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As foreign capital has flocked to African debt, Nigeria is giving its retail investors a chance to join the party with the opening of a new fixed income trading platform on the Nigerian Stock Exchange. But opinion is mixed on the opportunity it will provide.
The Fixed Income Market Making system was launched in Lagos on January 29 in order to allow individuals to trade debt issued by the federal and state governments and by corporations. It pledges continuous two-way quotes through the exchange’s automated trading system and – according to a presentation by Dipo Omotoso, head of product development at the NSE – aims to open up participation in Nigerian bonds to retail, complement the OTC market with a more transparent trading venue for bonds, deepen the bond market, improve trading and liquidity, and generally develop the Nigerian capital markets. There is not a huge pool to choose from – 56 listed bonds in total, 24 of them federal, 13 state and 19 corporate, worth N5.93 trillion (US$37.7 billion) between them – but six market makers have been appointed: Capital Bancorp, Cordros Capital, ESS/Dunn Loren Merrifield, FSDH Securities, Greenwich Trust and Investment One Stockbrokers.
The idea has met with a cautious response. “It’s all about liquidity,” said Wale Shonibare, managing director for investment banking at UBA Capital, responding to questions from Euromoney and others at the UK-Nigeria Bilateral conference in London last month. “Bonds are traditionally bought by institutional players and held to maturity, [often] for treasury management purposes. If you want Bill Blogs to come in, he should be able to get out quickly.” He stressed the importance of market-makers to maintain two-way pricing and spoke of “a healthy skepticism that we have the liquidity to allow this to happen quickly”, suggesting that a better option would be the development of collective investment schemes. “Last time around you had drivers and housemaids buying shares because someone told them it was a good idea. With collective investment schemes you have a fund manager in there.”
Similarly, Isabella da Costa Mendes, head of ECM and DCM execution at Renaissance Capital, said: “Everyone wants to see retail investors come and participate in transactions, but with the overriding concern that you want to make sure they are not burned in the investment by not being properly advised or not receiving enough disclosure,” so as “basically not to lose the family savings.” And Peter Sullivan, managing director in the public sector group at Citi, said: “It’s a bit about timing. When you think about the level of financial exclusion, you are still talking about a very small retail base.” Others fear that banks will prefer to stick with the existing OTC market and in any case are unlikely to wish to prompt retail investors to take money out of deposits to deploy in the debt markets.
Nevertheless, it is easy to see why retail investors want a piece of the action, and why the NSE wants to allow them to get it. Ever since JP Morgan elevated Nigerian government bonds to its emerging market government bond index in August, demand for the securities has pulled yields on naira-denominated 10-year bonds from 16.39% on August 14 to 11.22% in early February. The NSE says total bond market capitalization grew 55.6% in 2012.
