Driving Nigeria’s capital market performance with innovations

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With the Nigerian capital market striving to register its presence in the world as a major point of reference, there is the need to develop the market via innovation-focused investments, STANLEY OPARA writes

For a very long time, the Nigerian capital market operated predictably with its processes not aligning with global realities.

This inaction or laggardness contributed largely in retarding the growth of the market, thus questioning its global competitiveness and relevance, especially among contemporary players following the proliferation of new needs and contemporary market tendencies.

For a long time, the market was seen as a no reference point for new and hybrid capital market products. This in turn stalled its growth.

With the global marketplace increasingly getting more sophisticated and erratic, there had been efforts to disrupt the status quo and realign the market and processes in climes like Nigeria.

But financial experts have stressed the need for the country to up its game geometrically given the gross inactions of the past as far as the capital market revolution was concerned.

To this end, the First Vice President of the Nigerian Stock Exchange, Mr. Abimbola Ogunbanjo, says one area that comes to mind in the quest to positively disrupt the status quo of the Nigerian capital market is the Exchange Traded Derivatives market option.

The concept of derivatives, he says, remains relatively novel in the Nigerian financial market space and has only been noticeable within the Over-The-Counter segment of the market.

According to him, the frontiers of the Nigerian financial market are expected to grow exponentially due to enhanced liquidity arising from the development of new and intricate financial instruments.

He adds that given the open and transparent financial marketplace the NSE offers to a wide range of domestic and international investors, it is expected that all participants must have the commensurate capacity and knowledge-base to deal with the intricacies and the sometimes esoteric features of derivatives.

Ogunbanjo explains, “Approximately 40 years ago, the modern derivatives market was small and domestic to mainstream Europe and America. Since then, it has grown impressively – around 24 per cent per year in the last decade – into a sizeable and truly global market with about €457tn of notional amount outstanding in 2014.

“No other class of financial instruments has experienced as much innovation from its embryotic development to a fully developed and respected financial market. Product and technology innovation together with competition has fuelled this impressive growth and has created many new jobs both at exchanges and intermediaries as well as at related service providers.”

The European derivatives players today account for more than 20 per cent of the European wholesale financial services sector’s revenues and contribute 0.4 per cent to total European Gross Domestic Product.

Given the derivatives market’s global nature, the NSE VP says users can trade around the clock and make use of derivatives that offer exposure to almost any “underlying” asset class across various global markets.

The derivatives market is predominantly a professional wholesale market with individuals, corporations, institutions and governments as its main participants. A single derivatives transaction may attract diverse levels of professional financial counterparts across the value chain.

He adds, “It is important to emphasise that the imperatives for a truly functional derivatives market are safety, effective risk mitigation, innovation and efficiency. Risks, such as counter party risks, operational risks, liquidity risks, systemic and legal risks could be implicit in even the most developed markets.

“Understanding the global implications of financial connectedness is also essential to developing a robust derivatives financial market. Recall that at the early stages of the global financial crisis, it was anticipated that Nigeria would not be directly impacted as there were no complex derivatives products being traded in our market at the time.

“However, the United States Federal Reserve dropped its benchmark lending rate to zero and began pumping money into the global financial system via its Quantitative Easing programme, which initially had a positive impact on Nigeria, as Foreign Portfolio Investors began to increase their exposure to emerging and frontier markets in the search for higher return on investments, compared to the risk-free financial instruments or comparable products in the US yielding zero returns.

“As the Fed signalled an imminent reversal of their QE programme, coupled with a commodities bubble, Nigerian banks found themselves exposed to large toxic non-performing loans to leading Nigerian corporations, combined with our local bank’s exposures to an agglomeration of margin loans as domestic investors speculated immunity to the GFC; hence the birth of the Asset Management Corporation of Nigeria, and initiatives like forbearance for margin loans for our brokerage community.”

Dr. Ayodele Shittu, an Entrepreneurship and Business Innovation Economics scholar of the Department of Economics, University of Lagos, says in order to fulfil Nigeria’s potential of stimulating economic prosperity, a reformulation of the nation’s business paradigm, both theoretically and experimentally must be achieved

According to him, Nigeria’s business environment is yearning for innovation in order to fulfil its potential of stimulating economic prosperity. He adds, “We must promote collaborative relationships between the academia and our industries.”

Shittu called for the development of smart focus for specific economic sectors, promotion of knowledge sharing between the enterprises in both formal and the informal sectors, putting in place physical centres such as business incubators, accelerators, among others; encouragement of innovative supply of infrastructure and utilities as well as prioritisation of innovative financing options to both existing and new businesses.

In assessing Nigeria’s business environment on the basis of three indicators — ease of doing business, business confidence, and capacity utilisation, he says Nigeria’s performance on the ease of doing business over the last eight years has been woeful as the country is ranked 169th position among 190 economies around the world.

According to him, consistent diminishing ranking is embarrassing to the country and its citizenry, of which the national economy remains at the receiving end.

Speaking on the factors that have contributed to the country’s declining level of competitiveness; Shittu maintains that Nigeria’s educational system, if not prioritised, may see reduction in future human capital.

He says, “The available evidence, in this regard, shows that the score of the skills of the future workforce sub-pillar is lower than the score of the current workforce by 10 per cent or more.

“Nigeria is ranked 108/135 on business dynamism and 90/135 on the innovation capacity indicators.”

Recently, the NSE unveiled its X-Academy, a knowledge-platform designed to provide education services to individuals who want to gain a better understanding of various aspects of the capital markets.

To this end, the Chief Executive Officer, NSE, Mr. Oscar Onyema, stresses the need to provide individuals and businesses with a robust and effective array of training solutions that ensure that players are abreast with trends in the rapidly evolving financial markets.

Also at the roll out of the Nasdaq SMARTS Market Surveillance Technology, the General Counsel and Head of Regulation, NSE, Tinuade Awe, says, “As we enter the growth phase of the development of our market, including the introduction of new asset classes such as derivatives, there will be the imperative of processing significant volumes of market information in real-time to detect anomalies.

“The need for technologies that allow for proactive analysis of patterns and trends to make sense of the vast amounts of data for investigative purposes and protection of investors, while strengthening the integrity of our market, cannot be overemphasised.”

The Director-General of the Federal Institute of Industrial Research, Oshodi, Prof. Gloria Elemo, says for innovation to be effective, it has to be simple and it has to be focused as well as channelled towards solving one’s problems.

She states that innovation that creates new users and new markets should be directed toward a specific, clear and carefully designed application.

Elemo adds, “Businesses need to imbibe high performance in innovation, balance of skills and abilities, appropriate equipment that is up-to-date as well as staff team development activities to promote compatibility and interaction.

“Innovative solutions can be applied to business issues so that businesses can create positive change. This can make people exploit new opportunities, refuse to give up and remake the economy for the better.”

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