The crucial role of capital markets and technology in Nigeria’s growth

BY AIGBOVBIOISE AIG-IMOUKHUEDE

Nigeria stands at a pivotal juncture in its economic trajectory, navigating through a myriad of challenges and opportunities. The country’s financial outlook is being shaped by a confluence of factors ranging from regulatory changes and technological advancements to global economic trends and internal policy shifts. This piece aims to dissect these elements, drawing insights from the recent Bloomberg Discovery Series (Nigeria) panel session in which I had the privilege of participating.

The current economic landscape

Nigeria’s economic landscape is characterised by a complex interplay of growth and stagnation. The National Bureau of Statistics reports growth, which is promising. However, the true metric of economic vitality lies in long-term investment. Unfortunately, Nigeria has been grappling with a significant exodus of multinational companies such as Glaxo, Proctor & Gamble, and PZ Cussons over the past year. This trend underscores a crucial issue: the need for robust domestic investment.

Strengthening Nigeria’s capital markets is paramount. These markets will serve as the bedrock for future investment, ensuring sustainable economic growth. Achieving this necessitates macroeconomic stability, particularly in currency and inflation management. Stability in the naira’s value against the US dollar and controlled inflation are essential for fostering an environment conducive to long-term business planning and investment.

Regulatory changes and their impacts

Recent regulatory changes are set to reshape Nigeria’s financial sector significantly. The ongoing bank recapitalisation process, which requires banks to raise over N2.0 trillion in fresh capital, is a transformative initiative. This move mirrors the impactful reforms initiated by Governor Soludo two decades ago, promising rapid consolidation and enhanced borrowing capacity within the banking sector.

Beyond banking, the Nigerian Exchange (NGX) is witnessing a surge in initial public offerings (IPOs), including the highly anticipated NNPC and Aradel IPOs. These developments signal a bustling year ahead, with increased market activity and potential for substantial economic gains.

Technology and digital transformation

The impact of technology and digital transformation on Nigeria’s financial services industry is profound. Internally, banks have leveraged technology to streamline processes, enhancing efficiency and customer satisfaction. Externally, technology is broadening financial inclusion, integrating more individuals into the formal financial system.

Start-up internet-only banks are making significant strides, though they have yet to displace established banks. Traditional banks have swiftly adapted, launching their own digital products and leveraging their expertise in liquidity management to maintain a competitive edge. The synergy between fintech innovations and traditional banking institutions is driving a more inclusive and efficient financial ecosystem.

Domestic and foreign investment trends

While the departure of multinational companies highlights a challenging investment climate, Nigeria’s future lies in its capital markets. These markets must be robust enough to attract and sustain both domestic and foreign investments. Controlling inflation is critical to achieving this goal, as inflation undermines business planning and investor confidence. Once inflation is stabilised, consensus on the naira/dollar exchange rate can be established, fostering a more predictable and attractive investment environment.

CBN’s monetary policies

The Central Bank of Nigeria’s recent shift towards orthodox monetary policies marks a significant development. With Nigerian Treasury Bills yielding around 25.0% for one-year T-bills and OMO bill auction yields reaching 29.0%, there is a renewed attraction for investment in the financial system. These high returns are enticing foreign portfolio investors and bolstering the naira.

However, there are trade-offs. High-interest rates impose a burden on borrowers but simultaneously strengthen the case for saving in naira. This policy approach is crucial for stabilising inflation and, by extension, the currency. As these policies take root, Nigeria can expect a more stable and prosperous financial landscape.

Risks facing financial institutions

Nigeria’s financial institutions are navigating a landscape fraught with risks. High interest rates, while offering opportunities for profit, also pose significant challenges. Borrowers are under stress, and the valuation of investments must reflect these elevated rates, introducing volatility into financial statements.

The adoption of mark-to-market accounting, championed by the Fund Managers Association of Nigeria, is a crucial step towards mitigating these risks. This accounting method ensures that financial statements accurately reflect current market conditions, fostering transparency and stability in the capital markets.

Sustainable finance and ESG considerations

Sustainable finance is gradually taking root in Nigeria, integrating environmental, social, and governance (ESG) considerations into financial activities. Regulatory policies by the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) are paving the way. These policies encompass principles of environmental and social risk management, financial inclusion, and guidelines for green bonds.

Banks and financial institutions are also investing in capacity building and training, equipping themselves to better assess and manage ESG risks. Despite progress, challenges remain. Limited awareness, inadequate regulatory enforcement, and a nascent market for green financial products hinder widespread adoption. However, the global shift towards sustainability presents significant opportunities for Nigeria to leverage its natural resources for sustainable development.

Financing SMEs: Challenges and opportunities

Small and medium-sized enterprises (SMEs) are the backbone of Nigeria’s economy, yet they face formidable challenges. Limited access to finance, due to high risk, lack of collateral, and inadequate financial records, is a primary barrier. Additionally, many SME owners lack financial literacy and management skills, further impeding their ability to secure loans.

However, there are promising opportunities. Government initiatives, such as the SME Credit Guarantee Scheme and the Youth Entrepreneurship Support (YES) programme, provide much-needed funding. Policy reforms, like the National Collateral Registry, enhance access to finance by allowing movable assets to be used as collateral.

Innovative financing solutions are also emerging. Crowdfunding platforms, angel investors, and venture capital firms are providing alternative sources of capital. Fintech companies are leveraging technology to simplify the loan application process and reduce reliance on traditional collateral. Microfinance banks (MFBs) offer tailored financial products to SMEs, making microloans more accessible.

Global economic trends and their impact

Global economic trends, particularly commodity price fluctuations and geopolitical tensions, significantly impact Nigeria’s financial sector. While commodity prices are relatively stable, the real concern lies with US bond rates. High yields on US Government bonds are drawing dollars away from emerging markets, including Nigeria. This trend is likely to persist until US bond rates decline.

The future of technological innovations

Technological innovations, particularly blockchain and artificial intelligence (AI), hold transformative potential for Nigeria’s financial industry. Blockchain can enhance security and transparency in financial transactions, while AI can drive efficiency and inclusivity. However, realising this potential requires a supportive ecosystem.

Collaboration among stakeholders—government, financial institutions, technology providers, and academia—is crucial. By fostering such partnerships, Nigeria can harness these technologies to spur innovation, improve financial services, and stimulate economic growth.

Conclusion

Nigeria’s financial outlook is at a crossroads, shaped by a dynamic interplay of internal and external factors. Strengthening capital markets, stabilising the macroeconomic environment, and leveraging technological innovations are essential for sustainable growth. By addressing these challenges and seizing the opportunities, Nigeria can build a resilient and inclusive financial ecosystem, paving the way for a prosperous future.

Aig-Imoukhuede is the managing director of Coronation Asset Management Limited