Nigerian capital market and economic development
In a paper entitled “Making Capital Markets Work for SMEs in Africa” at the 2010 Kikonyogo Capital Markets Awards in Kampala, Uganda, Arunma Oteh, director-general, Securities and Exchange Commission (SEC), rightly identified the capital market as a crucial component of a good working financial system and a critical vehicle for a nation’s development. Advising on the need for African countries to strive to develop their markets, she said, “The development of a strong capital market is imperative because theoretical and empirical literature have shown that there is a strong, positive correlation between capital market development and economic growth of any nation.” Oteh’s position, which was a corroboration of earlier researches by scholars and industry stakeholders, has, however, been reinforced by recent works by experts such as Kolapo & Adaramola (2012) and Josiah, Adedinran & Akpeti (2012).
In summarising the overall impacts of capital market development on economic growth, Ephraim Mbanaso, a securities market expert, writes that the capital market is a veritable platform for mobilisation of savings at all levels from both the least or uneducated to the very big or highly educated in the society, across income levels and geographic spreads; channelling savings into investments outlets by pooling the little savings by individuals from across the length and breadth of the country to become a huge chunk of investible funds that can be channelled into the productive sectors of the economy through public offers of shares for subscriptions and bond issues by public companies and governments; and promotion of real sector of the economy as funds raised from the capital market are guaranteed for a medium- to long-term period and tied to expansion, modernisation or restructuring of plants, equipment and infrastructure, therefore reducing wasteful and frivolous consumption while promoting growth of the real sector of the economy.
Other economic growth impacts of capital market development as outlined by Mbanaso (See BusinessDay, August 11, 2011, p.29) are creation of employments (direct and indirect) which are sustained through activities in the capital market (All key players in the market, like stockbrokers, registrars, issuing houses and auditors as well as regulators in the market, contribute to direct creation of employment. Moreover, providing long-term funds for expansion and modernisation of businesses increases not just their productive capacity, but their capacity to employ more people along the value-added chain.); and liquidity in the economy as the daily trading activities in the capital market ensure that money moves in all directions of the economy providing liquidity and hence oiling the wheel of societal development. Mbanaso therefore describes the capital market as providing “the best wealth circulatory system in a national economy”.
From the forgoing, it is axiomatic that capital market development and economic growth are ‘Siamese twins’, and it is instructive that the most advanced economies around the world also parade the most developed capital markets. I therefore agree with the submission of Peter Grauer, global chairman, Bloomberg L.P. (See BusinessDay, May 7, 2012, pp.40-41), that in an increasing era of globalisation, the capital market not only provides the needed vehicle for raising long-term fund for government’s capital projects, entrepreneurial capital and investment fund for industrial growth, as well as liquidity for individual investors, but also acts as the mirror and gauge through which foreign investors and players view and measure the state of an economy.
The capital market has been established to be a reliable barometer for measuring the level of economic development in any country. It is therefore affected by corporate governance more than just a business entity is. The Nigerian Stock Exchange (NSE), the platform through which various players – private, institutional, government and international investors – interact for securities investments in the Nigerian capital market, and on which firms and corporate organisations list their equities for trading, and raise fresh capital for expansion, should therefore not only be an observer of a good corporate governance code but also a giver of good corporate governance model. This explains why the NSE, besides the SEC’s code of corporate governance for market operators and regulated entities, has its own laid-down code of corporate governance for dealing members. As Arguden proposed in his model (See Global Corporate Governance Forum, Issue 17, International Finance Corporation, Washington, DC, 2010), trust, built out of fairness, justice and transparency among all the stakeholders is, in my view, of essence in any corporate governance structure. Arguden states: “In order to attract financial and human capital to the corporation and to ensure sustainability of value creation, the governance mechanisms should ensure to gain the trust of all stakeholders.”
As it is with market operators, the level of corporate governance within the NSE as a self-regulatory organisation, as well as the SEC as the apex regulatory authority, remains a great determiner of the rate of economic development or crisis possible in the Nigerian capital market. I suggest the organisational structures within all the stakeholders in the market be such that clear, separate but mutually-inclusive roles are well defined among the shareholders, managements, and the boards of directors in a way that promotes transparency, trust, equity and fairness, and effective control mechanisms. This is essential at a time when many firms once listed on the NSE, a good number of which are financial institutions and multinational manufacturing concerns, have either gone into bankruptcy or near liquidation for reasons associated with poor governance issues. As a recent survey of 200 institutional investors by McKinsey & Co. revealed, “Governance has moved to the heart of investment decisions, with over 60 percent of respondents (in the survey) saying that poor governance practice could lead them to avoid certain stocks” (Alo, 2009).
R. Aggarwal (2002) holds: “The central importance of corporate governance to capital market development is underpinned by the current drive towards demutualisation of exchanges globally. Beginning with the Stockholm Stock Exchange in 1993, the World Federation of Exchanges (WFE) Annual Report and Statistics 2010 show that over 80 percent of members of the WFE have been demutualised as at 2009. Exchanges convert from mutual (not-for-profit companies limited by guarantee) to demutualised (for-profit companies limited by shares) for many reasons such as capital raising, streamlined decision making, and streamlining operations, but the enhancement of corporate governance forms the core of most demutualisation decisions globally.”
Qualitative board membership, diversified experiences, and a clearly segregated ownership, management, and trading (OMT) functions enhance risk management, customer protection, corporate governance and hence, market development; in a demutualisation regime better than in a mutual exchange structure.
In conclusion, the current vision of the NSE, which is “to be the leading stock exchange in the African region for capital formation, driven by transparency, innovation, efficiency and liquidity” thereby growing “to become the gateway to African markets” (Onyema O., 2011), requires that the country deepens its capital market, widens its scope in line with globalisation – the language of the 21st century – and moves its economy towards attaining its Vision 2020:20. A major tool for speeding up this process consists in good and effective corporate governance practice across the length and breadth of the Nigerian capital market.
OLUWATOBA OGUNTUASE
Oguntuase, a Young African Professional and founder, Oladog Artistic and Research Communications, wrote from Yola
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