May 18, 2023/NGX
by Temi Popoola
In this article, a first of a few to come, Temi Popoola, Chief Executive Officer of the Nigerian Exchange Ltd discusses how the capital markets are one of the most critical drivers of development and economic growth in any country and how Nigeria can benefit.
- Capital as a means to economic development
- The evidence – track records from a local, regional, and international perspective
- Nigerian Exchange Ltd. experience – ramping up capacity, capability, and reach
- Key mechanisms to unlock potential in the Nigerian capital market
Nigeria’s efforts to achieve significant economic progress have had varying levels of success. The country’s real GDP growth has averaged only 2.4% in the past decade, posing challenges to job creation, poverty reduction, and government revenue. Given the limited policy options available to address these critical economic issues, it is crucial to explore an often-underutilized mechanism that has proven successful in other nations facing similar challenges. By leveraging the potential of capital markets through intentional efforts and innovative approaches, Nigeria can unlock new avenues for economic growth and development.
Capital markets are one of the most crucial drivers of development and economic growth in countries. They serve as a platform for businesses to access funds from a broad range of investors, enabling businesses to expand, innovate, and create new job opportunities. Just as importantly, a robust capital market can reduce the susceptibility of an economy to external shocks, by reducing currency and duration mismatches in raising funds.
Capital markets were the enablers and funnels for growth in many of today’s developed economies. For example, much of the 19th-century rail construction in the US was financed through private investment. Entrepreneurs and business people, such as Cornelius Vanderbilt, invested heavily in building rail lines to connect cities and transport goods. These individuals and their companies, such as the New York Central Railroad and the Union Pacific Railroad, issued stocks and bonds to raise the necessary capital. Firms like J.P. Morgan & Co. also played a central role in providing financial services to the railroad industry. They were major underwriters of railroad securities, meaning that they helped the railroads issue stocks and bonds to raise capital. They would then sell these securities to investors in capital markets.
There are examples of these in other sectors as well. The development of the US oil and gas industry was largely financed through capital markets. In the late 19th and early 20th centuries, investors provided significant capital to oil companies to fund the exploration, drilling, and production of oil and gas reserves. Many of the major oil companies, such as Standard Oil and Texaco, were able to grow and expand through the issuance of stocks and bonds. The US real estate market has also been heavily influenced by capital markets. The issuance of mortgage-backed securities allowed for the bundling and trading of home mortgages, making it easier for banks to provide home loans to a broader range of borrowers. Additionally, real estate investment trusts (REITs) have allowed for investment in commercial and residential real estate on a large scale.
Over the past decades, China has experienced rapid economic growth propelled in part by its capital markets. The Shanghai Stock Exchange and the Shenzhen Stock Exchange are two of the largest stock exchanges in Asia, and Chinese companies have raised significant amounts of capital through initial public offerings (IPOs) and other securities offerings. The UK has a long history of using capital markets to finance its economic growth, from the financing of the Industrial Revolution in the 18th and 19th centuries to more recent developments in the financial services, technology, and renewable energy sectors. Africa has had limited success due to a variety of factors, including political instability, weak regulatory frameworks, and underdeveloped financial systems, but there have been notable solutions to national challenges in Africa using capital markets. South Africa is a leading example here. A lot of the exponential growth in the mining sector in South Africa was enabled by its vibrant capital market.
In Nigeria, a recent example is the 2004 banking sector re-capitalization exercise where the markets were a useful mechanism for banks to meet increased capital requirements, which then helped finance growth, create wealth, and facilitate economic development. With more intentionality and deliberateness though, the markets can be an even more efficient, affordable, and sustainable way to address many of the teething challenges facing the nation today. It is time for a clearly articulated and well-thought-out strategy for utilizing the market as an instrument for addressing many of our most pressing economic challenges.
One of the most significant benefits of capital markets is its potential to reduce unemployment. By providing businesses with the necessary capital to expand their operations, capital markets allow businesses to create new job opportunities for the workforce. When businesses expand through capital markets, they can invest in new technologies, develop new products, and expand their operations, leading to more jobs for the local workforce. Furthermore, the growth of businesses through capital markets drives innovation, increases productivity, and boosts consumer spending, all of which create more job opportunities for the workforce.
Capital markets can also increase tax revenues for the government. At 6% of tax receipts to GDP ratio, Nigeria’s tax receipts rank as one of the lowest in the world, and urgent efforts need to be taken to address this. As businesses access the markets for growth-related capital, economic growth is spurred as they invest and expand. This generates more revenues for the corporates, leading to higher tax revenues for the government. The increased tax revenues can be used to fund public services and infrastructure, such as healthcare, education, and transportation, which further contribute to economic growth. Research has also shown that capital markets lead to improved corporate tax compliance as listed companies are required to disclose financial information to investors. Listed corporates tend to be better governed, more transparent, and more adept at adhering to high levels of governance, leading to stronger compliance with tax provisions. A quick look at the listed corporates on the NGX reveals commendable levels of tax compliance.
Capital markets also play a vital role in boosting foreign exchange reserves. As businesses expand through capital markets, they tend to attract foreign investment, leading to an influx of foreign exchange into the economy. This increase in foreign exchange reserves can help in stabilizing the local currency, making it more attractive to foreign investors, which in turn, would improve foreign exchange reserves. Markets can also be used to aggregate and formalize existing “Over the Counter” foreign exchange transactions that are currently unreported, but if captured, can deepen FX flows. The increase in foreign exchange reserves can help the government finance international trade, pay off foreign debts, and stabilize the balance of payments.
Finally, capital markets can stimulate overall economic growth by promoting entrepreneurship and innovation. Access to capital markets enables entrepreneurs to raise funds and invest in new ideas, technologies, and businesses, creating a more dynamic and competitive business environment that fosters innovation. Innovation, in turn, drives economic growth by creating new industries, products, and services that meet the changing needs of consumers and businesses.
Over the past few years, the Nigerian capital market has witnessed significant innovation, improved regulatory controls, and a diversified investor base. These have ensured that transparency, efficiency, and accessibility in our markets have improved materially. The time is now for a well-crafted road map to harness the untapped potential in the Nigerian capital market to drive economic growth.
About the Author:
Temi Popoola is the CEO of the Nigerian Exchange Limited. A wall street trained investment banker, Temi’s career has spanned several continents and cuts across investment banking, securities trading, and structuring. Before joining the exchange, he was the CEO, West Africa for Renaissance Capital.
He is a Fellow of the Chartered Insitute of Stockbrokers and is a CFA charter holder.