Government policy has been supportive of growth of capital market retail segment
September 20, 2017 | 1:17 am| | | Start Conversation
Aigboje Aig-Imoukhuede is the outgoing president of The Nigerian Stock Exchange. He spoke to BusinessDay recently about his activities during his tenure at the helms of the Exchange, the future of the bourse and a myriad of other burning issues concerning the Nigerian Capital Market. Excerpt.
Congratulations on your successful tenure at the NSE. We would like to ask you to take a moment to describe your involvement and experience so far as the President of the Exchange
Thanks again gentlemen for the opportunity to exchange views and ideas as I come to the end of my tenure as President of the National Council. If my memory serves me well, I joined the Council of The Exchange in January 2013 and was thereafter elected as its 1st Vice President. By 2014 Alhaji Aliko Dangote, was planning for the end of his tenure as Council President and was keen to establish a robust culture of succession planning within the Council. He believed that since I had recently retired as Access Bank’s Group Managing Director/CEO, I probably had enough time on my hands to chair the Exchange at a critical time of transformation. You may recall that just before this I had played a key role in founding and establishing the FMDQ OTC PLC (FMDQ) and had acquired some unique insights regarding governance and oversight of an SRO (Self-Regulatory Organisation).
Interestingly, when we founded FMDQ, being bankers, we had limited experience of running an exchange. So I suggested we invite the NSE to be an investor in FMDQ and bring their experience, and institutional knowledge to support the development of FMDQ. Indeed, this really helped prepare me for the role of President of the Exchange.
So by the time I joined the Council of the Exchange, I had great clarity on a number of issues that needed to be addressed at the NSE and within the larger capital market of course. But as in all things, until you actually start performing a role, you don’t understand the full complexity and extent of challenges you will face.
When I joined the Exchange oil prices were still strong. There was uncertainty regarding the upcoming elections and how things would play out but at the same time optimism that the electoral process in Nigeria will be conducted reasonably well; people felt that their votes would count, and that a change was possible. Following the period of crisis and controversy within the Exchange, my predecessor Alhaji Aliko Dangote had managed to unify the Council, establish the new management team and had brought stability to the capital market. I was very impressed at the quality of employees at the Exchange, a talented management team led by a strong experienced CEO.
As the 1st Vice President, I was given the responsibility to chair the Council’s technical committee and the governance committee. The technical committee in particular gave me a lot of grounding in the equity capital markets. I was quite familiar with the debt aspect of the market which had always been ‘bread and butter’ for me, having chaired the board of trustees of the Financial Market Dealers Association (FMDA). But for the equities aspect I had to truly immerse myself in learning about contemporary market issues. My decision to enrol in the TRIUM MBA was of tremendous benefit in this regard. As we approached the date I would succeed Aliko as council president, crude oil prices started to move downwards and they eventually crashed by more than 50%. There is a strong correlation between the NSE equity index performance, and crude oil prices and the reason for that is not strange. Two things: one, Nigerian government revenue is very much dependent on oil prices and given the historical fact that most spending by African governments is wasteful, so when government revenue falls, the market expectation is that government will be unable to provide basic public infrastructure, goods and service, with the attendant socio political and economic consequences. That’s one. The second thing of course is that with fiscal federalism investors know that when oil prices crash, market consumption is significantly constrained at all levels of the economy, and will affect market confidence.
And so, when I was elected President, it was obvious that the economy was going to be facing tough times. It was not too long after that the issue of the appropriate foreign exchange (FX) policy response to our macro-economic situation came to the fore.
During my tenure, the NSE All Share Index experienced a 2-year downward spiral driven by worsening macro-economic conditions and inappropriate policy responses. In a situation like this you can raise your hands and I say I give up, go on holiday, switch off, and stop thinking or acting strategically. But we all agreed not to be deterred by these external challenges. An Exchange plays a very unique role in any economy and you can assess its performance from various perspectives. One is of course the economic return that investors generate from investment. But as you know markets go up and markets come down. That’s not really the appropriate way to assess an Exchange. The right way to access an Exchange is to look at the quality and sustainability of its operations and operating environment. There are objective criteria by which Exchanges across the world are measured, such as the FTSE Quality of Markets Criteria for example.
So, what we said to ourselves was that whether the markets are rising or falling, we have a public interest responsibility to advance the quality of our market, and decided to focus on this. We set an agenda to benchmark the quality of our output across every aspect of the Exchange’s operations against the Johannesburg Stock Exchange, which is currently one of the highest-rated markets globally. We said if this is our benchmark, everything that we do in the Exchange will be measured against this standard and we will pull ourselves towards that benchmark. That is what I focused my energy on as NSE President in doing, apart from advocating for the necessary changes that will improve the macroeconomic and policy context for businesses to engage in.
So I would say that it was extremely challenging but at the same time given the progress that we recorded in terms of improving the quality of the Exchange, it was very successful. Fortunately in the final year of my tenure Nigeria’s macro-economic indices began to show signs of sustainable improvement and the monetary authorities have taken steps to improve access to FX. These have had a positive effect on the performance of the NSE All Share Index (ASI).
Thank you very much. You talked about several issues. A big challenge of the Exchange for most people has been the issues of retail investors. There has always been the argument that the Exchange is really dominated by foreign investors and mainly institutional investors. There is the reasoning that that retail investors need to be encouraged to come to the market and the cushion that many retail investors will give you is missing in the market. During your tenure do you think this is really a challenge and how did you go about trying to resolve it?
First of all, when you look at Nigerian demographics, some say we have well over 180 million people. I’m not going to get into the argument of our actual population count, but only 7 countries in the world have 180 million or more people to boast of. I believe that this is one of our strongest sources of economic potential. Potential Market size is the sweet spot for most investors thinking about Nigeria. But to generate these volumes you must build enough scale to serve millions of retail customers. My experience is that this happens when the right government policies handshake with strong, courageous entrepreneurship. This has occurred in Commercial Banking, Telecoms, Cement, and is beginning to occur in Pensions and Insurance, and I see encouraging signs in Agriculture. It will take place in our capital markets once we address the issue of demutualisation and establish a platform to harness the entrepreneurial energies of all capital market operators. I have a vision of a ‘Big Bang’ exponential growth in our capital markets driven by retail investors.
Government policy has been supportive of the growth of the capital market’s retail segment. The Securities and Exchange Commission (SEC) and Debt Management Office (DMO) are very much on track in this regard. Demutualization will help address two factors which currently constrain the ‘Big Bang’. First is that currently non-traditional capital market institutions and platforms which today hosts millions of users are not able to access the Exchange, and secondly the size, capacity and technology deployed by our institutions fall short of what is required to galvanize the retail market.
I do not think I need to explain what I mean by Demutualisation, but I need to explain more on the ‘Big Bang’ vision. I realised when I joined the Exchange that unlike Deposit Money Banking where each Bank keeps all the professionals required to serve the customer in house, the capital market is not structured in that way. Exchanges are one piece of the puzzle, solicitors another, then accountants, then trustees and of course brokers and issuing houses.
In the UK, leading capital market institutions across all these various professions came together and established a powerful group to sustain the gains of the ‘Big Bang’ when in one fell swoop the UK established the City of London as a financial capital to rival New York. This UK group is known as TheCityUK.
I believe that we need such a platform in Nigeria. When I interacted with CityUK as Co-chairman of the Nigeria-UK Emerging Capital Markets Taskforce, I asked that they assist us in establishing a similar platform for Nigeria I sold the idea to the Exchange, the broker-dealer community, the law firms and issuing houses and we have progressed to the point where we are about to establish CityNigeria. CityUK is one of the most respected platforms in global financial markets and we must have the equivalent in Nigeria. Demutualisation and CityNigeria are key steps to our country attaining its specially anointed position as Africa’s financial capital.
When you say CityUK the first thing that immediately comes to your mind is a city in the UK. Are we likely to have that idea translated into a city Nigeria in terms of physical location?
I think so. There is a logical migration towards Lagos. I know that Lagos State Government is thinking through the infrastructure and development requirements of this vision of Lagos as Africa’s financial capital and CityNigeria will ensure greater alignment and strategic thinking regarding the requirements of sustaining a financial hub. If CityNigeria succeeds, we will create effective demand for infrastructure, and big Nigerian law firms each with 500 or more professionals, will serve not just Nigeria but the sub region. Our broker-dealers will grow to equal their banking counterparts, you will need buildings to house people, schools to educate their children and other lifestyle amenities, and these professionals will pay their taxes to fund the required infrastructure. At that time BusinessDay would have grown exponentially to serve a huge retail investing public hungry for news and information. This is going to be really interesting and that’s my ‘Big Bang’ dream.
Can you just give us a picture of what will happen today, assuming the National Assembly passes the law or today the president signs into law the demutualization bill today? What happens from tomorrow?
First of all, it is a regulated process and SEC has issued rules with respect to how a demutualized exchange should be established. As we speak the Demutualization Committee of the Exchange, guided by those rules, is putting together the plans. Now in legal terms, that would mean that the Council will recommend a Scheme of Arrangement detailing the terms and conditions for the demutualization of the NSE, which members will be required to approve at a general meeting. Once approved the scheme will be sanctioned by the appropriate authorities and members of the Exchange are converted into shareholders of a public company. The Council is reconstituted as a Board of Directors and the NSE without any constraints begins to function as profit-driven entity with a mandate to deliver value to shareholders and its customers. As I speak to you Council and Management are finalising the NSE’s 2018-2022 business plan, to guide its transformation into a high performing public company (PLC). This will be unveiled as part of the handover process to my successor.
In the last three years as president of the council of the Exchange what has been the most exciting day or period for possibly the duration and what has been the worst day?
I think the extraordinary general meeting over which I presided where the members of the Exchange endorsed the demutualization program is probably one of my happiest days. And in terms of worst day, I would say it was last year during one of our Council deliberations, when we were debating how to reverse the lack of market liquidity and the resultant collapse in trading volumes. I came to realise that the market had contracted to the point where the average stockbroker could no longer earn a living. It was quite frustrating that we could not do anything to reverse the trend unless the issues around access to FX were addressed. But thank God we have turned the corner.
You’ve created such a big bang picture. How do you get the government to buy into this big picture?
Of course, we will do what the Exchange has always done, which is to advocate strongly, both publicly and privately, for Government’s buy in and support. By public I’m talking about using various public platforms and interactions to persuade and convince policy leaders to see things the way we do.
The private aspect that people don’t see are the phone calls, visits, and even chance meetings on a plane; wherever it is that we may have opportunity to discuss these issues and get policy makers to understand our position, and to buy into our ideas. A lot of research is done, position papers are generated and presented, and so on.
By the way this has been on-going since the Exchange was established in 1960. The need to interact with public policy makers and get them to see the Exchange’s point of view is one of the responsibilities of the NSE President and other council members and of course the management of the Exchange.
My personal experience of advocacy in Nigeria over the years is that if something is good for Nigeria, eventually, with sustained advocacy, you will get Government’s support for it. You just have to sustain your optimism. For instance, an Over-the-Counter (OTC) market for fixed income securities (FMDQ OTC Securities Exchange) was not in existence and we had to advocate for it. If you recall, we convened a meeting in Abuja of all stakeholders, government and the private sector to advocate for the adoption of International Financial Reporting Standards (IFRS) and within a few weeks later, the Federal Government adopted IFRS with an even faster time table than we had suggested …and I can go on with other examples of successful advocacy. So in terms of pushing for a new direction, a new thing, a number of people who have led the Nigerian Stock Exchange, have done this successfully. Past Presidents like Pascal Dozie, Aliko Dangote, and others are known for this. Today we continue to do exactly that – we can’t shy away from this responsibility. Is it tough? Yes! Do you sometimes ruffle feathers or do you find that people disagree with you? Yes. It’s all part of the job.
Based on the plans in place now the outlook you have for the Exchange, in how many years from now do you see the Exchange assuming that leadership position you talked about?
First of all, if the ‘Big Bang’ takes place within the period that I am envisaging. I can see Nigeria becoming Africa’s financial capital in 15 years.
By then the Nigeria stock exchange will overtake I mean am particular about that because Nigeria is the biggest economy, the most populous . . .
When you say overtake are you talking in terms of market capitalization?
Market cap, diversity of products
I would imagine that in 15 years’ time we could have the same market capitalisation as Johannesburg Stock Exchange. If you are talking about diversity of products, market structure and market efficiency, in 10 years’ time we would be the same because there is not much room for them to progress anymore. So they will see us catching up, they can’t push their needle much further. But in terms of size of the Exchange, in terms of market capitalisation, 15 years is possible if we can get the telecoms companies, LNG, and so on, to the list; yes, it is possible.
What have been the fears of these other companies you mentioned? What has been scaring them from listing?
It has nothing to do with the Exchange itself. Historically the reason companies list is largely around access to capital and enjoying the ‘halo effect’ of being a listed company. Now unfortunately when you look at the business landscape in Nigeria and the challenges that entrepreneurs and businesses face, they are so daunting that to succeed these entrepreneurs and businesses have to become extremely self-reliant. Indeed, some of the benefits that come with being a quoted company have already been obtained by these companies without going to the Exchange. For instance, if you want to scale up your business in Nigeria you have to be able to solve many problems on your own which are really meant to be solved for you by government; you generate your own power, provide for your own security and safety and so on. Add to that the inefficiencies and bureaucracy across the public service and you find that the issues driving the need to raise capital go beyond what a Stock Exchange alone can solve In the long run, this is a most inefficient way to build an economy. For Nigeria to grow to its full potential, government must create the right enabling environment so that the private sector can focus its entrepreneurial energy on generating products and services. By the time you build a business model that can cope with Nigeria’s challenges, it is difficult to accept that the benefits of listing in the public market outweigh the costs unless your capital requirements far exceed what the private capital markets provide.
By listing your company you have positioned your business ahead of the queue of those seeking access to capital and the enabling benefits of the formal economy. As a quoted company, you are given the benefit of doubt by the institutions who control the formal economy, government, institutional investors, and analysts until you prove yourself unworthy of such confidence. With an improved enabling environment, it becomes easier for us to convince people to come to the Exchange.
So with the plans on ground now towards demutualization, increasing the efficiency of the NSE all that, the companies should start seeing the benefits of coming to the Exchange?
Even if it’s a fraction of the benefits companies in advanced economies enjoy from listing, demutualization improves the NSE’s ability to deliver these benefits. It signals that the Exchange is better positioned to facilitate these benefits however limited they may be given the current weakness of our business environment. When you look at the ‘Quality of Market Criteria’ which, of course, should influence the decision as to whether or not to list, amongst the criteria is Access to Foreign Exchange; but demutualization on its own is not going to fix access to FX. Another criteria is Political Risk; which demutualization is not going to fix. The extent of economic benefits that can be leveraged by a listed company is a function of the enabling environment for doing business.
If demutualization is not going to fix that then why are we demutualizing?
Because despite the challenges of Nigeria’s business environment, our population and economic base are still quite attractive to local and foreign investors. Won’t it be tragic that when government does fix the ease of doing business challenges the Exchange is not ready to take full advantage?
Now, won’t it be unacceptable that when government does its part we are not ready? So we have to be ready and that is what I always tell operators in any market, industry, or sector. If you acquire a license – be it banking license, exchange license, telecom license etc. and if you are not going to make yourself fit for purpose and ready, then you must return it.
I think that the handling of the demutualisation project by the executive and legislative arms of government have been quite admirable and is a sign of what Nigeria can achieve when the public and private sector work together.
We notice some little bit of competition between the FMDQ and NSE, and you were on both sides. Is this competition healthy or unhealthy? Are you going to encourage it? I know you are out there now, but what do you think about it and speak more about commodities exchange.
Based on everything I have seen and know, it will be unfair to either of the two exchanges to characterize their competition or rivalry as unhealthy. I haven’t seen anything that will support that conclusion. Are they in competition? Of course! Is competition good for the market? Of course! Is competition good for both of them? Of course!
Take note that the NSE is an investor in FMDQ. So we have always worked to establish a healthy competition between them. Now let me give you a very good example: Cristiano Ronaldo and Lionel Messi. Are they competitors? Yes. Is their competition intense? Very. Has the world been better for it? Much better. Imagine a world without one or the other. That is the way I would like you to see the FMDQ and the NSE. However, given that I am currently the President of the NSE, my primary interest has been that in this healthy competition, the NSE maintains its position as the flag bearer of the (Nigerian) capital market.
The issue of sustainability of leadership on the NSE has been raised by stakeholders in the past. Is there a succession plan in place at The NSE presently? If yes, how well is it working? If no, are there any intentions to establish it?
We have a very robust succession framework in the Exchange. That is the frame work through which I emerged as President and successor to Alhaji Aliko Dangote. The framework does not allow me to mention the name of my successor at this time because it is a process that requires elections and so on.
Over the last few years, we have taken steps to significantly elevate the governance practices of the Exchange. I would like to see my successor continue on this path. The vision for our Exchange is not one person’s vision; it is a shared vision of Council and management developed over long periods of intense work. I am confident that the incoming president and new members of Council will be flagbearers of this vision and take the Exchange to even greater heights. Amongst our new Council members will be three women. I thank my colleagues in Council and Stockbrokers for rallying behind my call for greater gender diversity in the Nigerian capital market. I hosted the leaders of the Stockbroker community to a small dinner reception in this compound yesterday; a forty-person gathering, and there was only one female CEO amongst us. I invited Oby Ezekwesili to join us, (we were together at the NBA conferences that morning), not to talk about gender diversity, but just to signal to the market that we need more brilliant energetic women like her in Council with us.
I am pleased that the scenario is changing. By this landmark appointment of three female council members, we have sent a strong signal on the new direction. We will be working with Wimbiz and other platforms to push the diversity needle further. This is another thing I want my successor to drive.
Finally during the recent extraordinary general meeting where we approved demutualisation, I stated that by God’s grace, unlike Moses, I will enter into the promised land of demutualisation on my own two feet. Aaron my successor must make sure that we all enter the demutualised promise land together. I was not joking, that is my prayer.
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