Brave New World

Success of Nigeria’s demutualised stock exchange hangs on governance

By David Whitehouse

Posted on March 4, 2020 11:54 (70) © The trading floor of the Nigerian Stock Exchange in Lagos. REUTERS/Afolabi Sotunde
The trading floor of the Nigerian Stock Exchange in Lagos. REUTERS/Afolabi Sotunde

Demutualisation can help Nigeria’s stock exchange attract new listings if large-cap corporate governance improves.

The reform will turn the exchange into a limited liability company, and is likely to lead to a stronger focus on seeking new listings.

The exchange plans to change its name to Nigerian Exchange Group Plc.

  • The new entity will be in a better position to “capitalise on new income opportunities, free from any limitations arising from conflicting member interests,” says Yinka Ademuwagun, equity and fixed-income analyst at United Capital in Lagos.
  • The separation of ownership and trading rights will give the exchange and its subsidiaries “greater independence from its professional intermediaries”, he says.

The bourse urgently needs to diversify its revenue streams.

Equity market turnover slid by 20% in 2019, with the financial-services sector accounting for over 50% of total activity.

CEO Oscar Onyema in January cited “underwhelming trends in foreign portfolio investments, concerns around the stability of the naira and moderate corporate earnings” for the decline.

  • Fixed income turnover on the exchange rose by 389% in 2019, but the government was responsible for over 60% of bond sales as it sought to finance fiscal and infrastructure deficits.
  • “The fact that the exchange is now profit-oriented will spur the executives to implement strategies that will encourage new listings,” Ademuwagun says.

Demutualisation also creates the possibility that the bourse itself will be listed.

  • The move means that the exchange can “more easily raise funds to finance strategic objectives and expansion,” says Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos. “The opportunity for a potential Initial Public Offer or strategic investment is created.”

Unresolved Challenges

Demutualisation in itself is not a panacea for increasing investment.

  • The exercise “will not solve the current challenge of the weak business operating and regulatory environment,” Ademuwagun says. “This remains the biggest downside risk.”

Nigeria moved up 15 places to 131st spot in the World Bank’s latest Ease of Doing Business Index.

The government still needs to create an enabling environment that provides secure ownership rights, is subject to the rule of law, fosters transparency, and enables reasonable risk mitigation, Ademuwagun argues.

  • “In addition, individual sectors will have to be viewed as financially and commercially viable.”
  • Ojo says that the exchange’s board “has to be more diversified and broadly based”, with representatives from both local and foreign parties

Researchers led by Akinwunmi Kunle Onafalujo at Lagos State University have argued that capital markets thrive on trust, irrespective of whether or not an exchange is mutually owned.

  • According to Onafalujo, the need for demutualized bourses to make profits may in fact lead to a weakening of corporate governance.
  • “Demutualization cannot solve the conundrum of capital market growth if the ingredients are insufficient.”
  • Shareholder protection is seen as the real key: “The enabling laws protecting minority shareholders and corporate governance of listed companies should be addressed en route to demutualization,” Onafalujo writes.

Bottom Line: Improved corporate governance standards at Nigeria’s biggest listed companies have the potential to do more to encourage investment than exchange demutualisation.

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