices during most of this period with the stock index having risen 28 fold or by 265 per cent. The steady increase in market capitalization as stated earlier, was interrupted in 1997 by a drop of 1.3 percent, from amarket value ofN279.8 billion in 1996 to N276.1 billion at year-end 1997, owing principally, to falling equity prices during most for the year. Secondary trading of bonds and government stocks are virtually dormant and continue to account for approximately 2. 0 percent of total market capitalization on the Stock Exchange. The Nigeria capital market still represents a small but growing proportion of the national economy. As a percentage of Gross Domestic Product (GDP), the total market capitalization (i.e. equity plus debt instrument) of the Exchange, increased progressively between 1992 and 1996 from 5. 7 per cent to 12.3 percent. The pi:eliminary figure for 1997 however, indicates a decline to 9.0 per cent. A comparative analysis of equity market capitalization ofthe Nigerian market with major emerging markets ofAsia, Europe and Lati.1). America depicts the Nigerian market as small and still Journal of Banking and Investment
37 lagging behind. A comparison of the market with African markets on the other hand, shows Nigeria as the fourth largest, after South Africa, Egypt and Morocco. It is instructive to mention that the value of a nation's currency does have positive or negative impact on the standing ofits capital market with others. Thus, while the value of certain market indicators such as market capitalization, trading and new issues show increasing trends in local currency, the value to the dollar depreciates. In order words a market with a strong currency would most likely display more impressive indicators than one with a weak and depreciating currency value. Of recent, we saw some Asian stock markets notably Thailand, Indonesia, South Korea and Malaysia shrink in dollar value as a result ofthe financial crises which rocked these countries and induced the devaluation of their national currencies. For instance, Malaysia had a market capitalization of$93.6 billion or by 66.9 percent. Thailand shrank :from $23.5 billion, losing 62.2 percent while Indonesia lost 72.7 percent from a market size of $106. 7 billion to $29 .1 billion during the same period. South Korea which was one ofthe leading emerging market by capitalization and the 11th largest economy, has declined to a mere $41. 9 billion as at the end of 1997. The Nigerian stock market suffered similar fate in the late 1980s andl 990s. The International Finance Corporation (IFC) figures at year end 1997, on Nigeria, reported an equity market capitalization of$3 .6 billion in contrast to $255.5 billion by Brazil, $232.1 billion by South Africa, $128.5 billion by India, $20.8 billion by Egypt and $12.1 billion by Poland. Nigeria was however, larger than markets such as Zimbabwe $2.0 billion, Slovakia $1.8 billion and Sri Lanka $2.1 billion.
TRADING VALUE AND ·LIQUIDITY The trading value of a stock market is usually indicative ofits level of activity, that is, the rate at which securities are bought and sold, as well as its liquidity, which is the ease at which securities can be converted into cash . An important attribute of a stock market is its ability to absorb large volumes of transactions without significant changes in price. In very active and liquid markets such as the German, British and French markets, annual trading value of securities nins into hundreds of billion of dollars while on the New York, Tokyo and NASDAQ markets, annual value is in trillions of dollars. The level of activity is usually influenced by the number and quality oflistings, the size of a market's outstanding shares and the efficiency ofthe delivery system(clearing, settlement, etc}. In otherwords, if a market has several high quality securities and the clearing and settlement system is efficient, investors would not develop the tendency to "buy and hold" securities while speculative activities would be encouraged. The Nigeria stock market which was very inactive and illiquid,.has recording marked improvements in recent years. In 1997, the market registered a total trading valUe ofNl 1.07 billion, of which equities represented N1092 billion or 98.6 per cent. This performance contrasts withN137.6 million total trading volume registered in 1988, N313.5 billion in 1992 and Nl .8 billion in 1995. Journal of Banking and I nvestment
38 Thus between 1988 and 1997, the value of trading had risen by almost 800per cent while ·een, 1997-2003, it has risen by 1500%. The growth in the value of equities is more remarkable - 9.445 per cent during the period from N22 million in 1988 to Nl0.9 billion in 1997. The ced trading over the past decade is attributable primarily to new listings, which have enlarged - ~outstanding shares in the market and offered the public more investment choices. Secondly, ket procedures and infrastructural facilities have improved. It now takes a shorter period to _'ear and settle transactions. Thirdly, there is increased and improved information about the market. mYestors are thus, better informed about the happenings in the capital market to aid investment iecisions. Finally, the investment culture in securities has obviously improved with many more _'igerians owning shares today-approximately 5-10% of the population. A comparison of the trading value with market capitalization (turnover ratio) further affirms me shallowness of the Nigeria stock market. At the end of 1997, turnover ratio was under 4.0% \Yhich however, was an improvement over 2.6 percent in the preceding year. However, a look at the standing of the Nigerian market vis-a-vis some emerging markets in 1996 and beyond shows the following ratio:
Argentina Botswana Brazil Chile Ghana India Malaysia Poland South Africa South Korea Taiwan Zimbabwe
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1999 10.6%
8.6% 61.5% 12.1% 1.1% 87.6% 65.5% 85.5% 10.4% 110.5% .204.1 % 9.0%
2003
15.6% 10.2% 72.4% 15% 2.1% 89.8% 74.2% 90.22% 12.4% 110.5% 210.4% 12%
18.21% 13.36% 75.44% 20.3% 3.6% 93.4% 79.2% 100.23% 15.5% 121.3% 220% 15%
The obviously portrays Nigeria as one of the least active markets in 1998. but the 21st Century has been favourable as the market has become highly stimulated. Similarly, average daily value for equities in dollar terms in comparatively low at $2.2 million for Zimbabwe. Nigeria however, recorded a higher value than Ghana with $0.3 million in 1997. A good percentage ofthe outstanding shares in the Nigerian market is held by direct investors such as multinationals who do not engage in regular adjustment oftheir holdings as portfolio investors do. This has impacted adversely on the market float and it is partly responsible forthe thinness of Journal of Banking and Investment
39 the market. In addition to this, the unattractiveness of the bond market has virtually stalled activities in it, and contributed to the low aggregate trading value in the stock market. However, the giant in the banking section is now awake. LISTINGS
The deregulation of the Nigerian economy savings into productive investment has been beneficial to the capital market in several ways, and could be said to be the single most influencing factor on listings in recent times. The Federal Government privatization exercise initially brought 28 new companies to the market. There were also some state government related privatization listings, which together with the Federal Government progran1ille, increased equity listings on the Stock Exchange by over 52. Many ofthese companies (although a few banks were listed recently) had after initial listings, issued additional shares by ways of bonuses, public offering and rights thus further enlarging the size ofthe market in respect of share ownership and outstanding shares. Some of the companies have apart from equities, floated debt instruments thereby increasing the number of securities for trading. Deregulation also led to new listings in a different manner as interest rates got liberalized and bank lending rates rose. Many companies turned to the capital market to raise funds, leading to subsequent listings. This created awareness about the importance of proper matching of funds by the business community which, in turn further encouraged floatation and listing activities. At the end of 1997, the Stock Exchange had on its board 182 equities, two preference share. 54 debenture stocks 4 state bonds and 22 government stocks giving an aggregate list of 264 securities. When equity listings are singled out for comparison, one observes that the 182 recorded in 1997, showed a growth of 80 new equity listings or an average of 8 new listings per year over the last decade. Of course the actual number of companies listed during this period surpassed this number, but some were later delisted for one reason or the other. Present showing as at year 2000 with a growth rate of 2000%. The number oflisted companies on the Stock Exchange is comparable with many emerging markets, higher than most in Africa, but falls below some other emerging markets of Asia and Latin America. Illdeed of the 17 stock markets in Africa, Nigeria has the 3rct largest equity listings in 1997. Surpassed only by Egypt(650) and SouthAfrica(642), Nigeria also had a higher number than Poland (143), Jordan (139), Argentina (136) and Venezuela (91). It however, recorded fewer listings compared to India (584), Brazil (536) Malaysia (780), Indonesia (282) and Turkey (257). The strong aversion of most Nigerian entrepreneurs to ownership dilution even in the face oflong term capital shortage was a major contributory factor to the size oflisting. This however is not a problem unique to Nigeria characteristic of many emerging markets. The scenario has changed in the present century. · STOCK 1-NDEX MOVEMENT
TI1e stock market was bullish during most parts ofthe last ten years with the Stock Exchange. Journal of Banking and Investment
40
=: :are Index climbing to 6440.1 at the end to 1997 from 233.6 in 1988. In essence, share ~ ~ ::bad moved by-over 2650 percent during this period.
The highest yearly movement of 130. 9 ~ ~ ent w as recorded during this period. The highest yearly movement of 130.9 percent was rded in 1995. This was in fact the highest annual gain since the introduction of the index - 984. Adetunji (1997) observed that prices remained firm in 1996 although gaining only 37.3 \JefCent over the preceding year. The advancement were basically influenced by good corporate esults and dividend payment that stimulated interest in the market during most of this period. _-onetheless, price movements particularly in 1995/96 period were of concern to some market o -ervers who had expressed the view that they did not reflect the fundamentals and thus prices were bmmd to adjust. The corrections came in 1997 as prices declined during the best part of the years; closing ~vith in index drop of 7 .9 percent over December 1996- this marked the first ever annual decline in the All Share Box. A closer look at the price movements in 1997 showed a seven month consistent decline starting in may, 1997. As a result, between April and November, 1997, the index lost 26.2 percent. It was again in December recording and marginal gain ofO. 7 percent over November 1997, prices remained for the year, bearish. As at 13th March, 1997, 126 of the 182 listed companies were on offer.
NEW ISSUES The entry of relatively many corporate entities into the Nigerian capital market in recent times has not surprisingly spurred new issue activities. In the ten year period ended 1997, new issues aggregated about N47 billion, of which corporate issues amounted to N39 billion or 83 percent of the total. Between 1988 and 1997, new issues grew remarkably by 2625 percent from N400 million in 1988 to Nl0.9 billion in 1997. Itis interesting that the bulk of the figure - Nl0.5 billion represented equities, whereas in 1988 less than half to the issues, than this, Nl 98 million were equities. Only very few States and Local Government have made in-road to the capital market while the Federal Government, which for years accessed the market for funds, has been out for over a decade. These have accounted for the relatively low activity in the debt sector. The growth of new issues is indicative of the potential of the market to efficiently mobilize and move savings into productive investment.
REGULATORY AND INSTITUTIONAL DEVELOPMENT The Nigerian capital market is currently guided by a number oflaws and a body of rules and regulations. The principal status regulating the Nigerian capital market is the Securities and Exchange Commission Act 1988. This statute is a re-enactment of the 1979 decree which, inter alia, establish the Securities and Exchange Commission (SEC). In addition to the 1988 Act, the companies and Allied Matters Decree of 1990 ( CAMD), particularly under part 17 also regulates Journal of Banking and Investment
41 the capital market. There are other legislations such as the Trustees Investment Act 1962 and the Lagos Stock Exchange Act 1960 which have some impact on trading and investment in the market. The Securities law in Nigeria like most counties, is focused on investor protection, based on full disclosure ofmaterial information. Prior to 1993, a inerit-based regulatory approach was in used in the country. This meant that SEC could pass value judgment on the quality or worthiness of an issue and the issuer, and based on such judgment, approve or disapprove an issue. Proponents of merit regulation have Qften argued that the State (i.e. government) has responsibility to protect the public from putting their monies in worthless securities, however rational or sophisticated such maybe. Thus, any issue considered unfair could be prohibited from being offered to the public. On the other hand, full disclosure regulation which is now practiced in Nigeria is predicated on the belief that an investor should be capable 'of determining merit or otherwise of an issue of given all material facts about it. Investors should therefore be.allowed to make right or wrong investment decision after being given all material information. Put differently, full disclosure regulation should allow an "investor to make a fool of himself but not others to make a fool of him". In addition to focusing on regulation as a means of investor protection, the securities law also stressed capital market development, vesting that responsility on the SEC. The inclusion of importance of a well-developed capital market in fostering socio-economic development of the nation. Given the economic developmental needs of the country, government must have been concerned about the rudimentary state of the market. Most courtiers complement statutory regulation, admirustered by a government agency with self regulation. This is also the case in Nigeria with the Stock Exchange currently providing the only frontline regulation of the capital market. The rules of an exchange as well as trading facilities must be such that promote fairness, transparency and the efficiency of the stock market. These are critical elements in strengthening confidence and encouraging participation of the market. The Stock Exchange has, from time to time, reviewed its rules and recently introduced an improved clearing and settlement system. Like any other market, the Nigerian capital market has not been immuned to malpractices, The SEC has however, endeavoured to keep a close watch on the market and deal promptly and decisively with every rul~ breach. In 1996, the SEC investigated 299 complaints and instituted enforcement a
