A Publication of Zenith Bank Plc V o l. 3 No. 3 July, 2007 3 No 3 July 2007.pdfregulation on nigerian economy - chuke nwude nigeria: conditions for private equity market - elaine delaney

TheStockMarketBoom

TheStockMarketBoom

Challenges&

Opportunities

PERISCOPE

ISSUES

POLICY

national policy and institutional framework

for an identity management

system for nigeria

FOREIGN INSIGHTS

capital market reform:

challenges & opportunities

- mike uzor

the impact of capital market

regulation on nigerian economy

- chuke nwude

nigeria: conditions for

private equity market

- elaine delaney

uses & abuses of

governance indicators

- christiane arndt

& charles oman

nigeria - uk: fostering

relations on trade imbalance

economy: activity, activity

and more activity

EDITORIAL

economic, financial and business indices

african capital markets:

the direction, the pace

GLOBAL WATCH

FACTS & FIGURES

A Publication of Zenith Bank Plc Vol. 3 No. 3 July, 2007

w w w. z e n i t h b a n k . c o m

ZENITH ECONOMIC QUARTERLY : : July, 2007 1

E D I T O R I A L T E A M

MARCEL OKEKEEditor

EUNICE SAMPSONTONY MONYE

Assistant Editors

SOLOMON OBEMBEAnalyst

MUSA MICHAELProduction Assistant

SYLVESTER UKUTROTIMI AROWOBUSOYE

Layout/Design

E D I T O R I A L B O A R D O F A D V I S E RSUDOM EMMANUEL

GIDEON JARIKREPAT NWARACHEOCHUKO OKITI

ZENITH ECONOMIC QUARTERLYis published four times a year by Zenith Bank Plc.

The views and opinions expressed in this journaldo not necessarily reflect those of the Bank.

All correspondence to:The Editor,

Zenith Economic Quarterly,Research & Economic Intelligence Group,

Zenith Bank Plc7th Floor, Zenith Heights

Plot 87, Ajose Adeogun Street,Victoria Island, Lagos. Tel. Nos.: 2781046-49,

2781064-65| Fax: 2703192.E-mail: [email protected],

[email protected]: 0189-9732

C O N T E N T S

PERISCOPEExamines developments in key sectors of theeconomy in the second quarter 2007 and at-tempts some prescriptions for the future. Pg.5-10

POLICYThe full content of the National Policy and In-stitutional Framework for an Identity Manage-ment System for Nigeria. Pg. 11-23

ISSUES IDiscusses the reforms in Nigeria’s capital mar-ket, throwing up some challenges and oppor-tunities for wealth creation for the discerninginvestors. Pg. 25-34

ISSUES IILooks at the impact of capital market regula-tion on the Nigerian economy while makingsuggestions on ways to improve the system.Pg. 36-45

ISSUES IIIHighlights the reasons behind the surge of pri-vate equity investors and investments in thecountry as one of the strongest emerging mar-kets. Pg. 46-50

FOREIGN INSIGHTS IAnalyses the growing interest in the uses andabuses of governance indicators and at thesame time, pointing at future direction. Pg. 52-57

FOREIGN INSIGHTS IITakes an overview of Nigeria-UK relations,highlighting the existing trade imbalance infavour of the United Kingdom. Pg. 58-63

GLOBAL WATCHExposes the growing opportunities in the Afri-can capital markets – as one of the vehiclesthrough which the Millennium DevelopmentGoals (MDGs) of halving poverty by 2015 couldbe achieved. Pg. 65-74

FACTS & FIGURESHighlights macroeconomic performance forQ207 using charts and figures. Pg. 76-80

ZENITH ECONOMIC QUARTERLY : : July, 20072

From The Editorial Suite

n a number of developing countries, including Nigeria,

various policy initiatives have combined to demystify the capital

market as a preserve of the elite. In Nigeria and several African

countries, returns on investment in the various capital markets

have consistently ranked among the highest in the world for close

to half a decade. The Director-General/Chief Executive Officer of

the Nigerian Stock Exchange, Professor Ndi Okereke-Onyiuke

stated this much recently on the floor of the London Stock Ex-

change when she took some Nigerian banks on exploratory pre-

listing talks with the LSE authorities.

Without doubt, the frenzied and frenetic efforts of banks in

Nigeria in raising money from the public through the capital mar-

ket in the wake of the recapitalization policy in 2004/2005, served

as the trigger that set-off the boom in the market. Hardly was there

any city, town, village or hamlet that was not reached by the

publicity blitz that went with the fund raising efforts. The enlight-

enment was massive, comprehensive and sus-

tained in a manner that the level of awareness

and consciousness of all strata of investors (lo-

cal and foreign) about the capital market and its

potential has remained very high and rising

ever since.

The enactment of the Pension Act 2004 and

its subsequent implementation thus far—and the

multiplier effect on the capital market—consti-

tutes another fillip to the blooming of the mar-

ket. The creativity of the Debt Management

Office (DMO) in managing the domestic debt—

via the bond window—is also an additional pep

to the capital market. The monetary policy mix in the past couple

of years has also had salutary effects on the phenomenal develop-

ment of the capital market. The ‘new strength’ of the banks since

end-2005 is already a boon to the growth of the capital market.

All these developments, the attendant challenges as well as

the emerging opportunities are expertly articulated in our sec-

tion—issues—under the title—‘Capital Market Reform: Challenges

and Opportunities’. In the section also is a treatise on ‘The Impact

of Capital Market Regulation on Nigerian Economy’. The private

equity market is also explored and strongly recommended in this

section under the rubric—‘Nigeria: Conditions for Private Equity

Market’. According to the author, “as developed markets become

increasingly saturated, investors are looking at emerging market

private equity as the next frontier”.

Our global watch section deals with the ‘The African Capital

Markets: The Direction, The Pace’ in which the characteristics,

strengths and prospects of a number of them are articulated. The

factors currently driving each of the markets are equally investi-

gated, just as various strategies for leapfrogging the development

of some of them are examined and recommended. Four of the

markets are explored in-depth as case studies, to drive home the

phenomenal growth of the capital markets in the African conti-

nent. These include the Johannesburg Stock Exchange, the Cairo

Stock Exchange as well as the Kenya and Nigerian stock ex-

changes. The common growth trend among the examined mar-

kets is exemplified by the Nigerian case where market capitaliza-

tion, for instance, grew from a modest US$10 billion in 2003 to a

whopping US$63 billion as at end-June 2007. Other market indices

also recorded similar growth.

Under foreign insight, the Nigeria—UK relations is examined,

with focus on trade, investment, history, demographics, econom-

ics as well as the future trend. The treatise indicates that despite the

trade imbalance in favour of the Unite Kingdom, Nigeria has re-

mained a key beneficiary of huge investment inflow from the UK.

The historical link between both countries is

also shown to have played a major role in shap-

ing the laws, governance and business prac-

tices in Nigeria. And despite the disparity in the

levels of economic development in both coun-

tries, it is indicated that the prospect for mutual

interdependence remains quite high. Also, draw-

ing from Goldman Sachs report, the author reaf-

firms that the economies of both countries will

rank among the twenty largest in the world in

less than two decades.

The topic: ‘Uses and Abuses of Governance

Indicators’ is also treated in this section. Under

it, the authors point out the critical place of the quality of gover-

nance in driving a polity forward, the various governance indices

as well as the pros and cons of each of them. They sum up that

“while there will never be one perfect governance indicator, the

production and use of more transparent governance indicators

will better serve the needs of both external users and developing

countries seeking to improve the quality of local governance”.

In anticipation of the critical role of the planned national iden-

tity scheme, we ran, under our policy section, the seminal docu-

ment on the ‘National Policy and Institutional Framework for an

Identity Management System for Nigeria’. We also have our other

regular sections namely Periscope, Facts & Figures, each with the

usual depth and touch that is already our hallmark. Happy reading,

as we get even better with each edition. You are welcome!

I

“as developedmarkets become

increasinglysaturated, investors

are looking atemerging market

private equity as thenext frontier”.


After going through two editions, we wish to attest to the deepprofessional quality of the contents, the articles therein are veryempirical, and in every sense, a reference material for studentsand practitioners in the economic and financialworld.

We urge you to please, keep it up and also thankyou for your thoughtfulness in sending us thosebeautiful copies.Bimbo AlagbeGeneral ManagerGateway HotelOtta Ogun State.

We hereby acknowledge with thanks the receiptof one copy of your informative and educativepublication, Zenith Economic Quarterly (ZEQ) sentto the library. We assure you that the journal willbe put to good use, as it is already on display onour board.Tim AyandaHead LibrarianChartered Institute of Bankers of Nigeria.

Thank you for your letter of May 30, 2007 enclos-ing the April 2007 edition of Zenith EconomicQuarterly (ZEQ). As you mentioned, I am sure wewould find it very interesting and educative.Mike OmalikoInternational Finance CorporationWorld Bank Group.

I am directed to acknowledge with thanks the re-ceipt of your letter dated May 30, 2007 forwardinga copy of the April 2007 edition of ZEQ and itsattachment. The journal is a good source of infor-mation on current developments in the Nigerianeconomy, and provides very useful informationto Nigerian living abroad.

While wishing your bank continuous success inthe years to come, please, accept the assurances of our highestregards.F. N. EnyaFor: AmbassadorEmbassy of the Federal Republic of NigeriaSouth Korea

We acknowledge with thanks, the receipt of your April 2007 edi-tion of Zenith Economic Quarterly (ZEQ) being the part two ofyour last edition to our Chief Executive, Mr. G. S. Nnadi andassure you that the journal is of immense benefit to the Board.

Thanks so much for your usual kind gesture.

J. M. Shibigem (Mrs.)For: Mr. G. S. Nnadi.Executive Secretary / Chief ExecutiveNigerian Accounting Standards Board.

I write to acknowledge the receipt of your cover letter dated 30th

May, 2007 which conveyed Zenith Economic Quarterly (ZEQ).The journal’s review of the current Federal Government Eco-nomic reform is very apt, and is in line with the demand to criti-cally assess the nature and direction of these new policies. Wewill surely find the journal useful and I have already recommendedit to our research and planning department.Osamwonyi Osagie.Director-GeneralNational Population Commission

On behalf of the Vice Chancellor of Redeemer’s University, Prof.Oyewole Tomori, it is my great pleasure to acknowledge thereceipt of a copy of the Zenith Economic Quarterly (ZEQ) thatyou recently sent to us. The journal is valuable as a reference

source material particularly for the staff and students in the Depart-ments of Economics and Business Studies; and financial Studies,both in the College of Management Sciences of the University.

The copy has therefore, been strategically de-posited for easy access to it. Once again, wethank you for the kind gesture.Prof. Peter F. OmoluabiFor: The Vice ChancellorRedeemer’s University.

The Director-General, Mrs. Modupe Adelaja, ispleased to receive a complimentary copy of thisquality publication from the Zenith Bank stableand therefore commends the creativity, innova-tion and value which the publication epitomizes.

There is no doubt that stakeholders/readers wouldfind the publication a useful resource.Levi AnyikwaChief Press/Public Affairs OfficersFor: Director-generalSmall & Medium Enterprises DevelopmentAgency of Nigeria

We are pleased to inform you that the journal istimely and quite educative. It would therefore beappreciated if the subsequent editions of the docu-ment could be forwarded to us whenever it isavailable.Bayo OrukotanCollege OfficerFor: Dean, College of Management SciencesBells University of Technology

We are grateful that you have put us on yourmailing list and hereby assure you that your jour-nal is academically enriching and very soughtafter by our numerous users.Dr. Okee OkoroUniversity LibrarianImo State University

We wish to express our appreciation to the Management of ZenithBank Plc and the Editorial Board of the magazine, Zenith Eco-nomic Quarterly, on their effort in sending us a copy of the maga-zine for some time now. Such kind gesture is commendable andgoes a long way in endearing you to the hearts of your admirersand partners-in-progress like ourselves.

While the quality of the magazine is good and standard, includingthe write-ups, however, we are of the view that the space / pageallocated to Capital Market reporting and happening is inadequate.If you consider the scope of the Capital Market and its impact onthe economy, it becomes necessary that more space / pages beallocated to this very important sector of the Nigerian economy.Kasimu G. Kurfi.Managing Director / CEOAPT Securities and Funds limited.

We wish to acknowledge, with gratitude, receipt of one copy ofthe current edition of the publication entitled, Zenith EconomicQuarterly (ZEQ), which you donated to the University of NigeriaLibrary System.

The publication, which is both informative and educative, will bean asset to our researchers in the Faculty of Social Sciences.

We appreciate this gesture and look forward to receiving similarpublications from Zenith Bank Plc.Dr (Mrs.) O. N. AmucheaziAg. University LibrarianUniversity of Nigeria.


PERISCOPE

* By Marcel Okeke

he second quarter 2007 was a verycrucial period in Nigeria, not only forpolitical activity but also for economicand other reasons. There was achange in government at all levelssequel to a general election; the pe-riod was also a terminal one for a num-ber of economic programmes/poli-cies, as well as an auspicious momentto gauge the state of the economy.During the quarter, government fast-tracked a number of projects andprogrammes to, so to say, reach thefinishing line before the take-off of anew administration. Thus, rather thatwind down, the tempo of governmentactivities heightened by the day allthrough the quarter. The period waslargely marked by commissioning ofprojects, sod-turning and foundation-laying for others as well as fresh policyinitiatives and tinkering with a few ex-isting ones.

All these, coupled with develop-ments in the international oil market,

reform activities of agencies and in-stitutions such as the Bureau of PublicEnterprises (BPE), the Central Bank ofNigeria (CBN) and the Nigerian StockExchange (NSE), among others,shaped the economy during the pe-riod under review. Specifically, newpolicies and projects in sectors like fi-nancial services, energy and power,oil and gas, solid minerals, aviation,telecommunication and maritime,among others, were carried out withrenewed zeal.

As in the previous quarter, thefrenzy among banks raising hugesums from the capital market (throughpublic offerings) continued, just as thepace of acquisition of liquidated banksand merger propositions got height-ened. The privatization of some stra-tegic state owned enterprises was con-cluded during the period under review.In the area of policies, Value AddedTax (VAT) was raised from five per centto 10 per cent while the pump price of

TAt the close of trading inJune, 13 banks numberedamong the 20 mostcapitalized equities in themarket, with Zenith BankPlc leading the pack with amarket capitalization ofN612.82 billion... ZenithBank also finished thequarter (incidentally theend of its financial year2006/2007) as the highestpriced bank stock at N66.14per share


petrol was increased from N65/litre to N75/litre—all thesehave been reversed sequel to a nationwide strike spear-headed by the Organized Labour. Petrol was however onlybrought down to N70/litre.

In spite of, or owing to, all these, major economic indi-ces show positive outcomes for the period under review.The inflation rate which has since attained the single-digitlevel, continued its deceleration during the quarter. Onyear-on-year basis (headline) inflation dropped steadilyfrom 8.5 per cent at end-December 2006 to 4.2 per cent inApril, but rose to 6.4 per cent at the close of the periodunder review. The slight rise was as a result of the in-crease in fuel price as well as the shot-lived increase inValue Added Tax during the period. VAT rate was doubled(from 5% to 10%) in May but was reversed in June. Theexchange rate of the Naira has continued to appreciate:from closing at N127 to the Dollar at end-2006, it got toN126.10 as at June 2007. Also, as in the previous quarter,the gap between the parallel and official market rates keptnarrowing.

Interest rates in various windows and instruments werealso on the decline during the second quarter, due mainlyto lingering excess liquidity. Thus, treasury bill rate at end-June stood at 6.10 per cent while the longest FGN Bond (7years) rate also declined to 9.00 per cent from the earlierlevel of about 10.00 per cent. In fact, from end-December2006, inter-bank rates have been stable, essentially owingto the impact of the Monetary Policy Rate (MPR) which

replaced the Minimum Rediscount Rate (MRR). The MPRhas also been reduced from 10 per cent at inception toeight per cent in June 2007.

During the quarter under review, Nigeria’s externalreserves continued to grow—but at a slow pace. This wasdue to the fact that although the prices of oil remainedhigh and rising in the international market, Nigeria’s earn-ing from the commodity was dropping. The decline in earn-ing is attributable to drops in crude oil production/exportowing the youth restiveness in the Niger Delta—the oilproducing region of the country. However, external re-serves recorded some accretion, rising from US$41.96 bil-lion as at December 2006 to US$43.58 billion at end-June2007.

All through the quarter, the capital market was liter-ally a beehive of activities—both in the primary and sec-ondary segments. There was an avalanche of public of-ferings by especially banks and insurance companies seek-ing to boost their capital base. Trading in the secondarymarket remained largely bullish, with most stocks (led bybanks and insurance firms) recording quantum price gains.Thus, the All Share Index (ASI) which stood at 33,189.30 atend 2006 rose to 51,149.40 at the close of trading in June; itwas 33,189.30 at the end of the first quarter, 2007. In thesame vein, Market Capitalization rose from N5.12 trillionat end 2006 to N7.13 trillion in March and to N7.80 trillion atend-June 2007.

Expectedly, banking stocks drove activities in the mar-ket—in terms of volume and value of sharestraded. At the close of trading in June, 13 banksnumbered among the 20 most capitalized eq-uities in the market, with Zenith Bank Plc lead-ing the pack with a market capitalization ofN612.82 billion. It was trailed by United Bankfor Africa (N424.87 billion), First Bank (N422.42billion) and Union Bank (N399.50 billion). Ze-nith Bank also finished the quarter (inciden-tally the end of its financial year 2006/2007) asthe highest priced bank stock at N66.14 pershare, again followed by UBA (N50.15), UnionBank (N41.40) and First Bank (N40.40).

Apparently owing to the successful con-solidation of the insurance industry (re-capi-talization closed February 2007), insurancestocks performed excellently, trailing bankequities in capital appreciation during the re-view period. Although most of the insuranceequities rank as ‘penny stocks’ owing to thererelatively low prices, such prices more than

20 MOST CAPITALISED COMPANIES AS AT JUNE 29th 2007

Source: Research & Economic Intelligence Group

PERISCOPE


doubled or tripled during the first half of this year. This iseven as more insurance equities are getting listed on thefloor of the Nigerian Stock Exchange.

BANKING AND FINANCEThe lingering frenzy in boosting shareholders’ fundsamong banks continued even with greater zeal duringthe second quarter 2007—with operators applying differ-ent strategies. However, majority resorted to the capitalmarket; a few sought foreign equity capital from repu-table institutional investors; others pursued local acqui-sition and merger deals. First Bank of Nigeria came tothe market with its jumbo hybrid public offer to raise onehundred billion naira (N100.00 billion); UBA consummatedits moves to acquire the liquidated Metropolitan Bankand City Express Bank through a ‘Purchase and Assump-tion’ deal with the Central Bank of Nigeria and the NigeriaDeposit Insurance Corporation. Ecobank Nigeria Plc andUnity Bank Plc signed a Memorandum of Understanding(MOU) to merge. The merger negotiation between IBTCChartered Bank Plc and Stanbic Bank Nigeria Limited(Stanbic Bank) made progress during the quarter—gain-ing formal approvals of all relevant regulatory authori-ties.

The new capacity of Nigeria banks to fund big tickettransactions came into play during the quarter, when tenof them pooled three hundred and fifty million US dollars(US$350 million) towards the ‘Local Content Fund’ of theoil and gas industry in Nigeria. The Nigerian National Pe-troleum Corporation (NNPC) and the ten banks have sincesigned an agreement/particulars setting up the Fund whichis meant to beef up local value added to the developmentof the oil and gas industry. The participating banks include:Zenith Bank, UBA, Diamond Bank, BankPHB, GTBank,Citibank, Stanbic Bank, First Bank, Fidelity Bank and Oce-anic Bank.

During the period under review, five banks joined thelist of Primary Dealers’ Market Makers (PDMMs). Theyinclude Zenith Bank, Union Bank, Afribank, Ecobank andBankPHB. Fifteen other financial institutions comprisingten banks and five discount houses had earlier been ap-pointed as part of Government’s effort to strengthen themoney market. They include Access Bank Plc, Fidelity Bank,First Bank of Nigeria, First City Monument Bank, GuarantyTrust Bank and IBTC Chartered Bank. Others are: NigeriaInternational Bank (Citigroup) Stanbic Bank Nigeria, Stan-dard Chartered Bank, United Bank for Africa, AssociatedDiscount House, Consolidated Discount, Express DiscountHouse, First Securities Discount House and Kakawa Dis-

count House.The CBN during the quarter under review, pushed fur-

ther its microfinance banking initiative by granting ‘finallicenses’ to 14 microfinance institutions; it also grantedprovisional approvals to about 66 converting banks (com-munity banks). The apex bank also granted approvals-in-principle to about 21 new investors in microfinance banks.The Bank also intensified its sensitization efforts throughthe “downscaling” message to existing deposit moneybanks. By this drive, the apex bank is pushing existing op-erators to reshape in manners that would accommodatemicrofinance banking tenets.

Developments in the Nigerian capital market as wellas the international financial milieu, especially during thequarter under review, have warranted a number of policyinitiatives on the part of the Government and market regu-lators. Specifically, the Federal Government during thequarter approved a new minimum capital base for all capi-tal market operators in the country, with December 31,2008 as deadline. Concomitantly, a reduction in transac-tion costs of about 40 per cent was also approved for themarket. Under the new capital base regime which wasannounced in April, the minimum paid up capital for issu-ing houses was increased from N150 million to N2 billion,while that of broker-dealers moved from N70 million to N1billion. Clearing and settlement agencies are now to havea capital base of N1 billion, up from N500 million whileregistrars are now to have N500 million, up from N50 mil-lion. Underwriters, who before the new dispensation hada minimum capital requirement of N100 million, are nowto have N2 billion, while that of portfolio/fund managershas been increased from N20 million to N500 million. Cor-porate sub-brokers also have to move up their capital base


from the current minimum of N5 million to N50 million.Also during the quarter, the apex regulatory body in

the capital market, the Securities and Exchange Commis-sion (SEC), inaugurated an 11-member committee chargedwith the responsibility of harmonizing and upgrading fi-nancial reporting and auditing practices by quoted com-panies in Nigeria. According to the agency, “this is in re-sponse to the current financial mis-representation by com-panies both within and outside the country, as well as tomeet the requirement of the International Organizationof Securities Commission (IOSCO)”.

The Nigerian Stock Exchange on its part, revved up itsdrive to get some Nigerian companies listed on the Lon-don Stock Exchange and expose them to international capi-tal finance market, where their shares can be traded. To-wards this end, during the quarter, the NSE took 10 Nige-rian banks to the LSE investors’ forum on a strategic visitand exploratory talks with the authorities of one of themost respected bourses in the world. The ten banks are:Zenith Bank, First Bank, Union Bank, Oceanic Bank, UBA,Intercontinental Bank, GTBank, Afribank, Ecobank and Ac-cess Bank. London is particularly seen as the world’s fi-nancial capital with a stock market that attracts interestfrom companies in North America, Europe, Asia and theMiddle East.

The NSE has also commenced an arrangement to ac-commodate Small and Medium-scale Enterprises (SMEs)in the emerging opportunities in the capital market. To-wards this end, the NSE is creating a third-tier securitiesmarket for the SMEs, and has churned out the require-ments for the listing of companies in the sub-sector. Cur-rently, the equities sector of the NSE comprises the first-tier securities and the emerging markets otherwise knownas the second-tier securities market. Some of the listingrequirements for the SMEs include: that a company must

be wholly indigenously promoted and registered as a pub-lic limited company under the provisions of the Compa-nies and Allied Matters Act 1990; must submit to the Ex-change financial statements/business records of past twoyears; date of last audited accounts must not be morethan nine months. Others include that the amount of moneythat can be raised may not exceed N100 million; at least 10per cent of share capital must be offered to the public;number of shareholders must not be less than fifty; andafter listing, company must submit half-yearly and annualaccounts, etc.

PUBLIC DEBTThe nation’s public debt as at the close of the second quar-ter was made up of N390 billion (US$2.6 billion) externalcomponent and N1.86 trillion local bit. Nigeria had by theclose of the first quarter this year, exited both the Parisand London Clubs debt—thus bringing her external debtoutstanding to the present level. And, although the quan-tum of the domestic part of the entire indebtedness wasgetting rather worrisome, the Debt Management Office(DMO) advises that there is no cause for alarm. The DMOsays that the external and local debts still remain “belowthe critical thresholds of 45 per cent and 25 per cent re-spectively of the country’s Gross Domestic Product (GDP)”.According the debt management agency, “what we shoulddo is to sustain the debt profile to ensure that we do notborrow in such a way as to slide back into the unsustain-able debt condition that we had in the past.” PresidentUmaru Yar’Adua has since assumption of office last May,expressed worry over the level of the local debt and calledon the CBN and the DMO to take steps to arrest the situa-tion.

OIL, GAS & PETROLEUM PRODUCTSThe tail-end of the second quarter 2007was marked by petroleum productsprice increases: pump price of fuelfrom N65/litre to N75/litre. This, amongother issues, however, triggered pub-lic discontent which culminated in anationwide strike—in the end, the pricesettled at N70/litre. In part, the highand consistently rising price of crudeoil in the international market coupledwith equally high cost of importing re-fined products accounted for the tink-ering with fuel prices. Nigeria as at thetime of this report, was depending on

PERISCOPE

Source: OPEC Monthly Market Report, June 2007

OPEC Reference Basket and selected Crudes, US$/b


PERISCOPE

imported fuel for over 70 per cent of its needs. The Orga-nization of Petroleum Exporting Countries (OPEC) aver-age crude price which stood at US$54/barrel early in theyear, moved up to US$60/barrel in March, US$64.40 in Mayand yet up to US$65 by June. A number of factors wereresponsible for the consistent crude price increases dur-ing the quarter; they include disruptions in the geopoliticalregions, inadequate refinery capacity, and increasedspeculations in futures markets, among others.

Production statistics indicate that ten OPEC membersproduced an average of 26.64 million bpd in May—about70,000 bpd higher than the April level of 26.57 million bpd.These however excluded Iraq which does not participatein OPEC output pacts and Angola which joined the groupearly this year. In Nigeria, crudeproduction level dropped from 2.14million bpd in April to 1.99 millionbpd in May, and further to about 1.85million bpd in June. Before the youthrestiveness in the Niger Delta, Ni-geria was producing about 2.5 mil-lion bpd.

Nigeria during the quarter un-der review awarded the first gaspipeline contract under its NationalIntegrated Power Project (NIPP).The US$148.4 million projectawarded to Messr IDT Consortiumis for a pipeline that will run fromAdanga Oilfield operated by AdaxPetroleum to Calabar. The projectmarked the first step in the secondphase of efforts to improve powergeneration, transmission and distri-bution under the NIPP. The 107 kilo-

meter pipeline will supply gasfrom the Addax platform off-shore to the gas power plant atIkot Nyong, near Calabar, CrossRiver State. The Calabar—Adanga pipeline is one of theprojects under NIPP, which isaimed at building new powerplants with associated gas pipe-line of over one thousand kilo-meters of transmission line net-work and several distributionprojects all over the country.

On its part, the Nigerian Elec-tricity Regulatory Commission

(NERC) licensed 18 Independent Power Producers (IPPs)in addition to the interim licenses it granted to the 18 suc-cessor-companies of Power Holding Company of Nigeria(PHCN)—all for the generation of a total of about 6,864MWof power. The Commission also granted three generationlicenses with a total installed generation capacity of 381MWin addition to the new hydro projects in Mambila, DadinKowa, and Zungeru that are expected to add a total of5,389MW to the national grid.

TelecommunicationsThe key issue in the public domain all through the quarterunder review regarding the telecoms sector was the dis-

Yearly Total and Distribution of Nigeria’s Local Debts

Source: Debt Management Office / Research & Economic Intelligence Group.

The 20 Licensed IPPs in Nigeria

Source: National Electricity Regulation Commission, NERC


PERISCOPE

content and concern over the depreciating quality of ser-vices by the GSM operators. The poor quality of servicesmanifest in the form of high rate of call attempts, high rateof drop calls, call interference and loss of audio. Therewere also the issues of recurrent down time, long delayand non-delivery of SMS and multiple delivery of sameSMS, among others.

Acknowledging the deteriorating service quality, theregulatory agency, Nigerian Communication Commission(NCC) said it “sympathizes with telecom consumers forthese problems” and was taking measures to ensure thatGSM operators improved service quality “in the shortest

possible time”. On their part, the GSM operators blamedthe situation on the poor state of infrastructure, especiallythe down turn in the power supply situation. But furtherexpressing its discontent with the whole situation, the NCChad, as an interim measure, restrained the mobile tele-phone operators from continuing with their sales promo-tions activities.

In the face of all these however, most of the GSM op-erators commenced fresh investments in infrastructureand equipment to not only stabilize their services but alsoexpand service penetration and market share. Thus, MTN,for instance, is embarking on its network expansion with abudget of N85 billion (US$667million). It currently has about

2,661 base stations spread across the country and plans toadd about 900 more before year-end 2007. The operator isalso expanding its fibre link by about 144 kilometres throughthe PortHarcourt-Warri route to support transmission ca-pacity. Celtel, another operator, is rebuilding its networkwith a budget of about N191 billion (US$1.5 billion) andplans to add about 3,300 cell sites. Another major opera-tor—Globacom—is equally investing hugely to expand itsnetwork and fast-track penetration into the hinterland.

A major development in the communications sector inthe second quarter was the launch of Nigeria’s communi-cation satellite (NIGCOMSAT-1) into space—in China. It is

projected that the Satellite would enable joboutsourcing through the provision of a robusthigh bandwidth for two-way broadband linksbetween Nigeria and other parts of the world.The Satellite is also projected to play key rolein bridging the digital divide by providing plat-form for small/medium scale ICT service pro-viders to partake in the global US$1.2 trillionbusiness opportunities. All these will translateto cheaper and qualitative internet access inNigeria even to the rural areas; and this willhelp drive e-commerce, improve governmentefficiency and promote the development ofthe digital economy in Nigeria.

PRIVATIZATIONThe Bureau of Public Enterprises (BPE) formallyhanded over both the PortHarcourt Refineryand Kaduna Refinery and PetrochemicalsCompany (KRPC) to Bluestar Oil Services—aconsortium comprising the Dangote Group,Zenon Oil and Transnational Corporation andRivers State Government. The PortHarcourtRefinery was sold for US$561 million (N71.8 bil-

lion) while the Kaduna Refinery went for US$160 million(N20.5 billion). Also handed over by the BPE to their buy-ers were Izom Brick and Clay Products (to ContinentalProject and Supplies Company Limited), Onigbolo Cement(to Dangote Industries), and Steyr Nigeria Limited, Bauchi(to Scintilla Prime Investments Limited). Ihechiowa OilPalm in Abia Stae was handed over to Omen Interna-tional Limited, and Anammco Enugu to G.U. Okeke andSons. [By the time of going to the press, the sale of PortHarcourtand Kaduna refineries had been cancelled](* Marcel Okeke is the Editor, Zenith Economic Quarterly)


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National Policy and institutional Framework for an identity Management System for Nigeria

NATIONAL POLICY AND INSTITUTIONAL FRAMEWORKFOR AN IDENTITY MANAGEMENT SYSTEM FOR NIGERIA

1.0 IntroductionThe Federal Government, in its effort at revitalising theNigerian economy, has embarked on a package of eco-nomic reforms as encapsulated in the NEEDS document.Its unwavering commitment to the implementation ofthese economic and social reforms in order to repositionNigeria has been consistently demonstrated in the con-tinuous review and enunciation of complementary poli-cies to further unlock hidden economic potential in spe-cific sectors of the Nigerian economy as well as enhancegovernance processes. Government will continue to de-liberately promote private sector development throughinstituting appropriate policies; procedures and structuresthat would further stimulate private sector led economicgrowth and development with long term social and eco-nomic benefits to all Nigerians.

One of such efforts by Government is the enunciation ofthe national policy and regulatory framework on consumercredit which is aimed at enhancing access to consumercredit by Nigerians. Credit providers have often expressedthe view that the inadequate identity management sys-tem and in particular, absence of a reliable identity verifi-cation process have contributed significantly to the dis-torted growth and development of the consumer creditmarket in Nigeria.

It is Government’s firm belief that a sustainable consumercredit system will thrive in an environment of enhancedidentity management system with secure and reliableverification and authentication parameters. Accordingly,

Government’s primary interest is to establish a reliableidentity management system that would, amongst otherthings, facilitate the orderly development of the consumercredit system in Nigeria. It would involve the develop-ment of a national identity database which would furtherenhance governance processes. For these and variousother reasons, Government decided recently to reviewexisting identification schemes in the country so as to de-termine ways of improving on the unique identification ofindividuals, (citizens and foreigners) and corporations inNigeria and develop a national system of identity man-agement.

Following Government’s acceptance of the Report of theCommittee on the Harmonisation of National Identifica-tion Schemes, a national policy and institutional frame-work for an identity management system for Nigeria hasbeen approved for expeditious implementation by thePresidential Implementation Committee under the Chair-manship of the Secretary to the Government of the Fed-eration.

Government recognises that there are currently existingidentification schemes in the private sector and in variousagencies and departments in government, including theongoing National ID Card scheme at the Department forNational Civic Registration (DNCR). In particular Govern-ment recognises that there are impediments to the devel-opment of a system of national identity management andhas enunciated this policy to address the issues, proce-dures, processes and set the basic parameters for the


National Policy and institutional Framework for an identity Management System for NigeriaPOLICY

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introduction of a unique system of national identification,establishment of a national identity database and therebycreate an identity management system for Nigeria thatwould be secure, widely accepted, functional and cost ef-fective.

2.0 The Need for a National Identity Management Systemfor Nigeria

2.1 IntroductionThe issue of identity management of individuals,organisations and other public institutions remains a corefunction of government. Issues involved in creating, us-ing, changing and ending an identity cuts across technical,legal, procedural and policy dimensions. This has evenbeen made more complex and demanding with the ad-vent of the information age and the capabilities for ma-nipulation and stealing of information, thus raising issuesof security, privacy and fair information practices as gov-ernments seek better means of service delivery,interoperability across government and private sectorsystems and enforcement of law and order.

2.2 Unfortunate MisconceptionsOften when people think or talk of identity, which is a refer-ence or designation used to distinguish a unique and par-ticular individual, business or device, the impression iscreated that it is just as easy as having another ID card orpiece of paper on which a person’s names are written.And truly there exists in the country today various kindsof representation of an individual’s identity. Unfortunatelymost of them can be duplicated/replicated and thereforeprone to all kinds of identity fraud. Presently there is nounique national identification scheme in Nigeria that islinked to a national identity database with appropriateaccess and in the case of government agencies,interoperability.

Yet there is need for an identity management system, thatis, the set of principles, practices, policies, processes andprocedures that are used to realise the desired outcomesrelated to identity. Furthermore this identity managementsystem should provide a unique, reliable, verifiable andsecure way of authenticating an individual’s identity. Itshould provide for not just a unique individual identifier,but also a national database, secure access, widely ac-cepted and can support a smartcard fitted with a chip onwhich e-government services as well as other private sec-tor applications can be installed.

For most countries today, the debate is no longer on theneed to have a system of uniquely identifying individualsand businesses but on the selection of appropriate tech-nology to authenticate citizens and businesses. In par-ticular such a system would provide for active participa-tion of various stakeholders in the process of establishingan identity, communicating an identity and assuring an iden-tity. It is true that the competing policy interests rangefrom protecting citizens’ freedoms, privacy and other pre-rogatives. There is also the need to ensure institutionalefficiencies, law, order and security.

The broader question of concern remains, how desirableis it to have a single national system of identifying all citi-zens in order to accomplish the legitimate business ofgovernment – law enforcement, intelligence, social andeconomic development, etc. In any case, both Govern-ment and the Private Sector have their respective roles toplay in the development of a national identity manage-ment system.

At present we do not have a central national databaseand the accompanying systems to support secure, reli-able identity verification and authentication. It is there-fore easy for an individual to acquire identity cards withdifferent names, leading to the high incidence of identityfraud.

Development in ICT and especially identity managementwhere it has been deployed has enhanced governanceprocess everywhere in the world.A secure national identity management system that en-ables a secure, reliable and authentic verification of anindividual’s identity anywhere across the country wouldfacilitate service delivery both in government and privatesector, like access to consumer credit which requiresproper identification of the consumer.

Therefore Government believes that a well set up nationalidentity management which addresses the lapses andconstraints in the current identification environment wouldhelp bring identity management in Nigeria to global stan-dards using modern technology and global best practice.Government proposes to create a system that would di-rect attention to identity management, away from cardissuance.

This new system would ensure that there is a unique wayof identifying an individual anywhere in Nigeria and the


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system would have high integrity, confidentiality, acces-sible, non-repudiating. It would be such that when youwalk into a place and your identity is obtained from you, itshould be possible to ascertain that you are who you sayyou are and this can be repeated everywhere around thecountry with same result.

2.3 Concern of GovernmentGovernment has identified the need to integrate the vari-ous identity Schemes (IDS) into one effective and func-tional National Identity Management System (NIMS) tocomplement its programme of social and economic re-forms. Amongst other things, this would provide a reli-able system of uniquely authenticating and verifying theidentity of every individual (Nigerian and expatriate), boostnational security through efficient and reliable Identityauthentication, promote consumer credit and minimisesidentity fraud. Governance, especially in terms of e-gov-ernment services, (which is the way to go for Nigeria), hascontinued to depend on improved national identity sys-tems which enhances security, planning and social devel-opment, it is therefore crucial to develop an identity man-agement system for Nigeria.

Government’s role goes beyond the provision of an en-abling environment for private sector initiative, since thereare specific applications that enhance governance pro-cesses, issues of privacy and therefore, accessibility, se-curity and rights. Indeed innovations in national identifi-cation systems have moved so fast that it is imperativethat Government’s intervention should foster the adop-tion of the most modern applications so as to achieveonline and offline capture of demographic and biometricdata, well organised access to verification and registra-tion, multi-tier architecture, secure management of thedocument lifecycle, biometric personalisation, off-line andon-line identity verification as well as enhanced disastertolerance and recovery levels.

Therefore Government is interested in the establishmentof an effective, functional and efficient system of identitymanagement that employs the benefits of modern tech-nological developments in:

(i) seamlessly integrating existing and future identifi-cation schemes;

(ii) instituting a unique national identification scheme;(iii) providing government with an opportunity for en-

hanced deployment of existing and other possible

government applications;(iv) develop a national identity database as well as pro-

vide a common platform for related applications;(v) institutionalise a reliable system for verifying and

uniquely authenticating the identity of every Nige-rian including those with the legal rights to reside inNigeria.

It is therefore paramount that Government should leadthe way by setting the rules of engagement that wouldencourage the private sector to invest in the developmentand roll out of a unique national identification scheme aspart of the development of a national system of identitymanagement for Nigeria. Government is mindful of thehistorical effort at developing this system and proposes inthis policy document to achieve the goal through a clearand strong partnership with the private sector for the fund-ing and operation of the system subject to national secu-rity interests.

2.4 Current Environment for National Identity ManagementThere is currently no centralised national identity data-base and no system of national identity management whichefficiently links private sector ID schemes with the publicsector schemes.

While the financial services sector has been most proac-tive in the deployment of identification schemes in thedelivery of their services, these have differed from insti-tution to institution within the sector. The result has beenseveral identification schemes and databases with theresult that an individual’s identity data is replicated by thevarious institutions offering service to that person.

Government agencies, notably National Pensions Com-mission (PENCOM), National Health Insurance Scheme(NHIS), Federal Road Safety Commission (FRSC), NationalPopulation Commission (NPC) Nigerian Immigration Ser-vices (NIS), the Department for Civic Registration (DNCR),Independent National Electoral Commission (INEC) alsohold considerable databases with no viable integratedaccess and interoperability in place to enhance servicedelivery in government even when some of these institu-tions have introduced smart card technology into theirschemes. Thus a reliable system for verification and se-cure authentication of an individual’s identity has not beenestablished.



14

The current environment for identity management istherefore less than desirable. Government therefore pro-poses to organise identity management in such a manneras to bring all government database into aninteroperability loop and also provide an institutionalframework for managing the system so as to be able tointroduce a unique identification scheme that would facili-tate the establishment of a national identity database forNigeria.

2.5 National Identification Schemes and NationalIdentity ManagementGovernment recognises that the issue of a national iden-tity management system has very often been misunder-stood. Often the proposal to develop a national identitydatabase and introduce a unique national identifier andthe consequent issuance of a multi-purpose (chip technol-ogy) smart card, is confused with the additional effort ofensuring that interoperability and secure access to thedatabase is achieved through connectivity and seamlessintegration with existing identification schemes. Ensuringthat this is properly managed under a unified struc-ture that is guided by set principles, practices, pro-cedures and policies are even further miscon-strued.

The focus this of policy is therefore not just theintroduction of a unique identification scheme witha resultant ‘card’ having certain hitherto unavail-able features and characteristics, but the develop-ment of an integrated interoperability framework,a national identity database and an agency chargedwith the responsibility for managing the systemwhich would be funded, built and operated under a PPPscheme.

Government proposes, in this policy initiative, to embarkon massive education of the citizenry on the benefits ofinstituting a national identity management system, com-prising a national identity database, a unique national iden-tification scheme, a national identity database and multipurpose smart card.

Government’s view is that an identity management sys-tem should support common identity needs of govern-ment and private sector transactions, reduce costs, en-hance service delivery, further safe guard the public or-der as well as preserve and improve on individual pri-vacy.

A smart card designed to accommodate any combinationof government services and payment applications whichwill be loaded on any chip and on any acceptance devicethat conforms to the Multiple Purpose Card (MPC) stan-dard is therefore desirable.

Accordingly Government proposes to, aside from theharmonisation of existing schemes, introduce a smart cardwith a payments application which would be integratedwith existing identification schemes.

2.6 Introduction of a Unique National Identification SchemeIt is proposed that a General Multi-purpose Card (GMPC)would be adopted for Nigeria. It would be based on thecreation of a national identity database using a system ofunique identification that has a national application andwhich conforms with global best practice.

The GMPC technology allows for the use of a chip (smartcard) in which different public and private sector applica-tions can be loaded into one card, with secure linkage to a

secure database with the associated biometrics and strongauthentication characteristics.

As earlier noted, the scheme would have the followingdistinguishing elements:

(i) A Database;(ii) A Unique Signifier for every Individual, including

at least:i. A ‘Unique Identifier’;ii. A Biometric Entifier ;(iii) An (Id)entification Token (that is the GMP ID Card);(iv) Mechanisms for Identification and identity Authen-

tication;(v) Widespread Use of Data (Flows, identifier and Da-

tabase);(vi) Obligations on stakeholders.

A secure national identity management system that en-

ables a secure, reliable and authentic verification of an

individual’s identity anywhere across the country would

facilitate service delivery both in government and private

sector


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3.0 The National Policy and Institutional Framework3.1 Direction of PolicyGovernment’s proposal is for the integration (uponharmonisation) of existing identification schemes, the in-troduction of a unique identifier (based on individual bio-metrics, and creation of a national identity database) andthe issuance of a GMPC that would facilitate the introduc-tion of a combination of government applications and otherpayment solutions. It is expected that this scheme wouldbe driven by the private sector and incorporates the mostmodern and tested technological applications in identitymanagement.

Government therefore proposes a public private partner-ship for delivery on the various components of therevitalised identity management system including wherenecessary renovation and upgrading of existing institu-tions and processes. It proposes to incorporate existingschemes such that interoperability can be achieved and,over the long term a unique national identification schemewould become institutionalised as a means to enhancinge-governance in Nigeria.

This national policy and institutional framework providesa basis for the orderly introduction of the unique nationalidentification scheme and creation of a national databaseto provide a reliable system for verifying and uniquelyauthenticating the identity of every individual in Nigeria.It also provides the framework for harmonisation of exist-ing identification schemes of government, integration ofexisting databases and establishment of a managementagency to oversee the sustainable development of thesystem.

3.2 Policy ThrustGovernment’s primary intention is to first harmonise ex-isting identification schemes and subsequently introducea unique national identification scheme.

Government’s second policy thrust is theinstitutionalisation of a system of identity managementfor the country with a national database that would bereliable and secure, enhance e-governance as well as pro-vide payment applications beyond the public sector activ-ity.

Finally Government proposes to establish an environmentof identity management that is safe, secure, provides aneffective database and offers a reliable platform for the

further development of the consumer credit system inNigeria.

3.3 The Policy ObjectivesThe overall policy objective is the promotion of an en-abling institutional, legal, supervisory, technological, andinfrastructural environment for the sustainable develop-ment of a national identity management system with aunique national identification scheme.

Accordingly Government’s policy objective would remainfocused on the need for identified system of technologies,business practices, law and policies that would ensure theattainment of the following specific goals:

(i) Reduction in the cost of governance through inte-gration and interoperability of government data-base silos in various agencies and departments;

(ii) Enhancement of the quality of government servicedelivery through providing a unique national iden-tification system and a multi-purpose smart cardwith chip technology that incorporates governmentapplications and payment systems;

(iii) Safe guard public order and facilitate the enforce-ment of law and order;

(iv) Preserve and improve upon individual privacy;

(v) Enhance security of identity information;

(vi) Support common identity needs of governmentand the private sector;

(vii) Ensure global best practice in the process of se-lection and adoption of appropriate technology andsolutions provider and general management of theidentity management system in Nigeria.

3.4 Policy TargetsIt is Government’s intention to:

(i) Achieve the harmonisation and complete integra-tion of the various ID related databases of govern-ment within 12 months of implementation of thispolicy;

(ii) Establish a National Identity Management Commis-sion within 6 months of the enactment of the appro-



16

priate legislation to manage and oversee the op-eration of the national identity database, nationalidentification scheme and the integrated network ofdatabases;

(iii) Commence the establishment of a National Iden-tity Database using automated fingerprint biomet-ric (AFIS) to uniquely and unambiguously identifycitizens and other legitimate residents in Nigeria,within 12 months of implementation of the policy;

(iv) Implement the Public Private Partnership (PPP)scheme for creating the database, achieving theharmonisation and introducing the GMPC within 12months of implementation of the policy;

(v) Set up a standard and secure process for issuanceof the GMP Smart Card to at least 12million Nigeri-ans by the first year of implementation of the policy;

(vi) Provide a platform for other e-governance serviceswithin 18 months of implementation of the policy;

(vii) Provide a secure and operationally efficient systemfor registration and enrollement of individuals andbusinesses all year round and spread across thecountry, beginning with 18 registration centres in thefirst 12 months of implementation of the policy.

3.5 Policy StrategiesTo accomplish the above stated objectives and targetsthe following strategies would be pursued:

(i) Government would secure a partnership schemewith the private sector in the deployment of anappropriate technology and National Identity Man-agement Solution (NIMS);

(ii) The Department for National Civic Registration(DNCR) would be reorganized as part of the newNational Identity Management Commission;

(iii) Government would continue to appropriately fundthe development of the national ICT infrastructurebackbone to support the creation of a national datacentre and the establishment of the national iden-tity database;

(iv) Immediate review and introduction of required andor necessary legislation;

(v) Review, renovation, replacement and or upgradeof ICT infrastructure facilities at various govern-ment agencies with database as part of the firstphase of the proposed integration scheme;

(vi) Undertake a Privacy Impact Assessment to deter-mine the scope and extent of issues in the realm ofprivacy to be addressed in the actual implementa-tion of the National Identity Management;

(vii) Develop a detailed timeline for the integration ofthe databases, creation of the national identity da-tabase and introduction of the Identity Manage-ment Scheme.

4.0 Components of the National Identity ManagementSystem

It is proposed in this policy that the national identity man-agement system for Nigeria would include the followinginstitutional and infrastructural arrangements:

4.1 Existing Identification SchemesGovernment’s view is that existing identification systemsare very useful and should be available and optimallyutilised in the process of governance. Unfortunately theabsence of an integrated system of access and especiallyinteroperability, off line and on line has limited the use intowhich databases in different organs of government havebeen put.

Current systems of identification especially at the Depart-ment for National Civic Registration (DNCR), NationalHealth Insurance Scheme (NHIS), National PopulationCommission (NPC), Federal Road Safety Commission(FRSC), Federal Inland Revenue Services (FIRS), Inde-pendent National Electoral Commission (INEC), and Ni-gerian Immigration Services and other such schemes andidentity databases in both the public and private sectorconstitute an integral part of the proposed national iden-tity management system.

4.2 A National Identity DatabaseGovernment proposes the development of a national iden-tity database. It would be a hub system which would pro-vide a linkage among multiple databases currently in ex-istence, including the new national identification scheme,thus achieving a ‘virtually centralised’ database. In addi-tion there shall be a National Data Centre (with adequate


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disaster tolerance). It would be networked to all existingand the new identification schemes and under the man-agement of the proposed National Identity ManagementCommission (NIMC).

The process of integration of the databases andcentralising management through the NIMC would alsoinvolve the launch of a new unique national identificationscheme. This scheme, which would lead to the creation ofa new database, would deploy a unique identifier, (requir-ing every person in the country to present themselves forregistration, and to provide copies of documents that at-test to their use of a name). Through this means and theharmonisation that would be achieved, integration of datawould be facilitated to institute a secure national identitydatabase. The scheme would include the ICT infrastruc-

ture upgrade and harmonisation of the existing databasesin government agencies, based on national minimum iden-tification criteria in order to achieve uniformity on the vir-tual identity platform.

Any national identification scheme has a database at itscore, and is crucially dependent upon its existence, on thequality of the data in the records, and on the reality of theinference that each record has a one-to-one correspon-dence with a particular individual. It is Government’s in-tention to achieve this objective through the introductionof the unique identification scheme and a supporting multi-purpose card.4.3 Institutional Mechanism for Managing the SystemGovernment proposes the establishment of a NationalIdentity Management Commission (NIMC) whose func-tions would include the monitoring, regulation, supervi-sion and management of the national identity databaseand the new unique national identification scheme undera partnership arrangement that would involve the private

sector in a concession agreement for the setting up, pro-duction and operation of the infrastructure.

Existing databases would continue to remain with the vari-ous agencies under a harmonised database structure (vir-tual platform) and an upgraded infrastructure and con-nectivity to facilitate interoperability. It is also expectedthat the various payments platforms in the country wouldbecome part of the application solutions on the multipur-pose smart card that would be introduced to embody theunique national identification scheme and utilise the na-tional identity database.

Government has taken steps to ensure the speedy devel-opment of the appropriate ICT infrastructure backboneincluding the construction of a National Data Centre to

enhance availability of the database and itsmanagement processes including access, in-terface and data update processes.

To facilitate the effective transition to the newsystem, it is proposed in this policy to submita legislation which would provide for the re-peal of the Act establishing the Departmentfor National Civic Registration (DNCR), estab-lishment of the NIMC and the transfer of theassets, liabilities and functions of the DNCR tothe NIMC. The current functions of the DNCRwould continue to be done under the NIMC.

4.4 Financial Arrangement for Managing the SystemGovernment recognises the need to ensure that the newsystem does not remain a perpetual cost burden on na-tional treasury. To ensure efficiency and expeditious imple-mentation of the transition programme including the in-troduction of the unique identifications scheme, Govern-ment proposes the introduction of a Public Private Part-nership Scheme.

Under this arrangement, Government, represented by theNIMC, would grant a concession to a firm/consortium in aBuild Transfer and Operate (BTO) agreement, for the in-troduction of the unique identification scheme, develop-ment of the appropriate infrastructure and institutionalarrangement for the creation of the database and inter-connectivity management of the system, production andissuance of the multipurpose card and the related admin-istrative issues. Government’s contribution to the schemewould involve the employment of existing infrastructure

Identity authentication, a process whereby checking is per-

formed, in order to be confident that the person presenting

the identity is entitled to use that identity, facilitates the early

detection and prevention of fraud.



18

which would be subsequently renovated and or upgradedunder the scheme as appropriate. The cost of upgrade ofexisting schemes so that they can conform to the newplatform would also be borne by the PPP scheme.

The PPP partners who shall include Identity Solution Pro-viders (IDSP), Financiers and Operators, would fund theproject implementation and roll-out (including the upgrad-ing and retrofitting of assets of the DNCR, construction ofthe National Data Centre, NIMC Head Office and equip-ment supplies consistent with Government’s specificationsas detailed in the Build Transfer and Operate Agreement(BTO).

Detailed financing arrangement and cost structure wouldbe agreed with the PPP partners based on the work of thePresidential Implementation Committee set up by Gov-ernment to over see the successful implementation of theproject. There shall also be financial advisers to the projectto ensure optimal cost and benefits to the citizenry.

4.5 The General Multi-purpose Smart Card (GMPC)Government proposes in this policy to introduce a Gen-eral Multi-purpose Card (GMPC) which allows for the useof a (smart card) technology in which different public andprivate applications would be installed. The essential keyto a GMPC is the linkage to a secure database with bio-metric verifications for an individual’s identity.

The benefits of the GMPC include the fact that it facilitatesidentification, authentication, non-repudiation and portabil-ity in identity management. The GMPC Technology has aframework that allows integration of many applicationsinto one multipurpose card which would enhance gover-nance and payments in Nigeria.

4.6 A Unique Identification scheme (Signifier) for EveryIndividual

Government proposes in this policy the establishment ofa unique national identification scheme which would re-sult in the institutionalisation of a unique signifier for ev-ery individual. This unique means of relating an entry inthe national database (a digital persona) to a physical hu-man being is required to ensure the quality and reliabilityof the database. Its major features would include the fol-lowing:

a. An ‘Identifier’: (usually a series of digits and mayinclude alphabetic characters) which is commonly

assigned to each digital persona, in such a waythat no two digital personas have the same identi-fier. Also once allotted an ‘identifier’ it would beimpossible to have another ‘identifier’ allotted tothe same person in the same database with thesame biometrics.

b. A Biometric Entifier: which would involve the useof a measure of aspects of the physical person.Government proposes that this would require eachenrolment to provide a set of 10 prints of the fin-gers and thumbs and the face. The biometrics arecaptured, encoded, and stored in the database (andalso the smart card).

c. A token of the identification: It is proposed in thispolicy that an individual’s signifier would be acces-sible from the database by a secure means whichcould be a device which can read on-line and off-line using an identification token, that is ‘identitycard’ which would have a chip on it. It is furtherproposed that this identity card would be a multi-purpose card with provision for installing govern-ment and private sector applications.

d. Mechanisms for Identification and Identity Authen-tication -the new system envisioned would have ameans of identification which requires that anindividual’s data (or biometrics) is collected and atrawl of the entire database would be conductedfor possible matches. It would also provide for theauthentication of an individual’s identity (card user)through a system of ‘entity identification’ wherebythe data (or biometrics) collected is used to test theproposition that the person presenting it is the samehuman being that the entry in the national data-base is meant to relate to.

Identity authentication, a process whereby checking isperformed, in order to be confident that the person pre-senting the identity is entitled to use that identity, facili-tates the early detection and prevention of fraud.The aim is to ensure that each identification card wouldonly be used by ‘the right person’ through entity authenti-cation of the pre-recorded biometric of that person.This entity authentication would be performed when theperson submits to the collection of a new biometric, whichis then compared with the one recorded on the card. Theassociation of the person with the card can thereby beestablished; the unique national identity code is then ex-


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tracted from the card and applied for the purpose of thetransaction.

e. Widespread UseGovernment proposes to facilitate the widespread use ofthe new identification scheme as part of its efforts to en-courage the generation of sufficient data-points to trackand provide a means for control of illegal conduct andactivity, amongst other things. This is one way in which anational database, with unique signifier and a multipur-pose smart card can be useful to governance. Accord-ingly, it is proposed in this policy that there would be vari-ous levels of data flows:

i. Widespread Data Flows Containing the Identi-fier

This would involve the flow of data betweenorganisations that perform registration (espe-cially under the harmonised system) and theoperator of the national identity database (atNIMC), the issuer of the signifier, and the is-suer of the card (the operator or solution pro-vider under the PPP scheme being deployedfor this purpose). There would also be accessto the data flow between law enforcementagencies where necessary.

Due to the fact that the multi-purpose chipbased smart card would provide for uploadingof private sector payment applications, accesswould also be defined for this category of us-ers (such as financial transactions). They too

must interact with the hub database.ii. Widespread Use of the Identifier

To facilitate information sharing amongst Gov-ernment agencies, it is proposed in this policyto harmonise the various identificationschemes including ensuring that the use of theidentifier under the new scheme is enhanced.

iii. Widespread Use of the DatabaseAny national identification scheme involveswidespread use of the hub-database, or infor-mation from the hub-database. Although in itsearly stages this would be restricted to gov-ernment agencies under the harmonisationprogramme, the introduction of the unique na-tional identification scheme would ensure thataccess to the national database is further ex-panded and enhanced.

Therefore, it is proposed that alongside theharmonisation there would be the upgradingof the various schemes to achieve uniformityof data gathering, seamless integration andaccess.

(f) Obligations of StakeholdersGovernment proposes in this policy to encour-age the use of the new national identificationscheme to further enhance the system of indi-vidual identity verification and authentication andthus foster the growth of consumer credit in Nige-ria, amongst other benefits. Furthermore specifi-cations for business processes which are included

in the applications on the multipurpose card wouldrequire encouragement if those cards are to be used.Therefore there is need to provide a mechanism forencouragement and motivation.

Accordingly Government proposes to introduce alegislation that would enhance the acceptance anduse of the smart card by specific categories of Nige-rians and legal residents. Imposition of this respon-sibility is simplified by reference to the type of cardsand transactions that are specifically covered in thesystem.

Government proposes in this policy that every individualwho is sixteen (16) years and above would have:

(i) An entry in the national identification scheme with

To provide a superstructure for the new system re-

quires the establishment of a central location where

the National Identity database would be situated and

the network connections would terminate with suffi-

cient security and ICT architecture conducive for the

interoperability of the system.



20

his own unique identifier;(ii) A token that evidences that identifier (that is the

GMP card;(iii) To produce the GMP card when undertaking cer-

tain transactions or dealings with organisations,both in the public and private sector;

(iv) To submit to biometric measurement whenever anorganisation with power demands it. The powermay derive from legal sources or based on marketconditions (transaction precondition).

In view of the harmonisation process, the deaths and birthsregistration would become integrated into the nationalidentity database. This would thus ensure that registra-tion is captured at birth while enrolment of biometrics issubsequently captured and deaths are recorded accord-ingly to provide an ‘end’ to the use of an identificationsignifier in the database.

Government proposes to impose other obligations on otherstakeholders to complete the circle of fostering the activeuse of the new scheme. It is recognised that unless this isdone, the scheme would not achieve its purpose. Theseobligations would include the requirement to: demand forthe Card and perform identity authentication, record theidentifier and where needed, report information using theidentifier and apply sanctions to people who fail to pro-duce their card (provided sufficient time is given beforethis comes into effect).

4.7 Harmonisation of Existing Identification Schemes (EIDS)Government recognises the need to establish aninteroperable system with sufficient interactive windowto facilitate the use of available database by governmentagencies without hindrance. Furthermore, the establish-ment of a system of national identity requires theharmonisation of existing systems to facilitatestandardisation and subsequently achieving uniformitywith a view to upgrading the entire individual’s identityverification and authentication that is reliable and secure.

The harmonisation scheme underscores Government’sresolve to implant a system of identity management forNigeria and clearly differentiates current efforts from pre-vious arrangements. The emphasis being ‘identity man-agement’ rather than ‘card issuance’. Therefore, whereasthe harmonisation programme would facilitate the devel-opment of a national identity database, the introduction of

the unique identifier would further enhance the use of thedatabase especially when the multi purpose cards with itsnumerous applications are introduced.

Current identification scheme would become harmonisedin phases so as to ensure seamless integration of identityinfrastructure and ‘change-over’ to the new set of uniqueidentifier requirements under the new system. These ex-isting systems represent the ‘legacy structure’ while therewould be a superstructure represented by the new scheme,national identity database and the supervision and man-agement of the system thus would be created.

5.0 LEGAL, INSTITUTIONAL AND SUPERVISORYFRAMEWORK

5.1 IntroductionTo ensure appropriate legal institutional and supervisoryframework, Government proposes to review existing leg-islations and where necessary submit appropriate Billsfor consideration of the National Assembly for enactment.There are two categories of issues in focus here: existinglegislations and their provisions and required legislations,

5.2 Existing LegislationsExisting legislations which provide for one form of identitydata collection or the other include the following:

(i) National Civic Registration Act;(ii) Passport Act;(iii) Immigration Act;(iv) National Population Act;(v) The National Health Insurance Scheme Act;(vi) The INEC Act;(vii) The FIRS Act;(viii) Births and Deaths (Compulsory Registration) Act;

and(ix) The Pension Reform Act.

Whilst these statutory roles would continue to be per-formed, the integration of the various schemes will en-hance interoperability and ensure that ultimately the in-troduction of the ID Scheme would further strengthen thenational identity database, enhance access, verificationand authentication processes.

5.3 Required LegislationTo ensure a seamless transformation of the DNCR from aDepartment to a Commission, a Bill for the enactment ofan enabling law for the establishment of the National Iden-tity Management Commission would be submitted to the


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National Assembly for consideration for enactment intolaw.

The proposed Act would provide the necessary frame-work, regulatory and supervisory mechanism for the man-agement of the National Identity Database (NID) and theintroduction of the unique national identification schemeincluding the relevant information to be obtained and how.

Government proposes that there would be definition ofthe various transactions for which a GMP Card is compul-sory in the Bill.

5.4 The Proposed National Identity ManagementCommission Act

In line with global best practices Government proposes inthis policy, the establishment of a Commission which wouldbe carved out of the present DNCR to carry out the func-tions of supervising and managing the national database,in addition to its other functions.

The object of the proposed Act is to make provisions forthe establishment of a National Identity Database (NID)and the National Identity Management Commission(NIMC) charged with the responsibilities for maintenanceof the National Database, the registration of individuals,and the issuance of General Multi-Purpose Identity Cardsand for matters connected therewith.

The proposed Act covers a wide range of issues including:(i) Establishment, functions and staff of the NIMC(ii) Functions and Powers of the Commission(iii) Financial provisions(iv) Establishment of a National Identity Database(v) Assignment of National Identification Numbers(vi) Mandatory use of the National Identification Num-

bers for Transactions(vii) Offences and Penalties(viii) Miscellaneous provisions, etc.

6.0 IT Infrastructure for the National Identity ManagementSystem

The deployment of a complete identity solution requiresan integrated national ICT infrastructure which would sup-port the generation, storage, use and application of thedatabase across a wide spectrum of users within the coun-try. Accordingly, this policy proposes the following comple-mentary ICT infrastructure development.6.1 Necessary Infrastructure requirements

(i) Registration Centres with full ICT infrastructureIt is proposed that the registration and enrolment proce-dure would be standard and available throughout the year.In which case, it would be possible for an individual duringthe working hours on any day to present himself for regis-tration under the new system as registration would be acontinuous exercise at designated centres. These cen-tres would be fitted with necessary ICT infrastructure andlinked to the national database on line real time.

(ii) The Central HubTo provide a superstructure for the new system requiresthe establishment of a central location where the NationalIdentity database would be situated and the network con-nections would terminate with sufficient security and ICTarchitecture conducive for the interoperability of the sys-tem. The registration centres would be the ‘service cen-tres’ of the super structure. The super structure wouldinclude the NIMC head office and the national database /data centre.

(iii) The Legacy SystemsAll the existing databases that are hosted by the relevantgovernment agencies constitute the ‘legacy system’. Thelegacy system and their network (which would be retrofit-ted, upgraded and integrated into the new system) wouldcontinue to be responsible for data capturing (i.e. biomet-rics, including photographs, and other details specific tothe agencies’ statutory responsibilities). They will in turncommunicate with the ‘super structure’ or central hub atthe NIMC as and when they so require.

(iv) Card Acceptance Devices (CAD)It is proposed that the General Multi-Purpose Cards(GMPC) installed with specific applications would be is-sued. It is therefore necessary to have Card AcceptanceDevices to facilitate access to the central database foridentity verification and applications utilisation. CADs tobe deployed in the new system would include hand-helddevices, mobile or stationary devices such as the ATM(which is now widely in use), digital kiosks, finger printscanners, point of sales, etc.

(v) ConnectivityIt is proposed that the new system would require the in-corporation of existing connectivity and establishment ofnew ones to achieve a secure connectivity with the hub(using closed Wide Area Network (WAN), Virtual PrivateNetwork (VPN), Dial Up or Fibre Optics), the CADs (using



22

Dial up, Global System of Telecommunication (GSM), andthe payments application (bank connectivity) through theestablished switching organisation, for both acquisition andsettlement functions.

(vi) Automated Finger print Identification Systems (AFIS)Currently some of the existing databases in different gov-ernment agencies use disparate AFIS standards for com-pressing and storing finger print images. It is proposedunder this new system that there would be a uniform AFISwhich would be specified by the NIMC al-though each agency would continue tostore its own finger prints to suit its statu-tory responsibility and thus facilitate ex-change of finger prints using the centraldatabase. The NIMC would house its ownAFIS which would be attached to the na-tional database.

6.2 Token of Identification (GMPC)Each individual registered under the newsystem or whose individual database isidentified under the new scheme wouldhave a unique identifier issued to him. Thiswould enable the issuance of the GMPCCard which would have a chip implantedon it and have the individuals identifier el-ements for specified applications uploadedon it including:

(i) National identity;(ii) Immigration details (passport);(iii) Drivers licence;(iv) Medical insurance;(v) Electoral system;(vi) Tax.to mention a few.

Accordingly it would be possible to integrate the proposedGMPC with the various existing government agenciesdatabases including the above listed identificationschemes.

6.3 PKI and Other InfrastructureThere are other ICT infrastructures, which would beneeded to implant the new identity management systemthat would be provided by the solution providers as partof the hardware and software to be deployed to introducethe new system.

With specific reference to public key Infrastructure, it isproposed in this policy that the National ICT infrastruc-ture backbone would be expeditiously deployed to enhancethe effectiveness and functionality of the new system.Thus, Government has embarked on the upgrade and in-troduction, where necessary, of appropriate infrastructurethrough the Galaxy Backbone Plc and the Nigeria Com-munications Satellite Limited and other agencies of gov-ernment to ensure adequate infrastructure support forthe new system. It is expected that the complement of

infrastructure would facilitate the capturing of data includ-ing biometric processing and management in a secureand efficient manner.

Furthermore adequate security and access procedureswould be incorporated such that the integrity of the sys-tem is assured.

7.0 Funding the National Identity Management SystemGovernment is mindful of the need to introduce a newsystem that would be reliable and sustainable. It has con-sequently decided on a public-private sector partnershipscheme. The scheme would involve the concessioning of

Government recognises the need to establish an interoperable

system with sufficient interactive window to facilitate the use

of available database by government agencies without hin-

drance. Furthermore, the establishment of a system of na-

tional identity requires the harmonisation of existing systems

to facilitate standardisation and subsequently achieving uni-

formity with a view to upgrading the entire individual’s iden-

tity verification and authentication that is reliable and secure.


POLICY

23


the development and implanting of the new systemthrough private sector funding under a ‘Build Transfer andOperate (BTO) model for a specified number of years.

Currently members of the public pay for each identifica-tion scheme they are registered for. It is expected thatunder the system, the charges would be streamlined andover time, reduced with total elimination of duplication. Itwould therefore be possible for the PPP scheme to fi-nance and sustain the new system

The objective is that government will not fund the newnational identity management system although for obvi-ous national security reasons, the database would remainthe property of the Government.

8.0 Consultation with StakeholdersThe overall objective of policy is to provide direction onthe deployment of identification technology and identitymanagement solutions with a view to achieving an or-derly deployment of solutions that enhance service deliv-ery across the country.

The expectation is that from birth, all citizens are coveredby the new scheme and the identity history is capturedearly and made to be part of a national identity database.

There have been several misconceptions and oftentimesmisguided comments about the new system and its ben-efits. Government therefore proposes in this policy to un-dertake extensive public awareness campaigns in respectof the benefits of the new scheme and in particular, thebenefits of the GMPC.

Furthermore Government proposes the integration of pri-vate sector identity initiatives through the various switchplatforms and payment solutions in a phased manner.Continuous consultation with the private sector would con-tinue the be an essential part of the scheme for givingeffect to this policy.

Based on the need to bring registration centres close tocitizens Government would explore the option of partneringwith States and Local Governments to establish registra-tion centres in the Local Government Head Quarters. Alsoestablishment of registration centres in Post Offices andsuch public institutions would be given special attention.

It is Government’s belief that the PPP scheme for the fund-ing construction/rehabilitation of existing infrastructureand introduction of the ID Scheme would be very benefi-cial to the citizens.

10.0 CONCLUSIONGovernment is desirous of implementing the new systemof identity management due to its firm belief in the ben-efits that accrue from it. Government believes that a strongidentity management plays a critical role in the imple-mentation of e-governance and further enhancement ofthe national payments system.

It is government’s belief that the introduction of smartcardis realistic, it has been proven to be a reliable technologyfor verifying the identity of individuals and biometrics tech-nology have been adopted to enhance the security levelof identity management. Therefore, biometric smart cardwould enable government fast track its implementation ofe-government not just in improving service delivery butalso in enhancing security and protecting individual pri-vacy.

The new system would address various lapses in the cur-rent system and provide a secure system that would fa-cilitate the development of the consumer credit system inNigeria. It would fast track the introduction of modern ICTin governance, while focusing attention on identity man-agement rather than identification schemes and card is-suance.

The harmonisation of all existing identity databases wouldgreatly enhance identity management which would cre-ate new economic opportunities in Nigeria, improvegovernment’s revenue collection and generation whileimproving socioeconomic life of Nigerians.


ISSUES (I)

* By Mike Uzor

ver since government policy began shift-ing in the direction of limiting the role of thepublic sector in business activity, the reform ofthe capital market has been a critical require-ment for creating a viable private sector. Theneed for a balanced financial intermediation ina system significantly lacking in long-termmoney has been a strong signal that the do-mestic capital market here is overripe for amajor change.

Some significant developments in the busi-ness and economic environment lately haveled to greater attention and reliance on the capi-tal market, also making operational and regu-latory responses almost imperative. The de-velopments have led to rapid growth of thecapital market, raising awareness and volumeof activity to a new level.

The high growth the market has recordedover the past seven years is hardly matchedanywhere else in the world. From a market capi-talization level of merely $3 billion at the end of1999, the market has advanced to about $60billion at present.

Driving forces of growthThe main starting point of the sustaining rapidgrowth was the discarding of institutional dis-tinctions in the banking sector with the univer-sal banking mandate that happened in 2000.

E


ISSUES (I)

The policy opened the doors of capital market business tocommercial banks that controlled the banking industry.

Until then, the stock exchange did not permit commer-cial banks to undertake investment banking business. En-gagement in capital market operations was limited tomerchant banks that played at the fringes. With the changein policy, the rapid growth in the financial services indus-try found an expression in a market set for explosivegrowth.

Other key driving forces of growth include the intro-duction of the automated trading and clearing system, theabrogation of restrictive investment laws and the enact-ment of accommodative investment and securities lawsin 1999. The step up of privatization of public en-terprises also provided a spur for capital mar-ket operations, opening wider the chan-nels of foreign and domestic capitalinflow.

The investment windows werehowever opening without the avail-ability of adequate instruments in bothvolume and variety. A major draw backwas the stagnation of the industrial sec-tor, which did not create room for newentrants or for meaningful expansion ofexisting entities.

In effect, only the equities of a fewmultinational firms were available fortrading. That clearly failed to give themarket the depth that was needed tostimulate the inflow of new investment. Thepotential of the capital market as a source of develop-ment capital remained largely undiscovered and untappedand the stock market represented a tiny fraction of a largeeconomy.

As a response in the way of increasing market depth,the stock exchange initiated the market for derivatives.Trading on rights has since commenced and volume oftransactions has been growing steadily. However, the ef-fort to groom small-scale enterprises in a second-tiermarket was undermined by operational difficulties thatcrippled most of them.

The big banking bangThe most important event in the growth process of thecapital market happened in 2004/2005. Banking industryconsolidation produced a big bang effect to the marketthrough high volume capital raising programmes. TheCentral Bank had set minimum qualifying capital for banks

at N25 billion compared to the paid-up capital requirementof N2.0 billion – that most banks were unable to raise eventhen. Until then nobody ever imagined the capital marketwas capable of absorbing the high volume offers thatturned out oversubscribed.

In the process of complying with the minimum regula-tory capital requirement, banks staged the biggest publicoffer programmes ever seen in the Nigerian market, pump-ing billions of equities into the market. The highly success-ful offer programmes confirmed the huge potentials ofthe market that have since been waiting to be tapped.

The period of banking consolidation gave the market ahigh lift from the primary market angle. The primary mar-

ket is quite popular here with investors andthe innovative marketing approaches

adopted by banks gave the market oneof its biggest advances ever almostovernight.

The inflow of new money fromboth foreign and domestic inves-

tors within the 18 months of bank-ing consolidation improved the rank-

ing of the Nigerian market within theemerging markets group. It is the fast-est growing equities market in Africa.

With the sustaining rapid economicgrowth, the high growth momen-tum of the capital market is ex-

pected to be maintained in thecoming years.

Re-entry of government bondsFurther driving forces of growth came from the reintro-duction of long-dated government debt instruments, whichwere suspended in the 1980s. This was in response tomonetary and fiscal policy changes aimed at shifting thefinancing base of excessive fiscal deficits from ways andmeans advances to long-term government debts.

There was a shift from long-term to medium-term datedbonds as a strategy to make the bonds marketable in short-term driven financial markets. This improved the attrac-tiveness of the instruments and gave life once again to anotherwise dormant bonds market.

The stock exchange has also migrated from manual toelectronic trading in bonds and primary dealership in theinstruments has also commenced. These have greatlyfacilitated transactions in the bonds market, adding depthand variety to the instruments traded.

The apparent rediscovery of bonds in development

The Central Bank’slow interest ratepolicy focus has

been reinforced bythe stability in

liquidity levels inthe money market.


ISSUES (I)

financing led to an upsurge of state government bondssoon after the civilian government came into office. Themove was however short-lived, as regulatory authoritiesdoubted the credit worthiness of state governments. Thatwas borne out of bitter experiences of rampant creditabuses by previous state governments in banks that hadled to financial distress and liquidations.

Monetary policy supportOver the past two years, monetary policy has achieved agreat deal of stability compared to the turbulence of thepreceding years. The Central Bank’s low interest ratepolicy focus has been reinforced by the stability in liquid-ity levels in the money market.

The effect of these developments has been to drivehigh return seeking financial capital into the stock market.The consolidation induced inflow of large resources intothe banking sector has further increased the flow of in-vestment capital from money to the capitalmarket.

The pressure for high rate of re-turn has again been sustained byhigh domestic inflation rate. TheCentral Bank’s low interest ratedrive has been enforced againstsustained effort to achieve singleinflation rate target. That has beenputting significant pressure on finan-cial assets but only the stock marketis in a position to respond to the de-mand for above inflation rate re-turn.

For most of the period,money market rates were tied to theCentral Bank’s benchmark rate – theminimum rediscount rate. The rate, now replaced bymonetary policy rate, is dictated by the bank and not sub-ject to market based responses. The rate was progres-sively adjusted downwards in pursuit of a low lending rateobjective.

The return of flight capitalTwo major regulatory successes have also increased theretentive ability of the capital market in terms of capitalflow. The economy, for the first time in about three de-cades is retaining an increased proportion of Nigerian origi-nated financial capital. The first is government effortagainst money laundering, which has recorded an appre-ciable success in stemming capital flight.

The second supportive policy action is the high level ofexchange rate stability achieved over the past two years.That has closed the opportunity to profit from holding dol-lar denominated assets and reconverting to the naira laterat depreciated exchange rate. The developments haveadded to the stability of financial markets and made avail-able large sums of capital for investment in the stock mar-ket.

This is a big victory for the Nigerian economy, which ishappening at a time of sustained rapid economic growth.Government revenue has been at an exceptionally highlevel in the past several years and reasonable stimula-tory spending has happened to raise the level of businessactivity generally.

A new strength from pension reformThe commencement of a new pension scheme has cre-

ated a strong flow of investment capital from retirees tothe capital market. Retirees leaving the pub-

lic sector are for the first time in Nigerianhistory able to get their retirement

benefits within a reasonable time.The number of such people has in-

creased over the past two years, asthe government privatization ma-

chinery gained speed.The pension reform itself created

a new window in capital market opera-tions for pension funds managers. An

estimated 10 million employees areexpected to register with the Na-tional Pension Commission[PENCOM] for retirement ac-

counts. This has created a huge mar-ket for pension funds administrators

[PFAs] – key actors in a stock market that have since beenvirtually absent in the Nigerian market.

Their presence will now increase the availability oflonger-term investment capital in the market and raisethe impact of institutional investing and trading in securi-ties. About N300 billion contributed by the public and pri-vate sectors are estimated to be currently under the man-agement of PFAs.

Contributions are estimated at N8-10 billion monthly.Nigeria hasn’t had such a long-term stable fund for a longtime. The inflow of huge funds for investment is clearlytasking the capital market in terms of absorptive capacity.The market is yet to develop the depth and investmentoptions needed in response to the demand for financial

Electronic processingof share issues is being

extended to primarymarket offers and this

represents a majordevelopment that willgive the stock market

here a big leapforward.


ISSUES (I)

assets under the pension reform. How much of pensionfunds the capital market can attract depends on how fastit can create the needed investment characteristics.

Rewards of banking reformThe post consolidation period has shifted the bank-drivengrowth to the secondary arm of the market. This is a pe-riod of spectacular growth for banks, as they are rapidlyrebuilding rates of return. A strong growth in earnings ishappening industry wide and with that, prospects for im-proved investor compensation are equally widely spread.With earnings growth spread industry wide, investing riskin the sector has reduced significantly.

Equity investors have begun reaping therewards of consolidation and they hope formore with the high growth momentum sustain-ing into the second year of post consolidation.General industry prospects are quite promis-ing and banking shares are generally a muchbetter risk now than any time in many years.

With a new strength in consolidation, banksare providing a driving force in the develop-ment of major arms of the capital market. Theseinclude pension funds management and mu-tual funds operations. In 2006 alone up to ninemutual funds were floated mostly by banks.The rapid growth in the capital market has cre-ated the window of opportunity for institutionalinvesting.

Banks are equally providing the spur for thegrowth in the stock market with margin tradingbeing one of the main channels for expressingthe bigger operating capacities of banks in thepost consolidated environment. How long will the bull rundepends on the general stability of financial markets andinterest rates. If there is any need for caution it is to seethat there are no developments strong enough to causebanks to pull back from competing on the asset side of thebalance sheet.

Margin financing seems to be an escape route for banksfrom the rising incidence of bad debts in a difficult economy.With worsening infrastructures, the operating difficultiesfacing the industrial sector have increased and banks willexpectedly be more stringent with new lending for realsector businesses. Short-term lending and investing withinthe financial markets are therefore very likely to be themain concentration of banks for now. The stock marketwill most likely remain a major destination of bank financ-ing in the medium-term.

The low interest rate environment is favourable formargin trading and there is no real pressure for moneymarket rates to rise. Low interest rates are fostering thestock market from two angles. The first is the opportunityto borrow short-term funds to play for higher returns inthe stock market. The second is the exit of higher returnseeking capital from low yield money market instrumentsinto equities.

Is the stock market exposed to undue risks by thesedevelopments? Not quite! The market isn’t likely to take ahard turn in a situation where investment capital hardlyhas any promising opportunities for high returns in theshort-term. The bull can be expected to keep running but

disappointing earning reports can present some hurdles.

Electronic processing of share issuesThe Securities and Exchange Commission approved theintroduction of e-bonus system in 2004 to replace the issu-ance of physical certificates for scrip dividends. This willend the roundabout journey of issuing and dematerializ-ing bonus share certificates by the registrars. The facilityprovides for direct credit of shares to the shareholders’stock accounts at the central depository [the CSCS]. Thisis considered to be the second most important step to-wards improving market liquidity and efficiency outsideof the T + 3 settlement cycle.

The move is an overdue right step to save the marketfrom the cumbersome process of share certificate verifi-cation. Share certificate issuance and verification is a snail


ISSUES (I)

speed business here. It is therefore a major limiting factorto market liquidity. There is no time limit for share certifi-cates to be issued either for bonus or for primary issues.

Sometimes certificates quality for the following year’sdividend while they are yet to be received by sharehold-ers. There is also no specified time for verification of sharecertificates from the time of lodgment. They lie fallow forseveral months at the registrars in the process of verifica-tion. On the average, share certificates stay up to twoyears from the point of issue before they can be activatedfor trading on the stock exchange. This is a clear disregardfor time value of money.

Electronic processing of share issues is being extendedto primary market offers and this represents a major de-velopment that will give the stock market here a big leapforward. It can be expected to improve corporate gover-nance standard and take the Nigerian market to a higherscale in the international ranking of stock exchanges.

(ii) The need for reformThe phenomenal growth in capital market operations hasnot been without the need for fundamental changes withinthe market itself. There has been a significant increase inthe number of capital market operators as the marketgrew in length and breadth. And with that came challengesof inadequate capacity for the growing volume of transac-tions. A number of operators have also been found want-ing in the areas of professionalism and operating disci-pline.

Apart from the need to build institutional capacity, therehave emerged a number of operational issues to be ad-dressed. The entire regulatory framework needed a regu-latory retouch.

In spite of the significant increase in marketcapitalization, the Nigerian stock market re-mains relatively small. The main sectors of theeconomy are not represented in the market,which is one of the reasons why the stock mar-ket does not fully respond to macro-economicdevelopments.

Apart from government institutions yet tobe privatized, there are a number of potentialblue chip companies that are not listed in thestock exchange. Regulators clearly need tocome up with new incentives to admit a lot morecompanies into the stock market.

Need for competitive transaction costThe downward movement of interest rates in

the money market had warranted a reduction in chargeson various aspects of capital market transactions. Re-sponding appropriately to declining short-term interestrates required lowering the cost of raising funds throughthe capital market. Lower transaction charges are neededto trap high return seeking financial capital leaving themoney market as rates push further downwards.

There was the need to make the domestic capital mar-ket competitive in terms of transaction cost in respect ofwhich Nigeria ranked among the highest in the world. Tothis effect, a committee was set up in 2006 to review thesituation and recommend an appropriate structure oftransaction charges. It is expected that a cut down in trans-action charges will have a stimulatory impact on the mar-ket.

The need to cut down on cost was practically reinforcedby the downward movement in short-term interest rates.The decline in money market rates made the cost of pri-mary market offers relatively uncompetitive. Regulationclearly needed to respond appropriately to declining in-terest rates by lowering the cost of raising funds throughthe market. Reducing the cost of transactions in the sec-ondary market was a strategic requirement to retain withinthe domestic financial markets high return seeking capitalwhen interest rates decline.

Checking operating excessesRegulatory policy also needed to move in the direction ofchecking operating excesses of stock broking firms thatwere increasingly getting out of hand. A clear expressionof poor institutional capacity was the large presence ofpoorly capitalized firms facing extreme cash flow difficul-ties. In desperation, the cash strapped operators would


ISSUES (I)

sell their clients’ investments unauthorized.The stock exchange had earlier responded to the prob-

lem through the introduction of trade alert in 2005, a de-vice to notify investors of transactions on their accountsin the central depository. By sending signals to investorsbefore transactions on their accounts are concluded, tradealert was the exchange’s answer to the question of unau-thorized transactions on investors’ accounts.

The introduction of the service came not only with ad-ditional cost but also with compulsion. This was at a timethat the pressure to cut transaction cost was reaching itsclimax. A big controversy that followed its implementa-tion stemmed from the question of who will act as thecollecting agent for fees most clients were unwilling topay.

This was subsequently resolved by build-ing in the trade alert charges in totaltransaction cost at the point of trad-ing. Meanwhile, the database andservice delivery platforms to inves-tors have not been set up. That meanstrade alert charges are being deductedfor services not actually rendered. Ap-parently, the trade alert service repre-sents an adequate response to a prob-lem except for its element of compul-sion.

The Securities and ExchangeCommission has also had the convic-tion that price making in the market isfraught with a great deal of imperfections.It believes the equity market needs to shape up to a rea-sonable degree of professionalism in securities pricing. Inthe commission’s view, a lot of price changes are not rootedin fundamentals and equity traders decisions on pricesaren’t backed by a strong research support.

(iii) The reform agendaIn the light of the developments, the finance ministry andSEC have set in motion the reform agenda for the capitalmarket. Following the examples of regulatory changes inthe banking and insurance sectors, the regulatory authori-ties are driving the market towards a major consolidation.The objective of the measure is to close the room for mush-room operators and rid the market of marginal practitio-ners creating image problem in a market looking up tointernational standard.

The main aspect of the reform agenda is the high vol-ume recapitalization required of all categories of capital

market operators. Stockbroker/dealers are expectedly themain candidates for regulatory cleansing. The minimumcapitalization has therefore been raised from N70 millionto N1.0 billion. They are expected to find the new money inabout 18 months.

The regulators aren’t expecting that more than a hand-ful of stock broking firms will eventually succeed in build-ing the new capital base. As happened in the banking andinsurance sectors, they expect the new policy to set inmotion a major consolidation process through mergersand acquisitions. In the end, they envisage a marketserved by significantly ‘fewer but stronger dealing firms’.

In regulatory circles, consolidation now seems to bethe panacea to the problem of financial distress and oper-

ating difficulties facing firms across sectorsand industries. While there is no proof

that consolidation will rid the marketof the many problems encoun-tered in dealing with stock broking

firms, it appears to be one big stepforward.

The stock broking business, in itsoriginal form, isn’t a big capital carry-

ing endeavour. But the combination ofstock broking and dealership in the Ni-

gerian market requires a reasonablelevel of capitalization to enablethe firms take positions in the

market on their own account. Deal-ing on their own account of course

should be limited to the funds at their dis-posal and does not necessarily warrant the huge capitalincrease now required. The regulators however aren’t justlooking at capital adequacy.

In the effort to comply with the new regulatory re-quirement, stock broking firms have begun to explore vari-ous options and strategies. Many approaches are beingmade to institutions, mainly insurance companies to buyup major equity holding. This is in line with regulators’objective of diversifying ownership of stock broking firmsand raising the standard of corporate governance in thefirms. That is expected to raise credibility and confidencein a market growing rapidly and anxiously courting for-eign portfolio investors.

Reasons for reformThe major reasons for enforcing a major consolidationpolicy rather than a modest increase in capital base, bor-der much on operating discipline. They include the recur-

Equity investorshave begun reaping

the rewards ofconsolidation andthey hope for more

with the highgrowth momentumsustaining into thesecond year of post

consolidation.


ISSUES (I)

unit operating framework without branch networks out-side Lagos will not encourage merger deals among stockbroking firms.

It is important to appreciate that what is being done isnothing other than compelling businesses that do notcomplement themselves to get together. There isn’t muchattraction and synergy among the mostly one office firmsresident in one building or one or two streets apart on theLagos metropolis to come together in consolidation.

Neither will most of them have much to show in termsof capital base, as the earlier recapitalization undertakenfailed to improve the financial health of many of them.That seems to suggest that evidence of inflow of newmoney may be difficult to find when all cards are put onthe table.

For the few that can raise the money on their ownthere will not be much attraction to acquire other firms.The reform can therefore be expected to sweep off thesmall, struggling firms that have neither capital nor highvalued clients to contribute in consolidation.

The test for operating strength in the stock brokingbusiness is expressed either in terms of large capital basethat permits high volume dealing or the number of high

ring unauthorized sales of clients’ investments by cashstrapped stock broking firms. From the experiences ofcapital market regulators, under capitalization is the num-ber one reason for most of the abuses by stock brokingfirms.

According to stock exchange officials, tampering withclients’ accounts by stock broking firms has become ram-pant to the point of destroying the very product the ex-change has to sell - public confidence. The many forms ofinvestor cheating have warranted major sanitization mea-sures to protect the investing public.

There is also the need to diversify ownership of deal-ing firms from the prevalent one-man ownership to re-duce the level of risk to which the market is exposed in arapidly growing transactions volume. Again, the regula-tory challenges of dealing with hundreds of firms on acase-by-case basis will be easier met with consolidatedoperations.

Challenges of consolidationConsolidation can be expected to be quite difficult to imple-ment in the capital market business compared to bankingand insurance sectors. Given the margin of increase incapital base, as many as 10 stock broking firms put to-gether aren’t likely to make up one new entity. The one


ISSUES (I)

net worth clients it can command. Firms that lack strengthin these two areas are neither likely to find merger part-ners nor will they be good acquisition candidates. Worsefor them is that the few high valued clients they may haveare most likely to leave for the likely survivors of the re-capitalization exercise.

In the wave of high level recapitalization now set tosweep through the capital market, most of the 250 func-tional stock broking firms will disappear, some into surviv-ing entities and most into the corporate grave yard. Thebusiness itself will change significantly in the environmentin which the number of operators drops suddenly fromhundreds to a few dozens.

With the high chance that many operators will closeshop, investors can be expected to be fretful about thesafety of investments as the post consoli-dated picture begins to unfold. Investorswill have to take steps to avoid a majorrisk that will soon be lurking in the horizon.That is the risk that a stock broking firm,unlikely to scale through the reform,tampers with clients’ investments beforeit goes down.

There is yet no insurance against suchrisk and the concern that investors’ ac-counts are directly open to the stockbro-ker will grow even more in the post con-solidated environment. In the effort to pro-tect their investments, there will be agradual run on the small and the weak firmsthrough account transfers and closures.

The houses that are able to move earlyto meet the new capitalization mark are very likely to at-tract fleeing investors and will be able to seize a majorshare of the market. Firms without a convincing evidenceof scaling through the recapitalization hurdle are certainto begin to lose business almost immediately.

Small investors may be left outIn the race from the small and the weak to the big and thestrong, only the big investors will be able to easily makethe shift. The biggest stock broking firms that will be thedestination of investors have since set minimum accountopening limits that exclude small accounts.

It can therefore be expected that many of the smallinvestor friendly stock broking firms that cannot find thenew capital aren’t also likely to find a place in the consoli-dation. The emerging environment will be an oligopolyand the choice of stock broking firms will be limited to a

significantly fewer number. The terms and conditions foravailability of stock broking services will change drasti-cally.

There is to be expected dregs of small investors’ ac-counts that aren’t likely to be welcome in the big firms thatwill emerge from the consolidation. The top names in thebusiness aren’t focused on the mass market and it can betaken for granted that the acquisition candidates will beforbidden to take penny accounts to the negotiation table.It should be expected that the emerging stock brokingfirms aren’t going to be friendly with the small investor.

The preference for the big investor isn’t a new devel-opment but only a matter of adding a regulatory induce-ment to an ongoing industry trend. Stockbrokers will seekto cut down on administrative cost and in the process,

they will force the consolidation drive down the line.As regulators prefer to deal with fewer but stronger

firms so will the operators prefer to deal with fewer butbigger investors. The investor will, in the circumstance,need to get ‘consolidated’ to have a place in consolidatedstock broking firms.

A cut in transaction costAnother major aspect of the reform is a reduction in thecost of transactions across the board. As a part of thereform package, cost of transactions in both the primaryand secondary arms of the capital market has been jerkeddown. With a cut that ranges from 147 to 260 basis points,investors will get a big relief on the usual charges for buy-ing and selling equities in the secondary market.

Raising new capital from the primary market as wellwill now be done at a significantly lower cost. This repre-

All-share Index May 2005 – June 2007


ISSUES (I)

sents the long desired complementary measure to theCentral Bank’s low interest rate drive in the money mar-ket. Policymakers believe that increased availability ofinvestment capital at low cost will exert a stimulatory im-pact on the real sector, domestic output and employment.

With effect from April 24 2007, total transaction costfor buying equities through the secondary market hasbeen lowered from 4.07% to 2.36%. On the other side ofselling, total charges have been reduced from 4.12% to2.65%. The main objective of policy is to make the domes-tic capital market competitive in attracting foreign anddomestic investment capital.

The reduction in charges is likely to be compensatedby the rapidly growing volume of transactions in both armsof the capital market. The likely stimulatory effect of thereduction in transaction charges on market turnover canbe expected to make up for possible decline in revenue.

It can be expected however that stock broking firmsare likely to respond in some ways to make up for appar-

ent revenue losses. In their desire to raise the volume ofdeals, minimum account opening amounts are likely to beincreased further and services that used to be cost freesuch as share certificate verification and printing of CSCSstock position may begin to attract charges.

A new layer of investor protectionIn the new round of recapitalization, the minimum capitalrequirement for issuing houses has also been increasedfrom N150 million to N2.0 billion. In addition to that is themore stringent requirement that primary issues be fullyunderwritten. This is expected to enforce a higher degreeof professionalism in managing new issues by ensuringthat issuing houses do not promote and dump low qualityoffers on the investing public.

With the new policy, the chance for an offer failure isclosed. The underwriter will make up for any public offernot taken up by the public. To be willing to take up thatresponsibility, it should be able to convince itself about theperformance prospects of the company it is promoting.This is a new layer of protection for the investing public.

(iv) Likely effects of the reformThe reduction in charges will reinforce an already grow-ing trend towards preference for high volume deals. Em-phasis on volume will be a natural response to make upfor revenue losses from the reduction in transactioncharges. While that will apparently close the door to thesmall investor, an alternative door can be expected toopen wider through mutual funds.

In the emerging new capital market environment, mu-tual funds are very likely to grow in popularity. They willbe the necessary reconnecting link between the small in-vestors likely to be displaced in the reform process and

the stock market. A regulatory move will be needed inthe direction of expanding the mutual funds window,which will cover the same type of gap for which microfinance banks are being put in place in the banking in-dustry.

The new environment will also usher in other invest-ment vehicles such as investment associations andclubs, which will follow the same principle of poolingindividual funds together for greater impact in shareinvesting. With growing awareness, various groups ofinvestors can be expected to get involved in the mar-ket. As competition gets underway, stock broking firmsare expected to design innovative products coveringand dealing with investors in their groups.

To the extent that the reform limits access of peopleto the secondary market, it is bound to have serious

implications for capital raising through the primary mar-ket. Minimum investing amounts for public offers will haveto rise to match the stockbrokers’ minimum account open-ing amounts.

Since investors are now required to open accounts withstock broking firms before certificate verification, sharecertificates worth less than minimum account opening val-ues may not sail through easily for verification. Either way,the emerging signals aren’t cheering for the small inves-tor.

Banking, insurance lead the wayBanking and insurance are the two main sectors leadingthe rest of the stock market on share price advances sofar this year. The two sectors account for virtually all the

Price/January Opening %Company

Top Rising Stocks 2007


ISSUES (I)

top 10 members of the share price advances table so farin 2007. The operators here have taken advantage of ma-jor changes in operating conditions to build operating ca-pacities and grow market share. Prospects for further shareprice advances look very good for these sectors.

Consolidation has had a stimulatory effect on the bank-ing sector, which shows one of the best prospects for in-dustry wide growth in revenue and profit. To find equitiescapable of building higher prices in the short-term, bank-ing stocks remain highly promising.

The insurance sector is expected to go the way of bank-ing with recapitalisation stimulating growth in the sector.The low priced insurance stocks are showing even muchfaster share price advances than banking stocks.

The rise of penny stocksAgain, the consolidation policy has got penny stocks mov-ing out of this category. The natural process through whichsmall businesses grow to become big has been halted.The instrument of consolidation has become the micro-wave for baking big businesses directly. The effect of thison the stock market is that the normal process of feedingthe market with low priced, start-up equities has been tam-pered with and a gap created.

The highest share price advances in the six-monthstraight rally seen so far this year have come from pennystocks. Most of the equities that have doubled and tripledin prices this year belong to this group. And with that, thegroup of low priced equities is fast losing its membership.

With sustaining share price rally in an economy warm-ing up for a post election boom, a number of penny stockswill rise above the status this year. Without any robustsuccession programme for this class of equities, pennystock strategists may soon run short of their ideal tradinginstruments. The stock exchange will need to reinforcethe second-tier segment of the market and even create athird-tier in response to the present developments.

The banks are the first to go from the penny stockclass as a direct result of consolidation. For penny stockstrategists, banking shares are already completely outfrom their portfolios. In a matter of months from now,hardly any banking stock will be trading anywhere belowN10 per share.

Insurance stocks are next on the rapid move awayfrom penny stock membership. Induced by the samepolicy of consolidation, the insurance group accounts forthe highest number of equities that have doubled andtripled in prices in just a few months of trading. Like bank-ing, insurance stocks are largely on their way out from

penny stocks. With consolidation spreading down andacross, the days of penny stocks seem to be numbered.

Foreign investors comingThe stock market is getting a good attention of foreigninvestors and fund managers with its exceptionally goodreturns becoming too good to ignore. The market is seenas a sure evidence of a gradual return of flight capital andrepatriation of funds by Nigerians in diaspora. Strong im-provements in the external sector of the economy havealso placed Nigeria among major destinations of invest-ment capital within the emerging markets.

The trend of growing inflow of foreign originated in-vestment capital is expected to be sustained and improvedin a post election environment. Domestic financial mar-kets are again expected to remain liquid with a number ofgovernment stimulatory spending votes coming on thisyear.

The outlook for the market remains exceptionally bull-ish and a year of high growth in the banking sector is pro-viding the spur. The capacity of the market is certain to beover stretched this year, as large funds compete for theavailable instruments. Despite the sustaining rapid growth,the consolidation and the reforms, in terms of depth andabsorptive capacity, it is obvious that the market here willremain a relatively small operation for some years ahead.(* Mike Uzor is Chief Executive Officer, Datatrust Ltd)

ReferencesCollier Paul [2003] Nigeria’s Options for Financing Fiscal Defi-cits and the Implications for Monetary Policy, A Presentationto the Central Bank of Nigeria, Abuja.

Rutterford J. [1983] Introduction to Stock Exchange Investment.Houndmills, London, The Macmillan Press Ltd.

Gelman Steve [1999] Money Adviser. New York. Time Inc.Equinox Asset Management Limited, The Nigerian Country &Risk Monitor, Lagos.

Uzor Michael A. [2005] How to Buy and Sell Shares in Nigeria,A Practical Guide, Lagos, Datatrust Publishing.Onosode G. O. “The Business World in Nigeria”, A lecturePaper, 1993

Securities and Exchange Commission, [1999] Securities MarketRegulation in Nigerai, Abuja, SEC Publishing.Securities and Exchange Commission [2003] Code of CorporateGovernance, Abuja, SEC Publishing.

The Stock Market Guide [2007] “Banking Sector Leads Mar-ket Growth”, Lagos, Datatrust Publishing.Lemo Tunde [2004] Corporate Governance Issues, Nigerian StockExchange Bi-ennial Conference Paper.

Ndanusa Suleiman [2004] Sec and the Development of the CapitalMarket, Nigerian Stock Exchange Bi-ennial Conference Paper.Okereke-Onyiuke Ndi [2006] Stock Market Performance in2006, Lagos, The Nigerian Stock Exchange.


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* By Chuke Nwude

he Securities and Exchange Commission (SEC) is theapex regulatory institution of the Nigerian capital market. Sinceinception it has been playing within the capital market, rolessimilar to those played by the Central Bank of Nigeria (CBN)in the money market. The main function of SEC is to regulateand develop Nigerian capital market in order to assure stake-holders protection and enhance socio-economic developmentof Nigeria. How far the regulation of the capital market hasimpacted on the Nigerian economy is of interest to the re-searcher.

What is Regulation?Black’s law dictionary (2006) states that regulation is the act orprocess of controlling by rule or restriction and administeredby the administrative agency. Longman family dictionarydefines regulation as an authoritative rule dealing with de-tails or procedure, a rule or order having the force of law.Hence regulation suggests the direct intervention or control

T


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by government or its agencies in the economy or financialsystem, with defined legal framework. It is a framework ofrules, procedures, and principles put in place to guide asystem. It is the prescription and enforcement of the dosand donts expected of any player in a system. Supervi-sion which is used interchangeably with regulation meansmonitoring the system to keep it in check and ensure thatparticipants operate within stated regulations. Both regu-lation and supervision are given the force of law.

Forms of RegulationTwo types of it are the statutory and non-statutory. Statu-tory regulations are usually administered by agencies setup by law while the non-statutory regulations are formu-lated and administered by self-regulatory organizations(SROs). Statutorily SEC is empowered by law (ISA No. 45of 1999) to regulate capital market activities in Nigeria. Atpresent, the only self-regulatory organization in Nigeriacapital market is the Nigerian Stock Exchange (NSE). Non-statutory regulations are not lawsby themselves but they have theforce of law derived from the pri-mary statute. The SROs regulatethe activities of their members toensure high level of professional-ism, ethical practices and efficiencyin their conduct of business activi-ties.

The Need for CapitalMarket RegulationIt is a truism that the financial sec-tor is among the most regulatedand supervised sectors of anyeconomy be it developed or devel-oping. This is as a result of the criti-cal role the sector plays in a nation’s economy as well asthe nature of products traded in it which cannot be sub-jected to physical examination or inspection, but basedpurely on information about the products. As financialmarkets get liberalized, market participants are more likelyto abuse its operations. It is generally believed that inad-equate or absence of regulation is detrimental to the capi-tal market as it encourages sharp practices by partici-pants. Regulatory agencies are therefore necessary topolice or monitor activities in the market with the ultimateaim of preventing or minimizing abuses which might marmarket integrity, erode investors’ confidence, therebythwarting development in the capital market and the gen-

eral economy.Recorded history suggests that stockbrokers were first

licensed to operate in England in the 13th century duringthe reign of Edward 1 of England. With time malpracticewas detected in the mode of operation of the stockbrokersand stock jobbers. The climax was the financial disasterhistorically referred to as the south sea bubble, which re-sulted in the financial ruin of thousands of investors inEurope. This led to the South Sea Bubble Act of 1720 inEngland, which made it mandatory for those offering se-curities to the public to be cautious in the investment ofpublic funds and to pay the appropriate penalties in theevent of failed securities investments, especially if thepublic was misled with false information into subscribingto the offer (Analike 2007:2).

Since the south sea disaster the authorities in Europe,Americas and recently the emerging nations have takenall necessary steps to ensure, that their investing public isprotected from unscrupulous financial market operators,

who may want to exploit the ig-norant public with offer whichmay be worthless, or overpriced or manipulated by cor-porate insiders to their advan-tage and to the disadvantageof the investors. Full informa-tion of the securities being putup for subscription or for sale,the capital base of the offeringcompany, the managementand directors of the company,audited account, projected prof-its and dividends are some ofthe information to be fully dis-closed in the offering docu-ments or prospectus. This is to

ensure that the investing public has full information onsecurities being offered for subscription or for sale beforeparting with their monies. In order to ensure that Nigerianinvestors are protected from fraudulent market opera-tors and corporate insiders offering shares for subscrip-tion or for sale the Nigerian authorities set up the Securi-ties and Exchange Commission (SEC) for the purpose ofprotecting investors in the capital market.

Though economic liberalization stimulates competition,innovation and entrepreneurial spirit, the domestic finan-cial markets of mature economies are well regulated, su-pervised and operated within well defined framework.Supervisory activities in less developed countries (LDC)

The aims of regulation are to

protect investors from

mismanagement of their

funds, fraud, insider

dealings and other forms of

market malpractices.


ISSUES (II)

are basically focused on domestic markets and measuresfor stimulating their development toward enhanced eco-nomic development. The aims of regulation are to protectinvestors from mismanagement of their funds, fraud, in-sider dealings and other forms of market malpractices;and protect the financial system from systemic risk, thatis, the possibility that the failure of one financial institutioncould lead to the failure of several others, and result in aloss of confidence in the entire system.

Good regulation of capital market operations leads toprofitability, growth and expansion which will lead to moreemployments. With more employment opportunities thelikelihood of improved standards of living becomes cer-tain.

Make Investments Easier: Without good regulation, thecapital market will not be well organized but with good

regulation the process of investing in the market will beorganized and this will make it easier for investors to op-erate in the market. With more investors operating in themarket, businesses will benefit from the increased fundand create boost for the economy.

Increased Confidence on the Market: The problem of doingbusiness in Nigeria to a large extent is that of lack of trustand confidence in the system. With good capital marketregulation accounting books of companies are subjectedto serious scrutiny and this creates the confidence neededto attract investors and operators thereby creating a strongcapital market that will drive the economy better.

Attract Foreign Investors: With good capital market for-eign investors will be attracted easily to make investmentsin the country because they will have access to data and


ISSUES (II)

information on activities in the market and thegeneral business trend in Nigeria. The moreforeign investment that is attracted to the coun-try the more the economy will grow.

Business and Wealth Creation: Lack of fund hascaused many companies to perform below theircapacity and this has affected the growth ofbusiness, profitability and wealth. The conse-quence is retrenchment, low salaries, low taxpayment etc but with good capital market regu-lation and access to fund there will be improvedbusiness performance, profitability, remunera-tion and tax payment that will benefit inves-tors, employees and, also the government.

Ensure Standardization: For a company to ac-cess fund from the capital market it must havea standardized management and operationalsystem. As such with good capital market regu-lation, business standards will improve and cor-porate governance will be enforced to boost business per-formance.

Strengthen the Naira: The Nigerian economy will bestrengthened with good capital market regulation. A goodcapital market will stimulate business activities, leading toimproved performance of the economy and standard ofliving. All these would strenghten the currency.

Measure of Economic DevelopmentThe growth or development of any economy rises or falls

as a consequence of changes in some economic factors.The growth is conceived as a rise, over a period of time,like a year, in the level of its aggregate production or in-come or consumption after due allowances have beenmade for the amount of reproducible capital used in theprocess (Aboyade 1985). An element of refinement is toreduce this measure to the level of output per head, orincome per head, or consumption per head having madeallowance for any change in the country’s population withinthe accounting period. The National Income (NI), a mea-sure of economic development, is the money value of allthe goods and services which became available to a na-tion over a given period from all its economic activities. Itcan be stated at constant prices (that is income method)which expresses the value of final goods and services pro-duced in one year at their final stage prices. This is other-wise called the Gross National Product (GNP). It can alsobe stated as quantities valued at base year prices. Thepurchases of financial instruments from the capital mar-ket also contribute to the national income. A peep into thelist of companies which tapped their funds from the capi-tal market will showcase this. The growth in capital marketfunding in Nigeria can be ascribed to massive sell of sharesduring the past years. Generally a capital market exist toprovide the facilities of a market where potential inves-tors can put their money to work by buying securities, andwhere those who already own securities can freely andspeedily turn them into cash. The advantage of going pub-

The SEC requires detailed

personal and business data on

applicants and reserves the right

following proper scrutiny of

information supplied to it, to

grant or deny registration.


ISSUES (II)

lic by a company is seen by experts to be beyond theraising of cheap funds. A quoted company can attract bet-ter executives who would prefer to work for an institutionas opposed to an individual (Adeniran 1991). Capital mar-ket is therefore, very vital to the growth of any economy.

Investments and Securities Act No. 45, of 1999The functions and powers of the Securities and ExchangeCommission as provided by Act No. 45 of 1999 are as listedhereunder.

• To regulate investment and securities business in Ni-geria.

• To register and regulate securities exchange, capitaltrade points futures, options and derivatives exchange,commodity exchanges and any other recognized in-vestment exchange.

• To register securities to be offered for subscription orsale to the public

• To render assistance in all aspectsincluding funding as may bedeemed necessary to promote aninvestor wishing to establish se-curities exchange and capitaltrade points.

• To prepare adequate guidelinesand organize trainingprogrammes and disseminate in-formation necessary for the es-tablishment of securities ex-change and capital trade points.

• To register and regulate corporateand individual capital operators asdefined in section 30 of the Act.

• To register and regulate the working of ventures capi-tal funds and collective investment scheme includingmutual funds.

• To facilitate the establishment of nationwide systemfor securities trading in the Nigerians capital marketin order to protect investors and maintain fair end or-derly markets.

• To facilitate the linking of all markets in securitiesthrough modern communication and data processingfacilities in order to foster efficiency, enhance compe-tition and increase the information available to bro-kers and investors.

• To act in the public interest having regard to the pro-tection of investors and the maintenance of fair andorderly markets and to this end establish a nationwidetrust scheme to compensate investors whose losses

are not covered under the investors protection fundsadministered by securities exchanges and capitaltrade points.

• To keep and maintain separate registers of foreigndirect investment and foreign portfolio investments.

• To register and regulate central depository compa-nies and clearing and settlement companies, custodi-ans of securities, credit rating agencies and such otheragencies and intermediaries.

• To protect the integrity of the securities market againstabuses from the practices of insider trading.

• To act as a regulatory apex organization for Nigeriancapital market including the promotion and registra-tion of self regulatory organizations and capital mar-ket trade associations in which it may delegate it’spowers

• To review, approve and regulate mergers, acquisitionsand all forms of business combina-tion.• To promote investors educationand the training of all categories ofintermediaries in the securities indus-try.• To call for information from andundertake inspection conduct inquir-ies and audits of the security ex-change unit trusts, mutual funds,capital trade points, futures, optionsand derivatives exchanges as well asother intermediaries and self-regu-latory organization in the securitiesindustry.• To call for and furnish to any

agency such information discharge of its functions.• To levy fees or other charges on any person for carry-

ing out investment and securities business in Nigeria.• To conduct research into all or any aspect of the secu-

rities industry.• To prevent fraudulent and unfair traded practices re-

lating to securities industry.• To advice the minister on all matters relating to the

securities industry.• To disqualify unfit individuals from being employed

anywhere in the securities industry.• To liaise effectively with the regulators and supervi-

sors of other financial institutions locally and over-seas and

• To perform such other functions and exercise suchother powers not inconsistent with the decree as are

The National Income (NI), a

measure of economic

development, is the money

value of all the goods and

services which became

available to a nation over a

given period from all its

economic activities.


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necessary or expedient for giving full effect to the pro-visions of this decree.

Tools of Regulation by SECRegistration: To ensure that only those considered fit andproper do business in the capital market and to ensure theworthiness of the instruments to be floated, the operatorsof the market are certificated through registration afterproper scrutiny of the intending operators and the instru-ments to be issued. The functions and scope of businessactivities permissible for each type of operator and theconditions under which they can conduct such activitiesare specifically stated. The operating capital adequacywhich is a key factor in maintaining stability in the marketis stated. The SEC requires detailed personal and busi-ness data on applicants and reserves the right followingproper scrutiny of information supplied to it, to grant ordeny registration.

Surveillance: SEC maintains proper surveillance on secu-rities trading to ensure orderly, fair, and equitable deal-

ings in stocks to forestall illegal deals by privileged insid-ers at the expense of innocent and often ignorant inves-tors which can destabilize the market. It sanctioned TradeAlert device that sends a notice on the investor’s mobilephone indicating elaborately all transactions taking place

in his account at CSCS, so that if unauthorized, the inves-tor can stop it before it happen.

Investigation: Section 8(q) (r) of ISA empowers SEC to in-vestigate all reports of violations and suspected violationsof securities laws.Rules making: To keep the market in check and enhanceits growth and development SEC is duly empowered toformulate and review rules and regulations for the mar-ket as the occasions may demand.

Timing of Issues: The SEC controls the time and amount ofissues on offer in order to avoid demand on the primarymarket beyond its absorptive capacity at any point in time.

Review of Accounts: It reviews the accounts of listed com-panies on regular basis to monitor the performance ofvarious enterprises within each sector and seek explana-tion on areas where unfavorable developments occurred.This exercise provides statistics for meaningful evalua-tion of the market performance and also the economy. It

also assist SEC in policy for-mulation. All transactionsmust be backed up by ex-ecuted mandates and con-tract notes to avoid doubts incases of disputes.

Approval of business combi-nations: It approves businesscombinations such as merg-ers and acquisitions to makesure the combinations are notlikely to cause substantial re-straint on competition or tendto create monopoly directlyor indirectly.

Enforcement: The commis-sion has the responsibility ofensuring that participants inthe capital market complywith the securities laws. It hasthe power to institute penal-

ties or sanctions and remedial actions if a violation is es-tablished. There is in-house joint monitoring committeefor trying erring brokers. It is composed of representa-tives from company registrars, stock broking firms, CSCSand NSE. The emphasis here is on restitution such that the


investors do not lose value. The investment and securi-ties tribunal(IST) adjudicates on civil cases in the capitalmarket to ensure that such cases are given speedy reso-lution. A case is referred to IST after being handled by theAdministrative Proceedings Committee (APC) of SEC.

Administrative Guidelines for foreign investments: Theguidelines state that once the principal remitted by for-eign investors is backed up by a certificate of capital im-portation issued by a Nigerian bank there is no need toseek CBN approval to remit dividends and the principal.

Data Presentation and AnalysisImpact of Capital Market Regulation on the NigerianEconomy1. Investors’ confidenceThe capital market regulation has engendered high inves-tors’ confidence in the market, which has contributed sig-nificantly to savings mobilization. The capital market regu-lation has played a major role intaking the market to greater heightsby opening doors for foreign inves-tors into the economy. The en-hanced confidence of foreign inves-tors has resulted in inflows of for-eign investments into the country.The Securities and Exchange Com-mission introduced code of conductand code of corporate governance,which has helped to create moreconfidence in the economy. The net-work to the wider world especiallyNigerians in diaspora has been ex-panded by introducing and install-ing various information technolo-gies. Trade alert system that allowsinvestors to receive immediatenotice about what is happening to their stock automati-cally increases the investors’ confidence. This has attracteda lot of foreign investors to the economy.

2. Financing Government infrastructural developmentRegulation of the capital market and its concomitant en-hancement of investors’ confidence have enabled gov-ernment authorities to mobilize long-term capital forinfrastructural development. It encourages all tiers ofgovernment to use the capital market to close their re-sources gap in the implementation of various develop-mental programmes. It helps the Federal Government’s

privatization and commercialization exercise, as it pro-vides avenues through which enterprises which were hith-erto not profitable under government control, to becomeprivatized and profitable with better management. TheFederal Government has divested its interest in severalenterprises through public offerings/quotation. On thewhole 35 companies were sold in the first exercise (late1980s to early 1990s) while the on-going exercise so farhas seen the sale of over 10 companies through the mar-ket. Examples of such companies include African Petro-leum (AP), Unipetrol, and Cement Company of NorthernNigeria, just to mention a few of them.

3. Banking sectorThe banking sector is experiencing a boom due to recapi-talization regulation. The banking reforms, through theCentral Bank of Nigeria (CBN) have made it possible formergers and acquisitions to take place and also led toreasonable degree of confidence in the banking sector by

Nigerians. A lot of hitherto pri-vate banks are now listed in theNigerian Stock Exchange. All thebanks mergers and acquisitionswere reviewed and approvedby the Securities and ExchangeCommission for them to sailthrough. When the CBN Gov-ernor on July 4, 2004, askedbanks to recapitalize to N25 bil-lion up from N2 billion, the mar-ket which was once thought notto be deep enough jumped tothe challenge and was able tomobilize enough funds for thebanks. The public confidence inthe ability of the market to raiselong term funds, to strength the

money market soared and even confidence of the opera-tors also grew in that some of the banks came back toraise more money for infrastructural development andworking capital amongst others. The market rose to thechallenge and was able to satisfy the demands for morefunds. Financial institutions particularly banks now findthe market a viable option for meeting statutory capitalrequirement and financing fixed assets. In 2006 and evencurrently in 2007 many of our banks floated securitiesthrough the capital market for these purposes. Some yearsback, many of these banks would not have given seriousthoughts to the capital market for fund raising. The grow-

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The capital market

regulation has played a

major role in taking the

market to greater heights

by opening doors for

foreign investors into the

economy.


ing preference for the capital market as a fund raisingvehicle is partly driven by increased awareness of thecapital market as an alternative source of funds, particu-larly, the awareness of the benefits derivable from equi-ties, which do not carry repayment obligations

4. Enhanced capacity in IndustriesThe regulation of the capital market has enabled it to pro-vide local opportunity to borrow or lend funds for long andmedium term investment, thereby enhancing capacity inthe production of goods and services. As a result of thestability in the market the country is witnessing a hugeinflux of foreign direct investment in the country. It showsthat foreign investors have a rekindled confidence in theNigerian economy and are willing to bring in their moneyto invest in the economy. Perhaps because of this growingconfidence the government is putting structures on groundto ensure that by 2020 Nigeria becomes one of the 20 larg-est economies in the world and Lagos, the financial hub ofAfrica. If achieved, Nigeria will be the destination for for-eign investors and investment.

5. Liquidity to investors and cor-porate organizationsRegulation of the capital mar-ket has provided avenues formarketability and quotation ofstocks and opportunities toraise fresh capital, thereby cre-ating liquidity to both investorsand corporate organizations.The process of entering themarket has become easier andmany companies are attractedto the market to raise fund eas-ily to finance their businesses.With the well regulated and op-erated capital market, raisingfund is cheaper for companiesand this will result to lower costof production and cheaperprice of good and serviceswhich will lead to increased demand thereby stimulatingeconomic growth. The capital a company builds up afterpublicly quoting its shares in the primary market enablesall those that invested in it to become part owners of thecompany. On the other hand, this public sourced fund willgo a long way to solidify the liquidity of the companyagainst any mishap and then gives the opportune masses

ISSUES (II)

the chance of owing investment in all or one of these bigcompanies in Nigeria. This is a very lucrative avenue forpeople looking for a viable business to invest their moneyand the returns are faster than any other form of businessever known. It doesn’t discriminate the choice of inves-tors, either by age, occupation or level of education etc.Rather it is free for all to invest, as far as you can affordthe on-going rate at which the product is offered. By sodoing, it exposes one to the rudiments of good investmentso early in life.

6. Employment opportunitiesCapital market has also created employment opportuni-ties through the ever-growing number of capital marketoperators and the various issuers who have raised fundsfrom the market. Nigerian economy has generally experi-enced growth due to the capital market regulation whichhas made possible good Corporate Governance, employ-ment creation, good infrastructure and new developmentin technology. These foreign investors create job opportu-

nity to the economy with their invest-ment. More so, when these investorsare attracted by the capital marketand get established, they help in en-hancing the technical and technologi-cal know-how of our practitioners. Thisis done by either being employed inthe company or through consultancyand this will go a long way to improvethe skills and quality of our homemade products, which will be highlyappreciated and accepted in all mar-kets.

7. Institutional development.The Nigerian capital market has awide variety and a good number ofinstitutions, which facilitate the opera-tions in the capital market. These in-stitutions are therefore, consciouslypromoted. They include issuinghouses, stock broking firms, regis-

trars, trustees and portfolio managers. In the last tenyears, the market has witnessed several entrants, whichhave increased competition and enhanced efficiency butalso created some regulatory oversight challenges. Thereis also the question of the increase in share capital of thecapital market operators to enhance confidence and sta-bility.

The growing preference forthe capital market as a fundraising vehicle is partlydriven by increasedawareness of the capitalmarket as an alternativesource of funds,particularly, the awarenessof the benefits derivablefrom equities, which do notcarry repayment obligations


ISSUES (II)

8. National IncomeThere is the need to improve our economy’s productivebase. But investors have always shied away from invest-ing in the production sector because it requires high capi-tal and returns are not quick. With a good capital marketas it is, it is now easier to raise fund for the industry andcreate a boost required to drive the economy. The im-proved investment powered by the wealth creation hasalso powered the Gross Domestic Product as well as theGross National Product. The foreign companies like Mobil,Agip etc, are drawn into investment through the rolesplayed by the capital market. In return we earn foreignexchange as well as promote and increase our foreignreserves. When we have a fat foreign reserves position,more grants and loans will be attracted.

9. Prevention of MonopolySection 99(3) (a) (b) of ISA states: “The commission shallapprove any application made under this section if andonly if the commission finds that-

(a) Such acquisition, whether directly or indirectly of

the whole or any part of the equity or other share capitalor of the whole or any part of the assets of another com-pany is not likely to cause a substantial restraint of com-petition or tend to create a monopoly in any line of busi-ness enterprise.” One important aspect of regulation isthe regulation of monopolies. In some cases monopolypower hinders consumers, while in others monopoly powerharms competition among businesses.

10. Capital AppreciationThis is the increase in values of equity an investor hasafter a period of time. For example, the public offer madeby Dangote sugar at N18 per share in December 2006 laterin April 2007 rose to as high as above N56 per share. Thesame way the shares appreciate in value is the same waythe investor’s capital appreciates, thereby enriching theeconomy in general. The fact that it brings about capitalappreciation means that the profit declared for the yearincreased and this affects the dividend declared for theshareholders positively as the dividend will increase too.A business mind bothers first about the maximization ofprofit and if an investment that cost little can fetch so much,

it then encourages more from thesame investor and as well attractsnew investors into the market.

11. Increase in Shareholders FundCapital market helps companies toincrease their shareholders fund bygranting them access to the marketto source for fund and boost theircapital. In order to meet theN25billion capital base, it was thecapital market that all the banks ranto. All the banks consolidated bybuilding up their shareholders fundeither by merger and acquisition orby public funds.

12. Establishment of 2nd Tier securi-ties market (SSM)The regulation made possible theestablishment of the 2nd Tier securi-ties market (SSM) whereby indig-enous companies are encouraged aswell privileged to be quoted on theNigerian stock exchange. By this,they access funds for various pur-poses, ranging from investments to


divestments, acquiring new plant and machinery to re-place the obsolete ones, increasing their business scopeboth locally and internationally.

Summary of Findings, Conclusions andRecommendationsFindingsInformation gathered from this study showcased the fol-lowing facts:• Foreign investors are now coming to invest in the Ni-

gerian capital market• Institutional investors are now moving in and invest-

ing in the market.• Many lame stocks are now active stocks in the market.

More companies are listing shares in the market. Itincreased the number of companies that use the mar-ket facilities for strengthening their capital structurefor modernization and expansion of operation.

• The Nigerian capital market has provided the mecha-nism for raising new capital which contributes posi-tively to the external financing of industries and com-merce.

• Regulation has sanitized the market andfunds are easily mobilized from numerouseconomic units for rapid capital formationfor economic growth.

• There are changes in wealth ownership andcomposition

• Pricing mechanism is now market-deter-mined and more transparent.

• Broadened ownership of asset base createsa healthy private sector

• Government is now alive to the usefulnessof capital market as an alternative source offunding their projects.

• There is liquidity in the market• The confidence of Nigerian investors in plac-

ing their savings into capital market invest-ment is now high as attested to over theyears by the over-subscription of 98% ofequity securities floated on the stock mar-ket.

ConclusionsThe capital market occupies a very importantposition in all economies, Nigerian economy notan exception. Its roles in economic developmentcannot be over-emphasized as it is a veritablesource of funds for businesses. Nigerian

economy was set back by years of military rule whichcreated instability and hindered business development.But with the restoration of democratic rule, the country isnow witnessing some growth as investors’ confidence isbeing renewed.

RecommendationsThere is the need to reorganise and professionalise mostof the registrar departments. At present, it is difficult forinvestors to sell their shares; verification of signaturestakes a long time. The quality of staff of most registrardepartments must be improved just as quality of opera-tions of issuing houses and stock-brokers has improved inline with volume of transactions handled.

Investors are getting frustrated by the issue of returnmoney when they do not get all the shares they appliedfor in an issue. They become worse-of when the moneydo not get to them long after the issue has been com-pleted.(* Chuke Nwude is a lecturer, Banking & Finance Depart-ment, University of Nigeria, Nsuka, Enugu Campus.)

ISSUES (II)

ReferencesAnalike Chukwudi Emmanuel (2007), Impact of Capital Market Regula-tion an Nigerian Economy, A paper presented on course BAF 503 (Man-agement Finance) May P.2Fied L. Fry; Charles R. Stoner and Richard E. Hattwrek; (1998), ‘Business:An integrative Approach, 2nd Edition New York, Irwin McGraw Hill’Garner Bryab A (2006), Blacks Law Dictionary, 7ed USA, West Publish-ing co. St PaulInvestment Regulation in the Nigerian Capital Marketwww.theconvention.org/regulationLaws of the Federation of Nigeria volume 8, chapters 112 and 118 tom10, lexis Nexis Butterworth 2006.Longman Family Dictionary: A clear concise and Modern Guide to theEnglish Chancellor Press UK.Ndi Okereke Onyuike (2005), ‘The Role of Nigerian Stock Exchange incombating money laundering in Nigeria; A paper presented at the 4th

National seminar on economic crimes, August 8.Nwankwo G.O (1991), Money and Capital Markets in Nigeria Today,Lagos, University of Lagos PressSuleman A Ndanusa (2003), “Country Experience with capital marketDevelopment: The Nigerian Experience”. A paper presented at 50th An-nual Financial Markets and Development Conference: The Future ofDomestic Capital Markets in Developing Countries, Organized by WorldBank April 14-16, at Watergate Hotel, Washington DC.The Nigerian Capital Market – Introduction.www.nigeriabusinessinfo.com/capitalmarket.htmThe Nigerian stock market Annual (2004), Being papers delivered atCBN Annual Monetary Policy Conference Nov. 25.


ISSUES (III)

* By Elaine Delaney

he point is, ladies and gentleman,that ‘greed’ — for lack of a betterword — is good. Greed is right.Greed works. Greed clarifies, cutsthrough, and captures the essenceof the evolutionary spirit. Greed, inall of its forms — greed for life, formoney, for love, knowledge — has

marked the upward surge of mankind.And greed — you mark my words —will not only save Teldar Paper, but thatother malfunctioning corporation calledthe USA.” The infamous words of thefictional private equity shark, GordonGecko, in the 1980s film Wall Street ad-equately captured the corporate greed

of the 1980s. The relentesspursuit of alpha combinedwith mediocre capital marketreturns has put private equityin the spotlight once again.The 1980s was the golden ageof private equity investment;a far cry from today’s empha-sis on financial engineeringrather than corporate rebuild-ing. A renaissance is set tooccur given that the privateequity boys are now turningtheir attention to the emerg-ing markets.

“T


ISSUES (III)

Money never sleepsPrivate equity investment plugs an important gap in cor-porate finance – domestic equity markets, credit marketsand banks are typically too risk averse to partake in theinvestment opportunities that fill the private equity space.

Household names such as Apple, FedEx, The AA and Intelwere borne by private equity funding. Such success sto-ries attracted the attention of the institutional investors,who by the nature of their liabilities can afford to takelong-term, illiquid views. A private equity investment islikely to tie up monies for periods of up to ten years andmay not be cashflow positive until after five years. Thecompensation for this illiquidity comes in the form of higherexpected returns. As their name suggests, private equityinvestors undertake equity investment and are thereforeincentivised to ensure the success of their stakes, aligningtheir interests with those of the original shareholders andminimising principal-agent risks. Furthermore, they areset apart from other forms of financing by the expertisethey bring to bear upon the company.

Hindsight and 20-20 visionFunds flowed unabated to Latin American and Asia Pa-cific markets on the untested premise that the privateequity models that produced superlative returns in theWestern markets could be carbon-copied for their devel-oping counterparts. What investors failed to take account

of was the enabling environment for private equity in de-veloped markets: political and economic stability, legal en-forceability, a supportive public policy framework and well-developed capital markets. Almost by definition, all suchkey drivers for a successful private equity climate are

absent in emerging markets. The obstacle that haspresented the greatest challenges to foreign inves-

tors is the company itself. In many instances, thecompanies in question have been family-con-trolled and therefore steeped in autonomy, opac-

ity and limited external accountability. The lack ofincentives to keep international standard accounts

increases the importance of due diligence by inves-tors. Seeking to establish the existence of subsidiar-

ies, off-shore entities and inter-relationships betweencompanies is a daunting task even for the most intrepid ofinvestors. Understanding a country’s tax regime is para-mount if one is to understand the measures taken by com-panies to circumvent such. Corporate governance issueshave no nationality; however they are particularly encour-aged to live in emerging markets. Access to timely andaccurate information is a prerequisite for an investor tomake appropriate decisions. “Mr China” by Tim Clissoldis a vivid account of how the “Johnny Just Come” investorcan lose billions by inadequately understanding the in-vestment regime of a country. Having a strategy to entera market is one side of the coin – exiting is the other. Pri-vate equity monies can generally only exit through anIPO or a sale to another private equity investor.

A brief history of the band-wagonThe standard mantra of risk versusreward should suggest that privateequity in the emerging marketspace should offer higher returnsthan in the developed markets. Ini-tially, this did not prove to be thecase and it is therefore instructiveto examine the reasons behind thisin order to avoid such issues plagu-ing the Nigerian market and historyrepeating itself. Private equity is

instrumental to capital market and macroeconomic de-velopment; it is imperative that lessons learnt from tran-sition economies are not ignored. Foreign direct invest-ment has always played an important role in developingmarkets; over the 1990s the advanced developed econo-mies recorded double-digit annual growth in FDI flows.However, these were largely focused on the large local


ISSUES (III)

companies. Globally, governments began to understandthe benefits of liberalizing their economies and creatinggreater accessibility for foreign investment. Supportedby development financial institutions, governments movedaway from private finance to fund public sector deficits.All these factors paved the way for private equity invest-ment to flourish. Latin America received $5bn in privateequity funding whilst Asia Pacific (ex Japan) marketsswelled by $50bn over the early part of the 1990s. EasternEurope soon followed with a similar tale. Such amountswere possible given the role that the IFC, the EuropeanBank for Reconstruction and Development and USAIDplayed, not only by committing some $15 billion, but alsotheir names.

Act Western, think WesternFirst generation funds to access these markets adopted aone-size-fits-all approach, mimicking the approach thathad been successful in US and Western European mar-kets. Strategy, organizational structure, transaction origi-nation and fund-raising approaches were replicated; froma macro to a micro level it appeared that a blanket ap-proach was adopted. Private equity returns are just that;private. It is difficult to gain insight into the returns offunds specifically unless an investor in that particular fund.Futhermore, there is no acceptable overall benchmark toprovide insight to the overall marketplace. However, sig-nificant anecdotal evidence exists that emerging marketprivate equity returns were not living up to expectations.Over 40% of respondents managing a combined assets

under management of US$2 trillion stated that returnswere below or far below expectations. The situation wasfurther exacerbated by the dollar’s steep appreciationagainst Latin American and Asian currencies; translat-ing mediocre local returns into derisory dollar returns.The combination of poor absolute and relative returnsequated to a protracted period of fund-raising difficul-ties for many emerging market funds.

Hard currency lessons learntIf we turn again to the fictional character of Wall Street’santi-hero Gordon Gecko, we find that he was able to pin-point the critical issues back in the 1980s:

“The most valuable commodity I know of is information”Accuracy, timeliness and transparency of informationare essential in order for an investor to make an in-formed decision throughout the investment lifespan. In-vestors underestimated the difficulties that they would

face in engaging entrepreneurs to provide them with thenecessary information. Rather, the assumption was madethat a new board would be inaugurated in which the inves-tor would be able to actively participate in making strate-gic decisions. In reality, the status quo of many boardscontinues, with minority shareholders sidelined, unable toaccess information required to monitor progress, developstrategy and further undermining the investor’s capabil-ity to plan their exit strategy.

“I look at a hundred deals a day. I pick one.”Initially, fund managers adopted a passive approach toinvestment; analyzing deals that crossed their desks us-ing the same textbook approach that they were familiarwith in Western markets. Originate through market intel-ligence, conduct due diligence, build a model, negotiatewith the owners, fill in the forms, close the deal and sitback and watch the returns accrue.

“If you’re not inside, you’re outside!”Managing a private equity investment in an emergingmarket requires dedicated local resources. Initially, manyfund managers underinvested in developing a local pres-ence, acting merely as “briefcase investors”. “Act local,think global” has a particular resonance in emerging mar-kets which are more likely to have business practices andcustoms that are alien to a Western operator. Also, giventhe greater propensity for limited regulatory oversight, itwould have been more prudent for such managers to re-main closer to their investments in order to exert influ-


ISSUES (III)

ence and control.

“It’s a zero sum game, somebody wins, somebody loses. Moneyitself isn’t lost or made, it’s simply transferred from one percep-tion to another.”Private equity funds exist to make returns to their share-holders. They can only do this with a clear exit strategy.Western markets offer the prospect of a ready and willingcapital market to underpin the private equity sphere.Empirical evidence suggests that an exit via a US IPO onaverage will yield a 55% per annum return against a saleto a strategic investor of 12% per annum. Exit via IPO isoften only a viable option for the larger issues, given thecorresponding local market’s lack of breadth and depth.

“Every battle is won before it is ever fought”The impact of weak corporate governance is amplified ifthe legal agreements that establish the nature of the rela-tionship between the shareholder and the company are

difficult to enforce. Limited legal recourse places the in-vestor at a significant disadvantage in the event of man-agement disagreements; the local company is likely to besignificantly more adept at legal maneuvering. As a di-rect consequence of protracted legal issues in respect ofminority interests, many fund managers now refuse toenter a deal unless they are the majority shareholder.Lack of shareholder protection has been cited by manyfund managers as a reason why they will avoid investingin particular countries altogether.

Recalculating for PEIn order for a buoyant and successful private equity mar-ket to flourish in Nigeria, all stakeholders must partici-pate; in particular government, capital market regulators,

investors, entrepreneurs and DFIs. In light of the experi-ence of advanced developing economies, the followinghigh-level measures can go some way towards encourag-ing a successful marketplace:

Government/Capital Market Regulators1. Liberalise the business landscapeThe World Bank has ranked the ease of doing business inNigeria against 175 countries as follows:Examining the changes over the last year, it is reassuringto see the noteworthy increase in contract enforceability.However, significant improvements need to be made toimprove property registration (170/175) and cross-bordertrading (137/175). 2. Increase investor protectionThe World Bank score places Nigeria in the twelfth tier ofcountries, alongside countries such as Kazakhstan andAngola. Moderate reforms to include protecting minorityinterests in shareholder suits, increased director account-

ability and higher disclosure requirements will drasticallyimprove the protection afforded to shareholders.3. Strengthen capital marketsThe capital markets are in their infancy in Nigeria. Thisoffers regulators considerable latitude in implementingregulation that will act as a natural precursor to properlyfunctioning private equity markets.4. Increased investor flexibilityPrivate equity investment has typically been funded byhigh net worth individuals and institutional investors givenits characteristics. Pension funds in particular have beenstrong proponents of private equity investment, oftenencouraged by government initiatives. Enabling Nigerianpension funds to invest in local private equity will enablegreater asset-liability matching, the potential for increased


ISSUES (III)

returns and the ability of pension fund monies to act as astimulant to the real economy.

Private Equity Firms1. Act localIn order for a private equity firm to be truly successful itshould establish a local presence, staffed by experiencedinternational investors supported by seasoned local pro-fessionals. This will enable the firm to gather market intel-ligence, examine investment opportunities robustly andconduct a meaningful dialogue with other shareholders.2. Time value of moneyA hands-on approach should be adopted; the value of hav-ing “eyes and ears on ground” is immeasurable. The pri-vate equity investor will need to invest significant time inenhancing their own shareholder valueby strengthening the corporate gov-ernance, restructuring managementand enhancing transparency and ac-countability. Merely reading thequarterly report will constrain boththe company and the investors’ poten-tial for returns.3. Cherry-pickingA passive approach to deal-making cansignificantly reduce the investable uni-verse. Private equity investors mustbe able and willing to originate their owndealflow, recognising their own skillset and expertise. Asectoral approach can enable a fund manager to identifythose areas that they will be able to add most value, cre-ate shareholder returns and extract profits to maximumeffect.4. Exit stage leftNecessity is the mother of innovation; the lack of a liquidIPO market should not act as too great a stumbling blockto thwart private equity investment. Innovative exit strat-egies have been developed, from recapitalisation to mez-zanine structures, in order to achieve the desired result.As stated earlier, entry and exit strategy should be con-sidered with equal rigour.

Entrepreneurs1. Increased transparencyBusiness owners should recognise the benefits that pri-vate equity investors can bring and treat such investorsas partners, sharing pertinent information to allow a co-hesive strategy to be developed. Private equity firms canbring much-needed long term capital to the table that istypically scarce in emerging markets, sharing in the risksand consequent rewards and driving the business to itsnext stage.2. Slicing and dicingThe temptation to incur debt and maintain managementcontrol is at the detriment to the company generally. Amindset shift is needed amongst many entrepreneurs to

appreciate that whilst they may hold a smallerproportion of the pie; the value of that portionshould be significantly larger than the wholepie in the absence of private equity.3. Global best practicesFinancial, marketing, structuring, strategic andemployment global best practices can be in-troduced easing the move from a local firmto an international player.

The Birth of VenusThe Nigerian market has recently wit-

nessed the renaissance; from Starcommsto Diamond Bank, the market has started to

discover the opportunities that exist outside the traditionaloil & gas space. The recent successful launch of TravantCapital Partners Ltd can only serve to strengthen the fledg-ling private equity marketplace. It is no coincidence thatthese opportunities are occurring now; the currency sta-bility, declining inflation, increased oil reserves and over-all macroeconomic management are laying the canvassfor private equity investors. Welcome to the renaissance.(* Elaine Delaney is a Senior Investment Consultant withZenith Capital Limited).

As developedmarkets become

increasinglysaturated, investors

are looking atemerging market

private equity as thenext frontier.


F REIGN INSIGHTS (I)

* By Christiane Arndt & Charles Oman

Why interest in governance?Four sets of phenomena have combined to drive the explosivegrowth of interest in the quality of governance – and with it the useof governance indicators – in recent years.

A first set of phenomena has much to do with the spectaculargrowth of international investment in developing countries overthe last 15 years. Foreign direct investment going to those coun-tries, whether to create or acquire production capacities to servelocal markets, or to serve global markets or the investors’ homemarkets, has grown from an average annual net inflow of about$10 billion in the early 1980s, to over $67 billion in 1992-94 and over$150 billion since 1997. Equally spectacular and important for driv-ing up interest in the quality of local governance has been thegrowth of international portfolio investment in emerging markets1

from net annual flows of below $2 million in the late 1980s to about$20 billion in bonds and another $26 billion in portfolio equity in the



1990s.2 International investors’ major newfoundinterest in the quality of governance in devel-oping countries is thus in part simply a reflec-tion of the spectacular increase in the value oftheir assets exposed to risk in those countries.

A second set of phenomena driving the ex-plosive growth of attention to the quality of gov-ernance in developing countries derives fromthe end of the Cold War. Throughout the post-war period the attitudes and behavior of OECDgovernments and their national and multilateralaid agencies towards developing-country gov-ernments were colored by the latter’s positionin the bi-polar world created by the Cold War.U.S. President Franklin Roosevelt’s often-quotedremark about Nicaragua’s ruthless dictatorAnastasio Somoza – that “He’s a bastard, buthe’s our bastard,” because of the non-commu-nist stronghold Somoza maintained in CentralAmerica – is emblematic of the attitudes andbehavior towards governments throughout thedeveloping world until the end of the 1980s.3

Only after the demise of the Soviet Unionhave these attitudes and behavior become sus-ceptible to real change – and increasingly so –with the perceived disappearance of the com-munist threat. A watershed was World BankPresident James Wolfensohn’s decision in 1996to radically reverse the Bank’s longstandingpolicy that it could not explicitly recognize orseek to address the acute problems of corrup-tion in many of its borrowing countries, because local poli-tics were outside the Bank’s official mandate, to givingthose problems a high priority. While World Bank lendingto promote economic reforms fell by 14 per cent annuallybetween 2000 and 2004, its lending to improve governancerose by 11 per cent annually during that period, and by thelatter year 25 per cent of its lending was committed to lawand public administration in borrowing countries.4

Growing perceptions in recent years of a relative fail-ure or inadequacy of policy reforms widely undertaken inthe 1980s and 1990s are a third set of phenomena drivingthe growth of interest in governance. Those policy reforms– reflected in the sea change in economic policy orienta-tion noted earlier and sometimes referred to, at least inthe Latin American context, as the “Washington Consen-sus” – were spurred by a combination of factors. Thesenotably included the onset of the Third World debt crisis in1982, followed by the drying up of voluntary international

bank lending to developing countries (especially the “sov-ereign” lending that had grown spectacularly to recyclepetro-dollars in the wake of the 1973 oil shock). They alsoincluded the sustained decline in commodity prices and,in many countries, a collapse of local development bankstogether with that of import-substituting industrializationstrategies. The combined result was the markedly slowedgrowth that plagued much of the developing world fromthe 1980s and gave impetus to widespread policy reformsthere during the 1980s and 1990s.5

Yet the resulting widespread policy shift during the1980s and 1990s in favor of greater “market friendliness”in developing countries, notably in Latin America, Africaand South Asia – and actively encouraged by the multilat-eral financial organizations that found themselves in astrong position to do so through lending conditionality –ultimately proved relatively disappointing.6 The ensuingdebate over whether the relative failures are better ex-



plained by too much or rather by too little effective imple-mentation of the recommended reforms is less importantfor our purposes than is the general recognition, today,that the reforms were relatively unsuccessful. This recog-nition has contributed to a growing understanding – in-cluding within the multilateral organizations and amongstaunch defenders of the importance of market-friendlypolicy regimes – that strong markets require good gover-nance, and that poor local governance may go far to ex-plain the relative reform failures of the 1980s and 1990s.

Finally, a fourth set of phenomena driving the explo-sion of interest in governance has been the work ofDouglass North and the New Institutional Economics ofwhich he is a leading figure. That work has convincinglydemonstrated the importance of a country’s system ofgovernance – its formal and informal institutions (the lat-ter including its culture and unwritten values) and theirinteraction with the behavior of economic and politicalentrepreneurs and organizations – for the country’s suc-cess in terms of its long-term economic growth, en-hancement of human welfare, and societaldevelopment.

(Mis)uses of GovernanceIndicatorsInternational investors, official na-tional and multilateral aid agen-cies, development analysts andacademics, and others tend to use– and widely misuse – governanceindicators produced by dozens of or-ganizations to compare the quality ofgovernance both among countries andover time in their decision-making pro-cesses.

Consider international investors, for example. BecauseFDI usually constitutes a relatively long-term commitmentof resources by the investor – funds invested in real as-sets are often not very liquid and thus relatively “hos-tage” to the success of the invested enterprise – foreigndirect investors tend to spend much time and effort tocompare countries they are seriously considering as po-tential investment locations. Political instability, weak ruleof law, contempt for property rights, or poorly functioningjudiciary can easily discourage investors that perceivethe risk of loss in a country as too high, or too difficult togauge. The research departments of multinational corpo-rate investors and banks now widely construct or use gov-ernance indicators to try to assess the general country

risk and governance situation in potential investment lo-cations.

Providers of official development assistance (ODA),both national governments and multilateral organizations,paid little attention to the quality of governance in recipi-ent countries during the Cold War period, as explainedearlier. Following the watershed decision by World BankPresident James Wolfensohn in 1996 to reverse course,and give high priority to addressing corruption and badgovernance as major barriers to development, the Bankundertook research showing a strong positive correlationbetween the quality of governance and the effectivenessof ODA in a recipient country.

As donors increasingly make the quality of governancein recipient countries an important criterion for aid-alloca-tion decisions, they feel a growing need for governanceindicators - not least to be able to base those decisions onconsistent and transparent criteria. An informal recent

survey of six official donorsfound broad support

among them for the useof governance indica-tors in country-recipi-ent selection. Donors’growing use of gover-nance indicators alsoreveals, however, anumber of serious

problems or potentialpitfalls associated with that

use.Consider the widely used Trans-

parency International’s (TI) Corruption Percep-tions Index (CPI). Cited widely and frequently in literally

thousands of newspapers worldwide, CPI has played aninvaluable role in originating and giving sustained impe-tus to what has become a global movement against cor-ruption. The international shaming that follows its publica-tion of scores encourages a race to the top both amongneighbors and globally, among countries at all levels inthe league table. Yet the CPI is also widely misused.

While TI clearly asserts that the CPI is a ranking andcannot be used as a measure of national performance inthe fight against corruption, it is often (mis)interpreted bynewspapers, and sometimes (mis)used by donors, as pre-cisely such a measure. The reason why the CPI is not ameasure of corruption – and cannot reliably be used as abasis for aid-allocation decisions – is because year to yearchanges both in its methodology and in the list of coun-

If a country is believed to becorrupt, but is willing to

reform, this should serve as asignal to donors that

investment is needed insystemic approaches to fight

corruption.



tries it covers mean that it does not dis-criminate reliably either 1) among coun-tries with scores close to each other; or 2)between conditions of corruption, evenin the same country, over time. Nor shouldit be forgotten that more than 50 coun-tries, including many that are undoubt-edly plagued by severe corruption, arenot ranked on the CPI.

Put differently, the standardizationtechnique TI uses to produce the CPI em-phasizes the rank ordering of countriesover internal reforms (or the lack thereof)in any country. This means that the CPIcannot be used as an indicator of progressto reward reform efforts in any country(and that a country’s score will changeeven though corruption there remains unchanged).Changes in the composition of the sources and method-ologies used, from year to year, mean that country-rankscores are not comparable over time. Thus, in its pressreleases, “TI warns against misinterpreting such arbitrarychanges in the rank order of countries. Despite these warn-ings, media headlines frequently refer to changes in acountry’s rank order and the various caveats on TI’swebsite remain largely unreported and widely misunder-stood.”7

In its own words, TI “does not encourage the CPI to beused for decisions on aid allocation. Countries that areperceived as very corrupt... need help to emerge from thecorruption-poverty spiral. If a country is believed to becorrupt, but is willing to reform, this should serve as a

signal to donors that investment is needed in systemicapproaches to fight corruption. And if donors intend tosupport major development projects in corrupt countries,they should pay particular attention to corruption ‘red flags’and make sure appropriate control process are set up tolimit graft.”8

Analysts and academics also make wide use of gover-nance indicators. Correlation and regression analyses thatuse corruption indicators have been crucial in putting thecorruption issue on the international agenda, for example.Yet researchers’ use of governance indicators is widelyplagued with pitfalls. The nature and limitations of com-posite governance indicators, which their users often seemnot fully to grasp, or admit, unfortunately weaken the rigorand thus the credibility of many studies.

Consider the World Bank’s gov-ernance indicators. Kaufmann andhis co-authors explicitly cautionagainst using their indicators forranking purposes because of themeasurement errors embodied intheir indicators (errors that are notunique to their indicators, it must beemphasized). Nor do they aggregatetheir six composite indicators, or asubset thereof, to create an overallcomposite indicator – they alwaysuse them separately – because, intheir own words, of “non-trivial is-sues when constructing one compos-ite governance indicator for a coun-try.”9 Many important studies nev-



ertheless (mis)use the World Bank’s indicators preciselyin these ways.

It is understandable that users would like to have anoverall indicator of governance. However, taking a simpleaverage of the six World Bank indicators and using it instudies is problematic for at least two reasons. First, tak-ing a simple average means loosing all the statistical ad-vantages of the aggregation methodKaufmann and his co-authors use toproduce both the composite indi-cators and the correspondingconfidence intervals for coun-tries’ scores on a given indi-cator. Second, it is no more ap-propriate to use an aggregate“governance” score that com-bines the different World Bankindicators into a single number fora given country than it is to aggre-gate the quality of apples and the quality of or-anges: if the quality of apples is very bad and the qualityof oranges is very good, saying that the quality of fruit issatisfactory would mask the respective quality differencesin the different types of fruit.

To illustrate the second reason, consider a compari-son of China and India, which havesimilar scores if one looks at an ag-gregate of each country’s scores onall six World Bank governance indi-cators for 2004. Yet China scores inthe upper half of all countries on“Government Effectiveness” and inthe lower quarter of all countries on“Voice & Accountability,” whereasIndia scores in the middle of allcountries on both of these indica-tors. The aggregate hides poten-tially important differences be-tween the two countries in theirscores on different indicators, yetprovides no meaningful overall in-dicator of governance with which tocompare the two countries.

Similarly, if a country scores very well on the majorityof the World Bank indicators but very badly on one ofthem, the country’s overall aggregate still presents a fa-vorable picture of the country’s “governance.” Take Is-rael and Oman, for example. They have similar aggre-gate scores that lie in the upper half of all countries, but

Israel’s score on “Political Stability” and Oman’s score on“Voice & Accountability” both lie in the lowest quarter ofall countries. Users who rely on an aggregate of the sixWorld Bank indicators would be easily induced to believethat the quality of governance [fruits] is fine and compa-rable in the two countries without realizing that there is a

serious problem with the “Voice & Ac-countability” [apples] in Oman and

the Israeli “Political Stability” [or-anges].

One must also rememberthat each of the six World Bankindicators is already extremelycomplex on its own. This com-

plexity, which reflects the largenumber and diversity of existing in-

dicators used to construct each mea-sure of governance means that the substantive

content or true “meaning” of each composite indicator isalready lacking in transparency and very difficult to deci-pher or interpret in real governance terms. This lack oftransparency is only multiplied for an aggregate that com-bines several of the World Bank indicators, to the pointthat it becomes very difficult to attribute any substantive“governance” meaning to such an aggregate.

Another example that comes to mind is the landmarkUNDP Programme on Governance in the Arab Region,which has played an invaluable role in bringing attentionto bear on the problems of governance in Arab countries.The problem, which does not diminish the importance ofthe Programme in other respects, is that it uses the World

if donors intend to supportmajor development projects incorrupt countries, they should

pay particular attention tocorruption ‘red flags’ and makesure appropriate control process

are set up to limit graft.



Bank indicators and CPI scores to compare the quality ofgovernance among countries whose scores are much tooclose to each other. If one keeps in mind the measure-ment errors inherent in the calculation of those scores, itbecomes evident that any such comparison is meaning-less. Not only does the Programme make such cross-coun-try comparisons, it does so over time – and even providesa tool on its webpage that encourages users to do like-wise. Unfortunately, neither such comparisons amongcountries with similar scores nor their comparison overtime is analytically sound.

Moving ForwardWhile there will never be one perfect governance indica-tor, the production and use of more transparent gover-nance indicators will better serve the needs of both exter-nal users and developing countries seeking to improvethe quality of local governance.

We believe it even more important to emphasize theneed for greater transparency in the production and useof governance indicators. Specifically, we believe it pos-sible, and important, for users, especially “external stake-holders,” to raise the minimum-quality standard they setfor the governance indicators they use particularly as re-gards the transparency of those indicators – relative tothose widely in use today.

Our recommendation is to move beyond the distinc-tion between relatively transparent indicators built to serve“internal stakeholders” and the policy needs of develop-ing countries, on the one hand, and composite percep-tions-based indicators widely used and misused by “ex-ternal stakeholders” for cross-country comparisons, onthe other. To achieve such greater understanding of thecauses of governance realities requires users effectivelyto understand the strengths and limitations of the indica-tors they use. The producers of governance indicatorsmust provide the following in order to help users under-stand their ratings:

• Full disclosure of methods and criteria scoring: Pro-ducers should clearly explain for non-specialists the meth-odology used to construct their indicators, including un-derlying assumptions that give de facto “meaning” to spe-cific indicators.

• Full disclosure of countries’ scores: Producers shouldpublish not only countries’ scores on each composite indi-cator but on each of the underlying indicators from whichthe composite indicator is constructed.

Encouraging organizations to clarify the norms andcriteria behind their standards for “good governance” by

setting higher standards for the transparency of the indi-cators they use should thus help to strengthen the bases,both analytical and political, for better understanding thekinds of institutions most conducive to development indeveloping countries today. This should in turn help raiseawareness both locally and internationally of how best totry to overcome obstacles to achieving those institutions.Raising the standards of transparency that we demand inthe governance indicators we use – and produce – shouldthus help effectively to improve the quality of governancein developing countries.(*Christiane Arndt and Charles Oman are both of theOrganisation of Economic Co-operation and Development(OECD). We are grateful to the OECD for the permission topublish this article.)

Notes1 The term “emerging market economy” was report-

edly coined in 1981 by Antoine W. van Agtmael ofthe World Bank Group’s International Finance Cor-poration. International investors, especially banksand portfolio investors, now widely refer to the low-and middle-income countries where they lend andinvest as such.

2 World Bank (2005), World Development Indicators Online,2005, World Bank.

3 The remark was made, of course, prior to the onsetof the Cold War.

4 World Bank (2004), World Bank Annual Report 2004,Washington, D.C.

5 Oman, C. and G. Wignaraja (1991), The Postwar Evo-lution of Development Thinking, Palgrave MacMillanLtd. and Development Centre Study, London.

6 Easterly, W. (2002), The Elusive Quest for Growth, MITPress, Cambridge, Massachusetts.

7 Galtung, F. (2005), “Measuring the Immeasurable:Boundaries and Functions of (Macro) CorruptionIndices” in Measuring Corruption, Ashgate, UnitedKingdom.

8 Transparency International (2004), Frequently AskedQuestions about the TI Corruption Perceptions Index (CPI)2004, available online at: www.transparency.org/cpi/2004/cpi2004_faq.en.html#five.

9 Kaufmann, D., A. Kraay and M. Mastuzzi (2005), “Il-lustrative Composite Governance Indicator World-wide Map,” World Bank, Washington, D.C., avail-able online at: http://info.worldbank.org/gover-nance/kkz2004/maps.html


F REIGN INSIGHTS (II)

* By Tony Monye

s at end-2006, the United Kingdom emerged as Nigeria’s largest export-ing nation in the whole of Europe, ahead of countries like Germany,France, Italy, Netherlands, and Spain. In fact, Nigeria’s imports from theUK alone are about 68.13 per cent of these countries’ put together. Ger-many and France came distant second and third, respectively. This pic-ture of the United Kingdom-Nigeria trade relationship is a vivid repre-sentation of how imports from the UK have been in the past half a de-cade, consistently dwarfing other countries’. On the export side, the rela-tionship takes a different shape. The UK’s imports from Nigeria rank assecond to the last of a group of six European countries. Spain is Nigeria’smost favoured exports destination, followed closely by France. Thesefigures are a strong reflection of trade imbalance between Nigeria andthe United Kingdom.

A




Nigeria’s imports from the United Kingdom have shownconsistent rise in the past five years (2002 – 2006). It wentup by about 161 per cent between 2002 and 2006; fromN132,032.0million to N344,609.9million. On yearly basis,United Kingdom’s exports to Nigeria went up, with the ex-ception of 2005 when Nigeria’s imports dropped by about26.7 per cent over the previous year’s figures. It howeverrebounded by a huge 128.15 per cent in 2006. Nigeria’s

export trend has been a bit random, periods of crests andseasons of troughs. The country’s exports to the UnitedKingdom hit an all-time high in 2003, when they went up bya massive 867.87 per cent; from N1,283.7million achievedin 2002 to N12,424.6million. The following year, the trend

witnessed a reversal, by as high as 80 per cent; from theprevious year’s figure to N2,485.1million in 2004. The hap-hazard nature of exports continued in the last two years,up in 2005 by over 170 per cent and down the succeedingyear by as much as 40.47 per cent.

Nigeria: Trade and Investment with the UKThe United Kingdom, without doubt can be partly cred-ited with setting Nigeria’s industrial base. Some of theearliest companies in the country were largely British.The Royal Niger Company, a leading mercantile firmchartered by the British Government in the nineteenthcentury, could be counted as one of the very first. TheUK is one of the largest investors in Nigeria, with cumu-lative investment worth several billion pounds by someof her companies such as Shell in the oil and gas sector,Unilever in the manufacturing, and Guinness, Cadbury-

Schweppes in the brewery and beverage sector.GlaxoSmithKline provides a good British representationin the pharmaceutical industry, while British Airways andVirgin Atlantic come under the aviation industry. British-America Tobacco is one company where the Britishpartnered with the Americans to contribute to the growthof the Nigerian economy

Nigeria can be regarded as the second destination

for business by the British in sub-Saharan Africa, just be-hind South Africa. The gross trade imbalance highlightedcan be reasoned out. It is often said that as a people,Nigerians generally have a tendency to look to Britishgoods and services and even in some cases, their ways.

Also, United Kingdom is home to about five million Nigeri-ans, the largest concentration of Nigerians in a single coun-try abroad and, in the Diaspora contributing to the growthof the British economy. Nigerians in the UK are another

Trade: Nigeria and the UK – Imports

Source: National Bureau of Statistics / Research & Economic Intelligence Group

Trade: Nigeria and the UK – Exports

Source: National Bureau of Statistics / Research & Economic Intelligence Group



huge source of overseas remittances back home. Withrising income level in the country, the balance of trademay move further in favour of the British given a highpropensity that exists for imported goods and services.

Nigeria – UK: HistoricalNigeria and the UK have strong political, historical, lan-guage and constitutional ties. The two countries havealways pursued special, mutually beneficial relation-ship dating back to 1861. It was the year the Britishbegan the gradual colonization of the country with theannexation of Lagos through the offer of‘protectorateship’. In brief, the name ‘Nigeria’ wascoined by the wife of the country’s first Governor-Gen-eral, Lady Flora Lugard, who had borrowed fromnature’s gift to the country, River Niger. On IndependenceDay in 1960, the British were the first to establish diplo-matic relations with Nigeria which both countries haveguarded with some suspicion of rivals.

Nigeria is the largest English-language speaking coun-try in the whole of Africa. South Africa comes next. Apartfrom these, on Freedom day, most of the laws in thecountry’s statute books were almost wholly copied fromthe United Kingdom. Therefore, when businesses are con-ducted between citizens of both countries, they do so un-der familiar terrain provided by the similarities in bothcountries’ systems of adjudication. Also important is thefact that the first system of government practised by Ni-geria, the Parliamentary System, could be said to be asimple ‘transfer’ of the British system to Nigeria. The sixyears experimentation with parliamentary system wasprematurely brought to an end by the military in 1966through a coup d’etat. In 1979, given the return of the coun-try to civil rule, the nation dispensed with it and instead,opted for the American system – the Executive system.

Nigeria has since then held on to it, although with someslight modifications here and there to make room for localdifferences, practices and values.

To the officials at 10 Downing Street, Nigeria, being amember of the Commonwealth, is an important ally and acrucial economic partner south of the Sahara. However,the two nations have had to go through long periods ofamicability interspersed with short ones of uneasiness.On a general note, according to the British High Commis-sion, the relationship between both countries can be saidto be strong and the UK has been a leading key advocateof debt relief recently achieved by Nigeria.

Nigeria – UK: DemographicsThe demographic structures of the two countries differ.They both reflect the state of the individual country’s levelof development. Nigeria’s population figure at over 140million is more than twice that of the United Kingdom. Thegap in the years ahead will not only be maintained butalso increased, given that Nigeria has a higher net addi-

tion rate placed side by side with the UK. To reflectthe fact that the UK is a more advanced economyalmost under all indices, the life expectancy of anaverage Briton, at 78.7 years is almost twice his Ni-gerian counterpart. Nigeria soars over the UK whenbenchmarked on fertility rate. An average Nigerianwoman is likely to have about 6 children during thecourse of her lifetime while a British woman looks atabout two.

Nigeria, with a land mass of 923,768 squarekilometre, is a huge country compared to the UK.Her size is about three times more than the UK at244,820 square kilometre. The size of the two coun-tries’ land area is about the same benchmarkedagainst their total area in percentage terms. BothMarina - A prominent business district in Nigeria situated in Lagos.

River Thames



countries have 98.67 per cent.

Nigeria – UK: Economics:The dis-similarities between the two countries continuewhen viewed through the prism of economics. Nigeria is adeveloping, low-income economy according to the WorldDevelopment Report (2006)and the third largesteconomy in the poorest con-tinent, Africa, after South Af-rica and Algeria. The samestudy classifies the UnitedKingdom as a high-incomeeconomy with the fifth larg-est gross domestic productin the world in terms of mar-ket exchange rates. The UKis situated in the richest con-tinent in the world, Europeand is the second biggesteconomy behind Germany inthat part of the world.

The size of the UKeconomy, at $1.93trillion isabout ten times that of Nige-ria in terms of gross domes-tic products (at purchasingpower parity, PPP). In termsof annual growth rate, theBritish economy at 2.8 percent experienced in 2006,however, paled behind its Ni-gerian counterpart put at 5.3per cent. The domineeringstature of the Britisheconomy over the Nigerian

one is again brought to the open whencomparison is made on per capita incomebasis. Nigeria’s per capita income is putat $1,500 which is some distance behindthe UK’s figure at $31,800 – a massive 2120per cent difference!

Nigeria with a foreign reserves posi-tion of $42.97 billion, which ranks asAfrica’s highest as at end-2006, is over110 per cent that of the British externalreserves, at $38.83. This means that Ni-geria has higher ability to meet with itsobligations more than her British coun-terpart if all other things are held con-

stant. The Chinese foreign reserves holdings put at overUS$1trillion are the world’s largest.

The sector by sector contributions to gross domesticproduct (GDP) of the two countries give inkling to the na-ture of the two economies. The more developed an

Key Demographic Indices: Nigeria and the UK

Key Economic Indicators: Nigeria and the UK

Sources: Central Intelligence Agency (CIA), United Nations Development Programmes (UNDP), African Development Bank(AfDB), National Bureau of Statistics (NBS) and Research & Economic Intelligence Group.



economy, the less the contribution of the primary sec-tor to the GDP. This is true of the UK’s where the netadditions to the GDP from the agricultural sector arejust a mere 1.00 per cent. On the other hand, the ser-vice sector dominates all others, by a whooping 73.4per cent as at end-2006, followed by the industry sec-tor with 25.6 per cent. Nigeria’s picture points to itsdeveloping characteristics with the industrial sectorovertaking the agricultural counterpart with 53.2 to 17.3per cent respectively. Agriculture used to be the main-stay of the Nigerian economy. In a nutshell, agricul-ture is still responsible for about half of the employ-ment opportunities in the country, especially in therural areas where it still accounts for over 70 per cent.Nigeria’s service sector’s contribution is growing, withnet additions to the GDP of about 29.5 per cent.

Stock Exchanges: Nigeria and LondonWith market capitalisation (MC) in excess of US$4trillion,the London Stock Exchange (LSE) ranks as the fourth larg-

est in the world in a list topped by New York Stock Ex-change (NYSE) Euronext with MC of US$20.692trillion. TheLSE was founded in 1801, some 341 years after the world’sfirst stock exchange was established in Antwerp, Belgiumunder the rule of Philip the Good. As at end-June, 2007,

there were over 2,749 companies listed on the exchange,with many overseas listing as well as UK companies. As at10th February, 2007, the National Association SecuritiesDealers Automated Quotations (NASDAQ) upped its stakein the LSE by additional 5 per cent; from 25 to 30 per cent.This holding, NASDAQ hopes, will make a rival takeoverbid unlikely to succeed.

Structurally, the LSE is broken down along the mainand alternative investment markets, as well as EDX Lon-don – the derivatives arm. There are also the independentFinancial Times Stock Exchange (FTSE) group which main-tains a series of indices for measuring performances onthe LSE especially amongst the top-100 quoted compa-nies (FTSE 100), top-250 firms (FTSE 250), and top-350 (FTSE350).

The Nigerian Stock Exchange (NSE) situated in thecountry’s commercial capital, Lagos, was established in1960. With a market capitalisation of US$61.316 as at end-June, 2007, the Exchange is arguably the fastest growingin the world. Analysts project that it has the capacity to hitthe US$100 billion mark at end-2007. Drawing from its trendso far, the NSE seems determined to surpass its projectedgrowth potential. With returns rate, conservatively put at35 per cent, the NSE rates as the world’s most attractiveexchange for investors. At present, there are more than300 companies listed on the Exchange, of these firms, onlyone is international, Ecobank Transnational Incorporation.

The NSE has received a buzz in activities in recentyears. Chief amongst the factors that impacted on itsgrowth is the abolition of the legislation against the inflowof foreign capital. Now, there is a growing number of for-eign dealers and brokers and investors of any nationalitywho are keen on investing in the exchange. The NSE also

NSE vs LSE by Market Capitalisation June ending 2007

Source: LSE and NSE websites

NSE vs LSE by Market Capitalisation as at end-June 2007

Source: LSE and NSE

20 Largest Stock Exchanges by Market Capitalisation

Sources: World Federation of Exchanges (June 2007).



makes room for Nigerian companies to engage in mul-tiple and cross border listings in foreign markets.

Nigeria – UK: FuturescopeThe economies of the UK and Nigeria will rank among thetwenty largest in the world in less than two decades ac-cording to a study by Goldman Sachs. The UK’s woulddrop one place backward, overtaken by India, with GDPvalue close to the US$5 trillion mark. On the other hand,the Nigerian economy will be the largest one in Africa,emerging from the shadows of South Africa, the continent’smost dominant economy at present. The United Stateswill still lead the rest of the world, with GDP figure of closeto US$20 trillion.

Income per capita will witness an upward trend in both

countries. At almost, US$55,000 per capita income, the UK’swill rank as the fourth highest in a list topped by the UnitedStates with almost US$60,000. Nigeria will take the secondslot amongst African countries with figures nearingUS$3,000. Egypt here assumes the leadership positionamongst the countries in the continent.

In 2050, Nigeria would have entrenched her presence

in the list of the world’s top-20 economies; moving 8 placesfrom what it attained 25 years earlier; from the 20th posi-tion to the 12th, just behind and in front of Indonesia andKorea (South), respectively and with GDP values closingUS$5trillion. By that time, Nigeria would have outpacedtwo key members of the Group of Eight (G8), Italy andCanada. At almost US$7trillion, the UK’s GDP figure wouldhave shown marginally increment over the 25 years pe-riod, dropping three places to the 9th position overtaken by

Brazil, Mexico and Russia.On the basis of income per capita, the Egyptian figure

will still eclipse Nigeria’s and at the same time, toppingother countries in Africa. Of the 22 countries profiled,Nigeria’s figure will put her at the 20th slot, ahead of onlyPakistan and Bangladesh. The per capita wealth of the UK,at over US$75,000 will rank her as the 5th best in the worldwhereas the US will still lead the rest of the world withover US$87,500 as per capita income.

The future of the two countries – Nigeria and UK, por-

tends much opportunity to be explored and exploited.Democracy, one of the key requirements by most west-ern nations in strengthening economic and social rela-tions, is firming up in the country. Nigeria has finally suc-ceeded in transferring power from one civilian adminis-tration to another. The present Nigerian governmentseems poised to continue with some of the reform policiesof the past administration. The economic and businessclimate in the country appears to be in the right directionas they are gradually being made more investment-friendly for the needed foreign direct investment (FDI)inflow. The United Kingdom, on her part, is also stretchingher hand in the direction of the world’s last bride, Africahoping to expand trade. Nigeria here seems a veritablepartner given the time-tested nature of the two countries’relations and other attributes Nigeria possesses that puther in good stead to deal with, better than other countriesin sub-Saharan Africa.(*Tony Monye is an Assistant Editor, Zenith EconomicQuarterly.)

Source: Goldman Sachs 2005




The Largest Economies in 2025

Income Per Capita: 2025

The Largest Economies in 2050

Income Per Capita: 2050


GLOBAL WATCH

*By Eunice Sampson

he ultimate aim of the acclaimed Millennium Development Goals (MDGs)is to halve global poverty by 2015. For Africa, the capital market could play anenormous role in achieving this target.

“If you have stronger companies that have greater access to capital for theirgrowing businesses ... then there is the potential for creating more sustainable jobs,which can also lead to a reduction in poverty,” ….Alan Kyerematen, Director,Enterprise Africa, UNDP.

The capital market offers returns in the form of capital appreciation, divi-dends, bonuses, and the increasing propensity to save, all which have thepotential to create wealth.

One of the advantages of capital market investment, critical for theperculiar African situation, is its flexibility. For the investor, very little initialcapital is required for investment; for the fund seeker, the amount of capitalthat could be generated from the market is enormous.

In Nigeria for example, it is interesting to note that investors in the capitalmarket could invest as little as N1,000 ($8.00) on securities. On the other

T


G L O B A L W A T C H

hand, in recent times, some local firms have raised asmuch as N100bn (about $80million) through the capitalmarket, from a single offer.

For a continent like Africa where poverty is rife, GDPper capita is low and cost of capital is high, the elasticityand flexibility of the capital market offers a win-win situa-tion for the two key players – the investor and the fundseeker.

AFRICAN ECONOMY – AN OVERVIEWThe theme of the age long African story has not

changed much – high rate of poverty, illiteracy, unemploy-ment, infrastructure decay, etc. Over 70% of Africans stilllive below the poverty line; a great majority of the popula-tion still remains un-banked; saving culture and invest-ment in securities are luxuries still outside the reach ofover 70% of the population.

However some far-reaching restructuring are begin-ning to take place in major African economies, promisinga more prosperous future for the continent:

• An annual average growth rate of about 5% has beensustained for more than 4 years;

• African governments in all regions are beginning to‘let go’, loosening their tight grip on the economy andpaving way for a private sector driven economy

• Overregulation is gradually giving way for marketforces to determine the direction of the economy

• Economic planning and strategy are being given moreserious attention.

• There is greater emphasis on reforms in all sectors,usually kick started with the financial services sector

• Infrastructure and legal structures are being put inplace to improve the investment climate and encour-age local and foreign investments.

• Fiscal discipline is being entrenched while efforts arebeing made in different countries to diversify theeconomy for enhanced and more sustainable eco-nomic prosperity.

After decades of trailing behind other continents, Africa’seconomic performance indicators are beginning to lookup.

The time seems right for the continent to focus on de-veloping its capital market, to further consolidate on on-going economic progress.

Among the current trends in the African economy, andone which can set the pace for the development of itscapital market is privatization of state owned enterprises. Afri-can leaders must begin to see the convenient link betweenpoverty alleviation and the duo of privatization and capi-tal market development; and be willing to take advantageof them to drive their economies towards recovery.

THE CAPITAL MARKET IN AFRICAUnlike their peers in developed economies, African capi-

tal markets are only just evolving. Apart from afew like those of South Africa, Egypt and Zimba-bwe, which have history spanning over 100 years,most capital markets in Africa have less than 20years history, with some (for example, the MaputoStock Exchange, Mozambique) being as young aseight years.

There are currently about 19 capital marketsin the continent, most of which were formed be-tween 1989 and now.

The leading capital markets include those ofSouth Africa, Nigeria, Egypt, and Kenya, with eachof these leading the South, West, North and EastAfrican regions, respectively.

As local companies respond to a fast globaliz-ing world economy, and bigger and more profit-able firms emerge in the continent, African capi-tal market could soon come of age.

Some locally quoted firms in Africa now alsoplay in international Exchanges as listed compa-nies, a boost for the local economies.

As at June 2007, about 10 Nigerian banks (Ze-nith Bank, First Bank, United Bank for Africa (UBA),

Source : Wikipedia; Research & EIG

Major Stock Exchanges in Africa (2006 & 2007)



Intercontinental Bank, Union Bank, OceanicBank, Guarantee Trust Bank, Ecobank, Afribankand Access Bank) were concluding plans to en-list in the London Stock Exchange.

Major Characteristics of AfricanExchangesAside from the Johannesburg Stock Exchange,most other Africa Exchanges share the follow-ing similarities:• Low market capitalization• Small average company size• Meagre number of listed companies• Risk averseness and preference for govern-

ment securities• Overregulation and heavy government con-

trol• Low trading activities and stocks dormancy• Low liquidity levels since the value of shares

traded is usually too small vis-à-vis the totalmarket capitalization

• Poor information access and exchange• Low participation of foreign institutions• Low returns on investment• High volatility and ‘speculative bubbles’

Since very few companies are listed, the few prominentstocks dominate total trading activities day after day. Insome markets, a single security could account for over50% of total market capitalization and daily volume andvalue of trade.

Current Drivers of Capital Market ActivitiesDespite the seeming hiccups identified above, many Afri-can capital markets have in the last 3 years witnessedsignificant growth, stimulated by changes in the widereconomies. Owing to evolving economic trends, somecapital markets in the continent are actually experiencing

Some Internationally Listed African Stocks

Structure of the Capital Market

Source: “Challenges For Financial Sector Reform In Africa” Victor Murinde University of Birmingham; 2007



a boom in the volume and value of trade and in the re-turns to investors.Factors driving increasing activities and profitability inthese Exchanges include:

• Adoption of market-driven economic reforms• Overhaul of the financial services industry• High liquidity and growing incentives to save• More stable democratic structures• Growing public awareness• Privatization of state-owned enterprises• Lifting of price controls and reduction in government

monopolies• Globalisation and greater involvement of foreign in-

vestors in African capital markets• Pension reforms• Dwindling disincentives in bank deposit due mostly to

falling ratesHowever, the pace of advancement is not the same for alleconomies; and different factors are propelling the growthbeing experienced in the mar-kets.

In Zimbabwe, the cur-rent bubble in the stock mar-ket is buoyed by prevailingrecord high liquidity and in-flationary pressure (close to4000%) amidst a low interestrate regime and negative realreturns on interest-bearinginstruments.

On Wednesday June 13,2007, the mainstream indus-trial index in the Harare StockExchange closed 54.6% higherat 40 063 181,62 points. In thehistory of the Exchange, thiswas the highest ever leap inthe index in a single day’strade.

On year-on-year basis, theall share index has risen byabout 7000% in 2007 alone, a frightening bubble which, ifthere is a burst could further annihilate the dwindling Zim-babwean economy, especially since this huge volume ofcash is being churned out as stock profits without any pro-duction activity ongoing in the economy to support it.

The capital market in Egypt and Nigeria are also cur-rently experiencing a major boom. Unlike that of Zimba-bwe however, the bullish market in both countries are notpropelled by inflation – inflation in Nigeria is actually at a

low of about 6% while that of Egypt is also at a record lowof 8.5% (June 2007). Rather, the market boom in both econo-mies are driven by gains of economic, especially in thefinancial services sector; growing public awareness; all-time high investors’ confidence; growing returns on stockinvestments; enhanced performance of quoted compa-nies; falling bank rates and high liquidity in the system.

Impediments to Capital Market GrowthWhile some capital markets are fast recovering and rap-idly closing the gaps between them and their peers in de-veloped economies, others are still only crawling, with nohope of a turnaround anytime soon.

Some of the following factors hinder many Africaneconomies from tapping into the huge wealth lying fallowin their capital markets:• Macroeconomic instability• Political risks and civil conflicts• Liquidity dearth, low income and poor savings

• Eroded public and investors’ confidence• Low awareness among the populace• Archaic and moribund capital market op-erations/ practices• Poor regulatory and supervisory frame-work• Inappropriate legal structure• Risk averseness•Low return on capital market invest-ments•Slow FDI inflow•Unskilled and inefficient leadershipThese factors have clogged the progressof many Exchanges in Africa, making itdifficult for corporate entities and indi-viduals to take advantage of the wealththe market could offer.

Potentials in African CapitalMarketsOne of the most basic problems faced by

real sector players today is ‘finance’ – limited ac-cess to, and high cost of capital.

The development of its capital market is an urgentnecessity for Africa since it offers the cheapest and mostconvenient access to capital for entrepreneurs. A welldeveloped and regulated capital market would:• Increase domestic resource mobilization• Improve the supply of long-term capital• Encourage the efficient allocation of existing resources• Lower the cost of equity capital

Driving privatizationthrough the stock

market wouldencourage the citizens

to save more,empower them

financially and givethem a stake and a

sense of involvementin the entire process.



• Spread the risks of long-term investment• Enhance the supply of investable funds by attracting

foreign portfolio capital• Provide a wide array of highly profitable investment

buckets

GROWING THE AFRICAN CAPITALMARKET - ISSUES TO ADDRESSGlobalizing the MarketWhile foreign investors’ involvement in African capitalmarkets is seen by many as a positive development, oth-ers have their reservations. These reservations are borneout of the belief that the more integrated a country’s stockmarket is with foreign holdings, the more susceptible it isto global financial shocks. For an already highly volatileAfrican capital market which regulation is yet to be per-fected, the risk of completely opening up the market toforeign securities holding is no doubt enormous.

Existing policies in some African countries (includingZimbabwe, Ghana and Botswana) allow foreigners to buyand sell shares freely and to buy up local stock brokingfirms when applicable. Other countries like Nigeria andKenya are beginning to open up to foreign investors afteryears of restrictions.

Ajit Singh, a Cambridge economist recommends thatAfrican countries focus more on encouraging foreign di-rect investment than on attracting short-term investmentflows through their capital market. This is because, in hisopinion, ‘large amounts of portfolio investment in Africa wouldgreatly increase vulnerability to domestic and internationalshocks’.

While his argument is very valid, yet protecting thecontinent’s capital markets from foreign investors coulddo more harm than good in the long run. The solution isnot on shutting the doors but on imbibing international stan-dards and global best practices in capital market opera-tions and regulations and in providing a conducive atmo-sphere for local and foreign investments to thrive.

Effective RegulationWhile the option of globalizing the market is controver-sial, the most efficient way to achieve a win-win situationfor stakeholders is through effective regulation. If the capi-tal markets are more effectively regulated and corporategovernance is enshrined among listed companies, andregulators it would be easier to guard against externalshocks even in the instance of foreign participation in lo-cal markets.

Effective regulation would also ensure that the mar-

kets are better organized; investors’ interests are betterprotected and public confidence is aroused.

Achieving Stable Socio-economic and Politi-cal EnvironmentOne way to sustain the confidence of local and foreigninvestors is to ensure an active, boisterous and progres-sive economy. A vibrant, fast growing economy like thatof China has in the last couple of years been able to sus-tain a stock market that is currently rated as one of themost profitable in the world.

Investors are not Father Christmas and would tend towithdraw their funds if necessary and re-invest them inmarkets where they are sure of economic stability andbetter returns.

Deepening the MarketMost African capital markets are still rather shallow andcharacterized by low public awareness, few listed compa-nies; low trading activities; and small volume and value oftransactions vis-à-vis the overall market capitalization.Recently, some Exchanges have devised strategies to over-come these setbacks, by for example, stimulating the in-terest and participation of small scale investors, who, inci-dentally, constitute over 65% of the potential investors inmost African economies.

Companies which are seeking to raise funds should beencouraged to allot preferential shares to organized groupof small investors, cooperatives, labour groups, etc. Insome countries, there are deliberate efforts at ensuringregional coverage in securities holding among the popu-lace.

On the other hand, initiatives that would encouragethe listing of more companies should be constantly de-vised. For example, the recent introduction of a Third TierSecurities window by the Nigerian Stock Exchange, to meetthe needs of SMEs seeking to raise funds through the capi-tal market, is laudable. Listing requirements must be re-modeled in most African Exchanges to create more roomfor smaller firms to operate.

CURRENT PACE OF AFRICAN STOCKMARKETS - EXAMPLESSouth Africa (JSE)The Johannesburg Stock Exchange (previously the JSESecurities Exchange) is the largest in Africa in market capi-talization and the 19th largest in the world. With marketcapitalization currently put at over $700 billion and about500 listed companies, it is the pacesetter in the continent,



controlling over 50% of the total value of the region’s listedshares.

South African firms also lead in participation in foreigncapital markets. Many South African firms are listed inforeign stock markets like the New York Stock Exchangeand the London Stock Exchange; for example Naspers,Harmony, Telkom, Gold Fields, Sappi, Sasol, AngloGoldAshanti, etc.

The South African capital market has been experienc-ing a bull, supported by fundamentals such as macroeco-nomic stability, enhanced foreign investment inflow, im-proved corporate earnings, and hyper active stocks in thebanking, mining and construction industries. The renewedinterest in construction stocks is due mainly to activitiespreceding South Africa’s hosting of the 2010 FIFA WorldCup.

The JSE top 40 has grown by 51% annualised since 2005,

and 61% in the last 3 years, a strong market performanceand another indication of the immense potential in Afri-can capital markets.

Egypt (CASE)In line with ongoing economic reforms in Egypt which be-gun in the early 1990s, the country’s capital market (Cairo& Alexandria Stock Exchange [CASE]) has witnessed far-reaching changes in recent years. Growth in the capitalmarket is driven by privatisation and deregulation activi-ties and the reforms in the banking sector.

The consolidation exercise in the country’s bankingsector in 2006 and the M&A activities that ensued havebeen a major boost to the Exchange. The inflow of newinvestments into the sector lifted the liquidity position ofthe market and accelerated trading activities. As a result,value of domestic liquidity rose in June 2006, reaching about



LE 560.4 billion. Between 2004 and 2006,the Exchange grew by about 98% intotal market value, driven mostly byincreasing domestic liquidity.

Significantly, President HosniMubarak in 1997 declared Egypt anopen market for investment withoutany limits. In response to that call,not only are some foreign securitiesquoted in Egypt’s capital market to-day, some Egyptian stocks like SuezCement Co, Telecom Egypt, LecicoEgypt, etc are now listed on foreignstock Exchanges. Rate of foreign par-ticipation in the local capital marketis currently put at over 30%.

Egypt’s capital market is one ofthe most promising in the continent.Daily transactions averaged 30,000 in2005/2006 while market capitalisationduring the same period rose to aboutLE 477 billion (about 80% of GDP) asagainst LE 172 billion by year end 2003.

It recently gained membership ofthe International Stock Market Union,becoming the first Arab stock marketto join this union.

Since 2005, the Exchange has em-braced global best practices includ-ing the introduction of Electronic Re-vealing System and the issuing of theDow Jones Case Egypt Titans 20 In-dex.

While most indicators currentlylook good, the future of the marketwould however be determined byhow steadfast the government re-mains about economic reforms andhow these impact FDI inflow, growthin the real sector of the economy, in-vestors’ confidence and the dispos-able income available to the populace.

According to the OECD, “Egypt is tobecome the first Arab and first Africancountry to sign the OECD InvestmentDeclaration. This marks a new stage inEgypt’s drive to attract more foreign di-rect investment (FDI). A series of policyreforms have helped to underpin a fifteen-fold increase in Egypt’s FDI between 2001

Source: Johannesburg Stock Exchange (Annual Report 2006)


Emerging Stock Markets As At 29 December 2006 (Provided by the WorldFederation of Exchange)

Position in The World League As At 29 December 2006 (As Calculated by the WorldFederation of Exchanges)


JSE: Top 10 Equity by Market Capitalisation As At 29 December, 2006



and 2006. FDI reached a record USD 9 billion in the first threequarters of its 2007 fiscal year. This compares with USD 6.1billion for the whole of 2006". … CASE website.

Its domineering regional status and huge tourismpotential are some of the advantages the country couldleverage on to attract increased domestic and foreignparticipation in its capital market.

Kenya (NSE)Established in 1954, the Nairobi Stock exchange, NSE, isthe leading and most progressive capital market in EastAfrica with about 18 member firms and 49 listed com-panies.

Between December 2002 and October 2006, theExchange’s market capitalization grew by 550%, from112 billion shillings to about 730 billion shillings, whileit’s 20-Share Index increased by 260% to 4890.

One of the propelling forces behind the improvedperformance is the deregulation and privatisation ex-ercise embarked on by the Kenyan government. Re-cently, government sold 30% of its shareholding in theKenya Electricity Generating Company through theNairobi Stock Exchange – an offer that was oversub-scribed by 330% and fetched 8 billion Shillings:

Other drivers include growing awareness amongKenyans about the huge returns the capital market of-fers; government incentives, including a reduction incorporate tax for newly listed companies, the pensionsector, driven by the Retirement Benefits Authority,which investment activities have improved liquidity andvolume of trade in the market.

For the government, the Exchange has become anindispensable source for pooling funds for developmen-tal projects:

“This year (2006), Treasury Bonds with a face value of 75billion shillings have been issued and listed at the NairobiStock Exchange. The total face value of all listed Governmentof Kenya treasury bonds is 234 billion shillings. A 12-yeartreasury bond, with a face value of 4 billion shillings, wassuccessfully issued and listed at the end of August 2006. Plansare also underway to issue a 15-year treasury bond for the firsttime. This is an indication that we are truly seeing our capitalmarket come of age”…. President Mwai Kibaki; Oct. 25th,2006.

The capital market is an integral part of Kenya’splan to achieving its vision 2030, part of which includes aprojected annual economic growth of 10% and attainmentof the status of a middle income economy by 2030.

As part of the country’s regional integration strategy,the NSE on October 2006 initiated the integration of all

three Exchanges in the region (the Nairobi Stock Exchange,NSE; Dar es Salaam Stock Exchange, DSE; and UgandaSecurities Exchange, USE) to form a single stock marketcalled the East Africa Stock Exchange, this move would be

Egypt: Real GDP Growth Rate (2000/2001 – 2005/2006)

Egypt: Market Capitalization (June 2005 to Jan. 2006)

Egypt: Growth in Domestic Liquidity (Jun 2005–Jan. ‘06)

Egypt: Fall in Inflation Rates (Nov. 2004 – March 2006)*

*change in consumer price index

Egypt: Central Bank’s Deposit and Lending Prices areFalling (June 2005 – March 2006)

Source: Ministry of Economic Dev, Egypt (http://www.mop.gov.eg)



followed by the setting up of a single Depository SystemCorporation which would serve all East African countries.

On October 25th, 2007, the Exchange launched its Auto-mated Trading System, to further facilitate the plannedregional securities exchange, a strategy that would createa larger market in East Africa and make the region moreattractive to foreign investors.

Nigeria (NSE)“The speed of domestic and international market development weare witnessing in Nigeria outstrips anything we experi-enced in other markets. This means if the right environ-ment is established in Nigeria, the rewards from the capi-tal market will be very large and very rapid”. - - - StephenJennings, CEO, Renaissance Group.

From a market capitalisation of just $2.94 billioneight years ago (1999), the Nigerian capital marketas at June 2007 had listed stock value of about $63billion, third in Africa only to South African andEgypt’s Exchanges, respectively.

The Nigerian capital market is now rated as oneof the fastest growing and most profitable in theworld with an estimated return of over 350%.

Considering the much it has achieved in the lastcouple of years, the challenge for the Nigerian stockmarket now is how to sustain the current tempo

and keep the enthusiasm of the local and foreign inves-tors high.

GOING FORWARD“Countries with highly active capital markets tend to have thehighest levels of economic development, while those with lowlydeveloped or no capital markets lag behind even where good eco-nomic opportunities for growth and development exist”… JimnahMbaru, Chairman, Dyer & Blair Investment Bank Ltd,Kenya.

NIGERIA STOCK EXCHANGE- MARKETCAPITALISATION (2000-2007

Source: NSE, Research & EIG

Kenya Stock Exchange: Growth in Market Capitalization (In Billions of Kshs) 2001-2007

Source: Nairobi Stock Exchange: Note that blank spaces means information not yet available



The financial intermediation role of the capital marketif effectively leveraged could leapfrog economic transfor-mation in Africa.It is imperative to reiterate at this juncture, the need forAfrican countries to weave ongoing economic reformsround their capital markets, especially the deregulationand privatisation exercises.

This emphasis is necessitated by the observation thatmuch of the privatization programmes have not been chan-neled through the capital markets. Driving privatizationthrough the stock market would encourage the citizens tosave more, empower them financially and give them astake and a sense of involvement in the entire process.

“Transferring ownership to the public through the stock ex-change could be a very useful tool of, not only disempowering[former state managers], but also expanding the liquidity of thesemarkets, developing the culture of investment, and expanding thehorizon of investment opportunities that are available …..privatization of shares in large state utilities in Nigeria through

Nigeria: Top15 Quoted Companies inMarket Capitalisation (as at June 15, 2007)

Source: Nigeria Stock Exchange / Research & Economic Intelligence Group

the stock exchange would “provide notonly a boost for the exchange in termsof size and market capitalization, butalso in terms of getting thousands andthousands of[local] people to becomeshareholders.” - - - MengistuAlemayehu, IFC (World Bank).

Also if African capital marketsare to consolidate and build on thegains so far made, there is no over-emphasizing the need for:• The development and empow-erment of the real sector• Socio-political stability• The rule of law and afavourable regulatory system• A diversified economy in placeof the traditional mono-culturesyndrome• Huge investment in infrastruc-ture to act as an attraction for in-vestors and reduce the cost of do-ing business locally• Shareholders’ protection regu-lations to keep investors’ confi-dence alive• Transparency, accountabilityand good corporate governance inquoted companies and stockbroking firms

• Adequate public awareness and enlightenment onsecurities investment

• The development of diverse investment buckets (in-cluding bonds and derivatives) for the public to choosefrom

• The removal of entry barriers for small - sized firmsinto the capital market, either as fund seekers or asinvestors

• Stimulating the growth and efficiency of the financialservices system

The development of bond and equity markets in Africawould go a long way in alleviating poverty, building a soliddomestic capital base, growing the real sector of theeconomy and reversing the age long vice of capital flight.(*Eunice Sampson is an Assistant Editor, Zenith EconomicQuarterly)


FACTS & FIGURES

ZEQ DATABANK

Source: IMF/R&EIG

- Solomon Obembe

MACROECONOMIC ENVIRONMENTNigeria’s macro-economy performed fairly well in the second quarter of 2007 defying analysts’ projections. Economiccommentators had forecast that major indices could plunge during this period as a result of the April general electionsand May handing-over formalities. Although, the impacts of the elections were felt, there were notable improvementsin almost all major macroeconomic fundamentals. The nation’s currency, the Naira, for instance appreciated againstsome of the major foreign currencies. Also, inflation rate dropped in April but reversed in the last two months of thequarter. Gross Domestic Product (GDP) also experienced upward movement. With the improved contribution fromnon-oil exports, the sector looks set for possible all-time record growth in 2007. On the flip side, the major problem facedby the economy during this period was the sustained youth restiveness in the Niger-Delta region leading to cuts in oilproduction by major exploration companies.

GROSS DOMESTIC PRODUCTGovernment had made a projection of about 8 per cent growth rate in gross domestic product (GDP) for 2007. At theheart of the forecast is the growing role of the agricultural sector in terms of contribution to the nation’s GDP and ofcourse, its ability to generate employment for the teeming masses. GDP growth rate had averaged 5.77 per cent in thefirst quarter with the month of March contributing about 5.43 per cent. The second quarter witnessed some drop as GDPgrowth rate fell to 5.76 per cent. The economy seems poised to achieve its projected growth estimate as it is expectedthat the restiveness in the oil producing region will abate given government’s readiness to constructively engage theNiger-Delta restive youths. It is expected that favourable crude oil prices too will have some positive impacts on GDPgrowth rate for the remaining quarters of the year. In addition, the fast approaching harvesting season, the calm afterthe storm of the recent increment in petroleum products prices, and the anticipated return-to-normal production levelof the oil companies, will also boost GDP.

GDP GROWTH RATE (JAN-JUNE 2007)


FACTS & FIGURES

Source: IMF/R&EIG

INFLATIONYear-on-year inflation experienced haphazard trend during the course of the second quarter. From a high of 8 per centattained in March, it went down to 4.2 per cent in April. The following month, there was a trend reversal as it went upmarginally to 4.6 per cent. The rising trend was sustained in June when it closed the quarter at 6.4 per cent. The inflationmovement in the last two months of the quarter can be explained. The short-lived increase in value added tax (VAT) thatwas later reversed, hike in the prices of petroleum products, the drop in both the MPR and interest rate corridors, therise in the cost of transportation occasioned by fuel price increase were some of the major factors that pushed up theinflation rate in the last two-thirds of the quarter. Inflationary trend in the last two months of the quarter had createdsome concern for the monetary authorities. This was because the movement in inflationary rate was contrary to whatthey had planned to achieve under the subsisting monetary policy regime.

INFLATION RATE (JAN-JUNE 2007)

EXTERNAL RESERVESNigeria’s external reserves position which had witnessed a declining trend throughout the first quarter rebounded inthe second quarter. It went up by 4.8 percent; from $41.9 billion at first quarter-end to $43.90 billion at the end of secondquarter. The reserves, at $41.9 billion at end-March 2007, rose slightly by 1 percent, to $42.34 billion in April. At the endof May, the reserves position had gone up by 3.1 percent to $43.67 billion. At end-June, the nation’s foreign reserves hadhit US$43.9 billion. According to the CBN, with the external reserves at this value, the nation can finance her importcommitments / disbursements in excess of forty months.

NIGERIA’S EXTERNAL RESERVES (MAR ’06 - MAR’07)


FACTS & FIGURES

Source: CBN/R&EIG

Source: CBN/R&EIG

EXCHANGE RATEThe Naira firmed up even further against the dollar in the second quarter of 2007. It gained about 35 kobo in the period;from N125.9:$1 at the end of the quarter-one to N125.55:$1 achieved at second quarter-end. Chief amongst the factorsthat gave boost to the Naira are the nation’s falling debt profile, increasing external reserves, inflow of foreign directinvestment due to increasing investors’ confidence in the Nigerian economy, rising crude oil prices in the internationalmarket, etc. Comparatively, foreign exchange demand went up between first and second quarters by 38 percent; from$282.1 million to $390 million at the end of the second quarter. At end-June, more banks were participating in theWholesale Dutch Auction System (WDAS) sessions as the number of institutions increased from thirteen to seventeenin June 2007.

EXCHANGE RATE OF N/US$ (JAN-JUNE ’06/JAN-JUNE ‘07)

INTEREST RATEInterest rates moved generally downward in the second quarter of 2007 due partly to reduction in Monetary Policy Rate(MPR) by 200 basis points; from 10 percent to 8 percent. Apart from the reduction in the MPR, the CBN also narrowed theinterest rate corridors, by 50 basis points, upper and lower bounds; from 300 basis points to 250. The prime lending rate(PLR) remained at 17.75 per cent. It had remained at this level since the second month of the first quarter. On the otherhand, the drop in the MPR seems to have had no significant effects on inter-bank dealings as the offered rates went upby almost a percentage; from 11.45 per cent at the end of the first quarter to 12.36 per cent at the end of the secondquarter.

NIGERIA INTERBANK OFFERED RATE (DEC 2006-JUN 2007)


FACTS & FIGURES

Source: NSE/R&EIG

Source: CBN/R&EIG

LENDING RATES (JAN’06 - JUN’07)

CAPITAL MARKETThe Nigerian capital market’s impressive performance in the first quarter of 2007 continued in the second quarter. Theactivity level went up appreciably as the All Share Index (ASI) rose by over 18 percent; from 43, 456.14 recorded at end-March 2007 to 51, 330.46 at the end of the second quarter. The market capitalisation of the Exchange rose by more than28 per cent in second quarter; from N6.15 trillion at end-March to N7.9 trillion at the end quarter-two. First Bank’sleadership position as the most capitalized company on the exchange was taken over by Dangote Sugar Refinery (DSR)in late April. DSR lost it to Zenith Bank less than three weeks later. Zenith Bank has since then maintained the enviableposition of the most capitalized company on the Exchange. Another notable development on the Exchange during theperiod under review was the adoption of new trading time. Stock traders and dealers are now to trade between 9.30amand 12.30am as against the hitherto practice, 9.00am -12 noon. This new trading time, approved by the Council of theExchange, came into effect from the 28th May, 2007.

NSE MARKET CAPITALISATION (JAN ‘07 – JUNE ’07)


FACTS & FIGURES

NSE ALL SHARE INDEX (JAN-JUNE 2007)

All

Shar

e In

dex

Source: NSE/R&EIG

CRUDE OILOil price per barrel in the international market experienced a rise of about 20 per cent during the second quarter; fromUS$61.65/barrel in late March to US$73.56/barrel at end-June. The nation’s crude oil output which experienced seriousdecline in the first quarter of 2007 continued its downward trend in the second quarter. Nigeria’s oil production capacityestimated at 2.5 million barrel per day in 2007 remains yet to be achieved. Youth restiveness in the Niger-Delta causedsome production drop – of about 18 per cent. Consequently, the country’s earnings from the commodity dropped at atime when other oil producing countries are smiling to the banks as a result of rising crude oil prices in the internationalmarket, which reached a record high of about $75/barrel in June.

CRUDE OIL PRICES: MONTHLY AVERAGE (JAN-JUNE 2007)

Source: OPEC/R&EIG

Documents

A Publication of Zenith Bank Plc V o l. 3 No. 3 July, 2007 3 No 3 July 2007.pdfregulation on nigerian economy - chuke nwude nigeria: conditions for private equity market - elaine delaney