From the Darkness to Light: A Case for Digitizing the Nigerian Capital Market.

I wasn’t too excited when MTN got listed on the capital market. After all, they were flat out against being a public company. The IPO was hyped and then postponed for like 5 billion times before it petered out. And it’s at the last minute that they reluctantly got dragged to list shares by introduction; even then it was more of a meh situation. Then the shares started an upward swing in valuation, and suddenly everyone wanted a piece of the pie: Since it got listed in May 2019 at N90, the shares have gone on to N138 in September 2019. Who doesn’t want an asset that swings up 65% within 4 months?

MTN didn’t plan to come to the capital market by choice. Its listing is part of the condition for getting its historic $5.1b fine reduced to a paltry $1.7b. And it got fined in the first instance because it broke the NCC’s rule of registering its customers; it had 5.2m unregistered customers too many.

In short, the MTN’s market rally really got everyone itching to get into the market; however, this new interest in the capital market did not meet a ready market. The hassles of buying and trading equities that have persisted since its inception only allowed for the really fanatical investors to surmount the long and seemingly sadistic process. This has always been counter-productive, but this manifested all too clearly in the MTN listing. Supposedly “lazy” investors, millennials and other interested newbies found it really difficult to get into the game, and most of them decided that the hassles of entry were not worth the shares after all.

With all the issues we face in Nigeria daily, who wants to spend precious lifetimes filling paper forms even if MTN is growing at 1 gazillion percent per month?

Getting into the Nigerian capital market is torture!

A retail investor, probably me and you, can only get into the capital market through a broker. You need to find a good broker, then open a brokerage account which involves completing the Central Securities and Clearing Systems account opening form, alongside the broker’s account opening form, providing a valid means of identification, utility bill (or any other valid form of residential verification documentation), and passport photographs. You will then wait another 48 hours (at the minimum) for the account to become operative, then proceed to fund the account and trade the shares. Everything being equal, all these should take about a week. This is, however, usually not the case as textbook interpretation is typically different from real life. Recently, a couple of friends tried engaging with a brokerage firm, and they reported that the time between making first contact to account opening took about a month. Who has time for such?

This, amongst others, points to the underlying reason why it is difficult for millennials, “lazy” investors and newbies to play in the capital market. Mainly because when juxtaposed with commercial banking, the ease it affords has not been duplicated. The accessibility and ease of banking services like responsive banking applications, opening accounts online, transacting with USSD, all of which can be done with minimal effort and within minutes has become their reality. They neither have the interest nor patience to go through the arduous process of getting involved in the capital market or trading on the stock exchange.

Let’s agree that these processes were put in place to stymie money laundering and ensure upmost compliance with applicable laws, regulations, and the dictates of regulators. However, this cannot make for a good excuse as the banks are faced with similar, if not more onerous, laws, rules, and even regulators. Since the banks have devised ways to provide fast, easy and solution-driven technological innovations to its customers while remaining within the confines of the law, it is clear that the blame lies squarely at the foot of the capital market operators.

Another prohibitive feature of the capital market is the transaction cost. At 1.35% of invested amounts, all the benefits that could accrue to the investor must have been given up as fees.

The capital market is paying dearly for being analog

While not substantiated, it has been rumored that not more than 200,000 unique investors have conducted any capital market transaction over the last two years. This data may continue to be nothing more than speculations because, asides the trading data from the NSE, getting information from this market is synonymous to getting water out of rocks.

Since the heydays of 2008 when practically everyone was involved in the equities game, the market has been in freefall. But as the demographics evolve, 90% of the young people who have entered the job market don’t have any brokerage account. The fact that the market continues to be roiled and influenced by international investors who are not committed to Nigeria and can move billions out at the slightest hint of trouble is no consolation.

Again, in comparison with the banks, it is clear what great strides have occurred in the banking industry in the last 5 years as a result of intentional digital innovation and transition. A clear example is in the number of people who have adopted digital banking solutions since its inception. According to the KPMG annual banking survey, in 2012, only 6% of account holders use mobile banking, now in 2019, 59% use USSD and 55% use mobile and web banking applications. Another case in point is interbank transactions which, last year, did 729 million transactions with about 18 million unique Nigerians participating.

We know for a fact that it is not the lack of interest or knowledge of investing that has bred a reluctance to participate in the capital market. With the likes of PiggyVest and Cowrywise attracting over 300,000 users, we can correctly deduce that Nigerians both know the benefits of investing and wants to invest. Other alternative investment options like FarmCrowdy and Thrive Agric get regularly oversubscribed. It goes without saying that the future of investing is any viable investment option that can afford a mobile, fast, seamless and cheap experience.

Guys, let’s get something done

The Security and Exchange Commission, the capital market regulator, knew the capital market needs urgent intervention which in 5 years might be a little too late. This is even much more dire for CSCS and the NSE as FMDQ moves deeper into the market. To better understand this, in 2012 FMDQ was registered by the SEC as an over the counter (OTC) securities exchange (an OTC is a platform where securities of companies that are not listed on a formal exchange are traded) but fully launched in November 2013. Today, FMDQ operates the largest securities exchange in Nigeria, with an average annual market turnover of circa $548 bn over the last five years. But by August 2019, FMDQ became Africa’s first vertically integrated financial market infrastructure group with an OTC exchange, a central clearinghouse, and a depository. FMDQ has also started the FMDQ Academy, an education program for the Nigerian financial market stakeholders — governments, regulators, operators, investing public, media, and students.

It is clear that FMDQ has positioned itself and is continually bringing the innovations that CSCS and NSE lack such as APIs and faster turnaround for account opening and trades, adequate sensitization, and knowledge sharing. The market will do well to thrive as a pluralized one rather than a monopoly hence the CSCS and the NSE in other to survive and compete favourably should heed the clarion call for the need to significantly transform the capital market.

So, what’s next?

Without prescribing specific methods as ways to move the needle, the most critical thing the capital market should adopt should be something, anything, that allows the opening of brokerage accounts from mobile applications with ease and enable trades to be driven seamlessly. As a rule of thumb, a millennial should be able to trade, using just a thumb, on a smartphone or a USSD within 1 minute at the most.

The market should also drive a massive knowledge and sensitization campaign. Most Nigerians just don’t know how the capital market works. It’s not for them to know, it’s for the operators, who need these retail investors, to demystify how the market works.

Brokers, NSE, and the CSCS should strike an integration and distribution partnerships with banks and telcos who already have the reach and the eyeballs.

And boy, the cost of trading is to not friendly for the reluctant millennials. The cost of transactions should possibly not be more than N100 per trade. After all, more volume means more revenue even if the margin for each is smaller.

We never know, these steps, amongst others if steadily implemented could (could is the word!) be a catalyst for the turnaround of the capital market.