SEC: Propelling economic growth via capital market

In this piece, JOSEPH INOKOTONG chronicles the Securities and Exchange Commission (SEC)’s efforts at reinvigorating Nigeria’s capital market for sustainable economic growth and prosperity for investors and enterprises alike.

Capital market, the world over, Nigeria inclusive, serves as the lifeblood of a free market economy, fostering entrepreneurship, economic growth, and efficiency. It enables businesses, especially startups, to access essential funding through avenues like IPOs, promoting innovation and job creation.

It plays a vital role in the economy, allocating capital efficiently, transferring risk appropriately, and providing liquidity and price discovery. It enable savers and investors to channel their funds to the most productive and profitable uses, based on the information and prices reflected in the market. It also allow issuers and investors to diversify and hedge their risks, by offering a variety of securities with different characteristics and returns.

Moreover, the capital market facilitates the exchange of securities among buyers and sellers, by providing platforms and mechanisms that ensure availability and accessibility. This helps to reduce the impact of adverse events on individual agents, enhance liquidity and efficiency in the market, as well as discover fair and accurate prices that reflect the supply and demand of securities.

Capital market brings a wealth of benefits to the economy, such as supporting business growth and development, enhancing public finance and infrastructure, and promoting financial inclusion and stability.

Businesses are able to access a large and diverse pool of funds to finance their expansion, innovation, and diversification, while also being subject to market discipline and scrutiny.

Governments can use capital markets as an alternative source of funding to finance their budget deficits, public services, and infrastructure projects.

Furthermore, investors can participate in the economy based on their risk appetite and return expectations. The stability of the financial system is also improved as capital markets can absorb and distribute shocks, as well as facilitate the coordination and regulation of financial intermediaries.

Despite the enormous benefits of the Capital market to any economy, it faces many challenges and risks, including market failures and inefficiencies, regulatory and institutional barriers, and global and systemic risks.

Experts say Asymmetric information, moral hazard, adverse selection, market power, externalities, and behavioral biases can lead to mispricing, misallocation, underinvestment, over investment, bubbles, crashes, and fraud.

Also, legal and regulatory frameworks, institutional and infrastructural capacities, market standards and practices, as well as political and social factors can impede the development and integration of capital markets.

In addition, capital markets are exposed to various risks that originate from or affect the global level such as macroeconomic shocks, geopolitical events, environmental issues, technological disruptions, and contagion effects which can have significant impacts on the performance and stability of capital markets.

In view of the challenges and risks associated with the capital market, despite its huge benefits, the need for adequate regulation becomes imperative.

In Nigeria, like many other countries, the Securities and Exchange Commission (SEC) plays immeasurable role in shaping the country’s capital market through various instruments.

Recognising this vital role of the capital market in the growth of Nigeria’s economy, the outgoing Director General Securities and Exchange Commission (SEC), Nigeria, Lamido A. Yuguda at the end of the first 2024 Capital Market Committee meeting (CMC) decided to take stock of operations, while emphasizing the SEC commitment to fostering a thriving capital market environment.

The meeting, which attracted over 345 capital market operators and stakeholders, underscored the importance of the event that ended after very robust deliberations.

According to Yuguda, the meeting focused on critical matters affecting the Nigerian capital market, including the current global and domestic economic climate, along with recent developments and regulatory initiatives.

In his opening remarks, the Chairman of the CMC provided an assessment of the global economic landscape, acknowledging the headwinds faced by the global economy in 2023, including the pandemic’s lingering effects, rising inflation, and geopolitical tensions. He highlighted the impact of this slowdown on African financial markets, including the depreciation of African currencies and a decrease in total market capitalization. On the domestic front, he expressed optimism that the recent actions of the Monetary Policy Committee (MPC) have led to the recent uptick in the value of the naira. The meeting also expressed its support for the Central Bank of Nigeria (CBN) in its efforts at strengthening the naira and combating inflation.

The CMC was also a veritable avenue for stock taking, and the Chairman informed of the significant achievements in the Nigerian capital market during 2023.

He pointed out that trading activity in equities and bonds increased, with the NGX All-Share Index reaching a high of 45.90 percent and the FMDQ Sovereign Bond Index a reasonable 8.79 percent return. Activity on the NASD exchange also rose significantly, with volume and value rising by 34.08 percent and 24.18 percent respectively.

The CMC Chairman reported the positive milestones in the Commodities Sector with AFEX and the Lagos Commodities and Futures Exchange witnessing increased volumes and values traded in agricultural commodities.

AFEX reported a significant uptick in both the volume and value of agricultural commodities traded by 34.79 percent and 47.84 percent respectively. The Lagos Commodities and Futures Exchange also recorded an upswing with Agro-commodities accounting for over 96 percent of total turnover.

The Chairman notified members that in aligning with, and directly supporting the Federal government’s infrastructure development goals, the SEC approved five infrastructure fund shelf programmes totalling ₦1.5 trillion, a major step forward.

“The Commission actively supported the growth of the Fund Management industry in 2023 with approvals for new mutual funds (₦18.20 billion) and discretionary/non-discretionary investment products (₦17.60 billion)”, Yuguda disclosed.

In line with the Commission’s drive to ensure actualisation of the target of the Capital Market Masterplan on Financial Technology (FinTech), he said, the Commission amended rules governing digital assets and established a Digital Exchanges (DEX) Division dedicated to the supervision of all duly licensed digital asset platforms. He was silent on Binance.

On Market Supervision, the Chairman reported that the Commission has intensified its supervisory efforts, focusing on fund managers and conducting inspections to address vulnerabilities and enhance stability, resulting in the implementation of a number of corrective measures designed to strengthen the overall health and stability of the fund management industry.

Progress was reported on implementing Anti-Money  Laundering/Combating the Financing of Terrorism (AML/CFT) regulations and addressing deficiencies identified in the Financial Action Task Force (FATF) Mutual Evaluation Report. He said the Commission has been working with the nation’s regulatory and law enforcement agencies to ensure that Nigeria is taken off the FATF grey list.

The Chairman highlighted that the Committee’s robust risk management and internal control framework has been put in place for the National Investor Protection Fund (NIPF) and that operations will begin this quarter.

Initiatives to promote investor education, particularly among younger Nigerians, and leverage digital platforms for broader market participation, were also highlighted.

The Chairman commended the successful launch of a new e-Dividend Mandate Management System (eDMMS), making it easier for investors to mandate their accounts for electronic dividends. The link to the portal can be found on the SEC’s website Yuguda told the Committee that work has continued on ensuring passage of the Investments and Securities Bill 2024 and that implementation of the Revised Capital Market Master Plan (RCMMP) remains ongoing.

He announced two engagements that will hold next month – launching of the Securities Issuers Forum to discuss attracting more issuances to the market and a roundtable on leveraging crowdfunding to support MSMEs.

The SEC commended the CBN for the recently announced policy on bank recapitalization and noted that the Commission has drawn useful lessons from the previous bank recapitalization exercise and will very shortly issue appropriate guidelines to facilitate an efficient capital raising process in the present exercise. He added that the Commission is committed to a process that will ensure speed, fairness, and good market conduct. The SEC is collaborating with the Central Bank of Nigeria (CBN) and other relevant agencies to ensure a smooth process.

He affirmed that the capital market is strong, efficient and resilient. “Over the past few quarters some large companies have raised significant financing from the market signifying the depth and ability of the market to provide such financing. We are confident of the ability of the market to provide the needed funds in the banking recapitalization”, Yuguda stated.

The Chairman underscored SECs commitment to embracing FinTech innovations while managing associated risks and establishing a regulatory framework for the digital asset space.

Members also received updates from CMC Technical Committees as well as heads of the self-regulatory organizations. The Committee on Identity Management for the Capital Market, provided an update on the work of the committee. He reported that, set up in 2021, the committee aims to tackle the investor data problems in the market by creating a unified database, improving data accuracy, and establishing a central repository for such data. This will ease market participation, address unclaimed dividends, and mitigate KYC/AML risks.

The Technical Committee of the Commodities Trading Ecosystem, also gave updates on ongoing endeavors of the Committee. The Committee reported that its work with the Standards Organization of Nigeria (SON) had led to establishment of standards for some commodities, a couple of them now awaiting ministerial approval. Ongoing initiatives of the committee include particular focus on transitioning the market from spotbased operations to trading in commodity derivatives.

Also, the E-Dividend Mandate Committee presented an update on the collaborative project with ICMR and NIBSS to enhance the e-Dividend portal. We call on the media to help publicize the new portal to investors and Nigerians in general.

The Financial literacy Technical Committee, informed the CMC that the committee is planning a nationwide National Quiz Competition testing financial literacy across four geopolitical zones (South-South, South-West, North-Central, and North-West), among others. This is in addition to continued public education through daily educational posts and videos across various social media platforms. These initiatives aim to promote financial literacy and empower Nigerians to make informed financial decisions.

Similarly, the Non-Interest Capital Market Committee reported that it was working with the Ministry of Finance to explore using non-interest instruments for asset securitization and infrastructure projects, potentially opening up new financing avenues. The Committee is also engaging with the Islamic Banking and Finance Institute of Malaysia (IBFIM) to provide training and collaboration opportunities for Nigerian Islamic finance institutions.

The Nigerian Exchange (NGX) informed members that the ALSI performed very well in 2023 and has also put up a stellar performance in Q1 2024. This good performance is expected to be sustained as efforts continue to be made to ensure a fair market.

At FMDQ, the Housing Finance Sub-Committee of the Debt Capital Markets Development (DCMD) Project has developed a toolkit to aid advocacy on the adoption of the Model Mortgage Foreclosure Law in Nigerian States.

The CSCS informed members that 12,127 accounts were updated in Q1’24, which is 49 percent higher than those updated in Q4’23. The significant increase can be attributed to positive investor sentiment. They reiterated the need for stakeholders to allocate more resources, especially experienced staff, to the initiative.

The update highlighted the successful deployment of self-service application programming interface (API) to custodians to support operational efficiency. This has significantly reduced the operational turnaround time of custodians and enhanced market access for foreign investors.

Lagos Commodities and Futures Exchange shed light on upcoming listings of Gold, Lithium, and Oil and Gas. These products are aimed at expanding opportunities for traders and investors in the commodities space. The

Commission will continue to work with the exchange to overcome challenges on the path to building a strong commodities market in Nigeria.

Also, NG clearing Limited informed the committee of progress made in the

derivatives segment of the capital market. Accreditation, onboarding, and training of trading members continues. NG Clearing successfully cleared and settled the first index futures trade, and lessons learned are being applied to make the process better.

The Commission continues to battle illegal operators such as Ponzi schemes. Over the past few quarters, the SEC said it recovered hundreds of millions of naira for investors, closed several such schemes and is prosecuting their promoters.

Yuguda said that the Commission has restructured its human capital for greater efficiency and is introducing a performance-based reward and selection system. The Commission is making efforts towards greater professionalism of its workforce by supporting members of staff to acquire more skills.

The SEC also embarked on an ambitious IT Transformation Programme which is over 75 percent complete. This project will, on completion, improve internal efficiency tremendously and will help reduce time-to-market and improve the Commission’s ability to detect market infringements. Achievement of these projects has been supported by good financial management, which has improved efficiency in use of resources.

He noted that this year, ongoing efforts such as inspection visits to various capital market operators are aimed at ensuring that the market remains fair and continues to be a veritable platform for financing and wealth creation. The collaboration with international bodies like the Islamic Financial Services

Board (IFSB) and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) further reflect the SEC’s dedication to ensuring market resilience and global competitiveness.

The meeting underscored the Capital Market Committee’s dedication to propelling Nigeria’s economy forward and ensuring that the capital market remains a veritable platform for financing government and businesses.

Based on the meticulous work done so far, the CMC eagerly anticipates continued collaboration with stakeholders in propelling sustainable economic growth and prosperity, thereby positioning the Nigerian capital market as a beacon of opportunity for investors and enterprises alike.

“The Chairman notified members that in aligning with, and directly supporting the Federal government’s infrastructure development goals, the SEC approved five infrastructure fund shelf programmes totalling ₦1.5 trillion, a major step forward.”

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