April 15, 2012 / Olufemi AWOYEMI, Proshare / Contribution to BusinessDay Capital Market Conference

The central argument to confidence in the Nigerian markets is predicated on how we deal with the combination of an “externally driven change to a system” and an “internal corrosion in process and practice of the system” – the consequence of which is manifested as a trust deficit in the market.
 

This trust deficit is however not just a function of processes but a natural reaction arising from the basic human psychology that drives markets. This destination is never attained as markets are forever evolving and hence, we believe it will change.

Yet, where this trust deficit is widened through the actions of regulators under a period of severe economic and political uncertainty, the gap is unduly expanded in such a way as to make the resolution more complicated than it should be,
 

To be talking about restoring market confidence in April 2012, must be the clearest indication yet that efforts till now, has done little to influence the ‘rate of correction’ desired.
 

This simplistic interpretation/approach however may not be a ‘fair’ assessment of the work done so far by SEC/NSE and other stakeholders to date, but it offers the most honest assessment of the approach deployed to dealing with an unusual development/problem that may define the maturity level of our market in today’s competitive but connected market place – revealing that the gap identified by Proshare in the February 2009 NCM Report to the market has not been bridged.
 

The NCM report had concluded that the challenges we faced may not be the simple ‘market meltdown’ – local or externally induced; but a major ‘leadership meltdown’ in the management of not only the financial markets but the economy as a whole. Today, all dramatis personae involved as at the time of the report are no longer in office. So why do we still have the problem lingering on after the many awards, commendations and public acclaim given to the managers of the new economy?

The answer is a bit complicated we must admit, but at the very base level, it relates to the ability of the managers of the market and economy to work together.
 

That should not prove too damaging to the personal egos of the very strong characters presiding over institutions, that in itself, are equally culpable of failures to discharge their statutory obligations when it was most required before their respective new leadership took office (and it must be noted that there are still people resisting change for a myriad of reasons, deploying the ‘PHD’ tactics).
 

At some point, we must all accept that the numerous talk-shops we are prone to hold or/and resort to; while necessary, achieves little compared to tough action. We have held same talk shops since 1996 and never implemented the outcomes including the recent market reform committee findings.
 

This is where the leadership but one has failed in taking actions (not drama) that impacts investors’ perception that the trust deficit is evaporating. Quite frankly, we missed a number of opportunities to confront the key deliverables that were required, some of which included the following:
 

1.    The acknowledgement that the ‘gun-out-of-the-holster’ approach that delivered the bourse from the paralysis it found itself in did little to help the recovery desired. Rather, it would seem that it did more to empower the resistance to change – by infusing motives into the action of the regulators;

2.    The opportunity to set the scene on a positive note – earlier embarked upon has seemingly thawed and the subsequent management of fall-outs unwittingly created an extended period to the cycle of negativity, thus eroding the goodwill attached to the intentions;

3.    Building a safer capital market with better crisis management and a compelling solution for burden-sharing wasn’t a priority;

4.    Recognising the nexus between matters related to fiscal or monetary policy as a risk factor for the capital market in a new era; and

5.    Avoiding raising expectations that reduce communications to a ‘wish list’ rather than action-based reviews.
 

The tables below put the low confidence in proper perspective, reflecting sell-off and low commitment in market as reflected in ASI plunges.

The growing number of self-delisting firms on the Exchange could also be taken as a true reflection of the low market confidence.

In spite of the drawbacks, it would appear that we still have the opportunity to communicate to the market that things have changed for the better. In this regard, the current NSE management and council has done a lot more to show that ‘it gets it”. The NSE appears to know what is important in shaping the market and will need all stakeholders to get on board to make it happen.

How does this play out?

The low value turnover growth recorded in the year 2011 was a true reflection of the illiquidity of the market as shown in the table below.

Aside this, the debt profile of the brokers/dealers and absence of margin facility in the market created serious friction in the market as proprietary trading has since not been active. In this regard, the debt forbearance to the brokers/dealers as proposed by the Federal Government recently could be one of the votes of confidence the market is waiting for.
 

Further, the introduction of market makers (with opportunities for stock lending and borrowing in the market) as part of initiatives to revitalise the market, can help improve the liquidity status of the market by boosting stocks marketability status (with all necessary caveats to such an initiative in a down-trending market hurt by the absence of a viable primary market and having to deal with an foreign investor dominated marketspace) and reduce the pains of low/weak floats of the market. The table below reveals the liquidity outlook for the NSE @2011.

This is considered necessary because the illiquidity of the market would definitely cripple market growth and development, and make it unhealthy as regards marketability status of the Exchange. This means that market is likely to fail in its statutory role to the economy i.e. capital formation for SME and big corporations.
 

For the moment, stabilizing the financial system by "detoxing" the banks and injecting public funds into banks by AMCON was an important task that needed to be done and we must give kudos to those that delivered this, in spite of any reservations we may have. This process of restoring the financial sector to health however may not be a ‘slam dunk case’.
 

The post merger & acquisition phase is just the beginning and there are still more hurdles to overcome. Why? The adjustments in the financial sector have to work through: higher capital provisioning, reduced risks on balance sheets, lower trading exposures, restructuring of business activities and compliance with BASEL III requirements from 2013.
 

But besides these immediate actions it is of equal importance to start now with laying the groundwork for medium-term reform of the financial system. A wide-ranging overhaul of the financial regulatory framework must be on the agenda.
 

In doing so, transparency becomes the key for maintaining market confidence and for crisis prevention. The lack of a clear path to market confidence must therefore be one of the drawbacks to the cocktail of interventions undertaken by the myriad of regulatory bodies involved in our financial system.
 

The first step must therefore be the signal sent that the CBN, SEC, NAICOM, MoF, MoT&I can and do indeed work together to deliver a seamless regulatory environment.
 

The second must be the re-orientation required for the financial media in ‘keying-in’ to the imperative for change and a reversal of the ‘cycle of negativity’ propagated by the fourth estate of the realm directly and indirectly. The need for the financial press to upgrade and upscale their knowledge, competence and skill set cannot be over-emphasised.
 

The third would have to be the working relationship between the co-ordinated financials services regulatory bodies and the legislature - to move beyond the ‘mouse trap’ approach to handling issues for political benefits. What is required is a ‘step up to the plate’ approach that deploys both lobby tactics and best-in-class professional support to the NASS in turning them into a facilitator of market development and not a post-development ‘agro’ court yard.

The Planned House Probe

The planned house probe on the nationalised, M&A and other capital market related transactions has increased the stakes. We have a position on the development based on our insight into recent developments.
 

The house is legally empowered to deliver oversight functions over the SEC and by extension, the market. The process is in motion and those to whom invitations were addressed should consider it appropriate to respond, albeit, in such a way as to emphasise respect and regard for the constitution; despite the misgivings. No one ever said that democracy was a less expensive and less intrusive model.
 

Some informed stakeholders reason that this is a needless exercise and one that smacks of nothing more than an opportunity for the members to enrich themselves. That may be the motive but we differ on this - to the extent that pecuniary benefits (a matter for the anti-corruption agencies) should not cloud the opportunity this presents the market to once and for all, come together, to confront the legislature on what its core/primary responsibility is to the citizens of the Federal Republic of Nigeria.
 

Rather than attempt to take over the role of the SEC as the protector of the investor, its key role is that of expanding the relevance of the capital market as a creator or wealth making opportunities to the electorate and ensuring through the capital markets, that Nigeria is able to provide the much needed liquidity and depth needed to access long term capital to fund its infrastructural needs and deficits.
 

Ab initio, the transactions for which the House seeks to hold a public enquiry is a matter for the CBN and SEC (regulators and public offices covered by the oversight responsibilities of the NASS) and not directly for the buyers (who have simply followed the laws of the land – as is).
 

To conduct/manage this process by focussing on a regulator approved matter is the clearest attempt at ridiculing the regulator – and by extension undermining the market confidence effort we are all working towards.
 

For the avoidance of doubt, we do not advocate for a second, that the deal(s), enforcement issues, market practice infractions and confidence sapping actions are off-limits to legislative oversight. That would be wrong and against the spirit of the constitution. Every citizen/institution must be entitled to an opportunity to use democratic means to understand, clarify and most importantly, resolve issues. The NASS is the body so authorised to do so and we are mindful of that.
 

At Proshare, we see this development as the great opportunity to take head-on the lingering imbalance between the vision/objective of the house (NASS) and the Regulators. This issue predates the current office holders and quite frankly, the circus must stop.
 

The house should, first, be interested in the issue to provide a balance between professional/regulatory perspectives and the much needed compromise required to address the concerns of the excluded and losers (inspite and despite the yet-to-be validated allegations by the courts). This is a much needed insight/perspective often ignored in delivering a package that allows us to move on. Fact is that this impasse remains the driving force behind the inquest that is slowing us down from the ‘main/big’ picture.
 

Second, the house must come to terms that while it should not abandon its oversight responsibilities, it must advance legislation that promotes the interest of Nigeria(ns) through both the privatisation end-game (ensuring that no less than 25% - 30% at a minimum of privatised entities through the BPE are listed on the bourse) and seeing to it that regulation is passed for major operators in ‘key sectors of the economy like oil, telecoms, roads, agriculture are listed on the bourse of the NSE.
 

Third, the NASS should designate at a minimum – six (6) sectors as “economic interest sectors for Nigeria” in a bill that requires that all investments in these economic sectors (but subject to a consensus reached between the NSE, CBN, MoF, FBIR, MoTI and stakeholders) make minimal listing on the bourse. This will be based on a growth-inclusive economic model where incentives for doing so provides an investment return incentive for providers of capital.

Conclusion

Investors have a longer memory than the sell-side of the market. To regain their trust, intensive work needs to be done in the coming years. In the capital market, we will need the support of a determined Nigerian legislature, a strong commitment from the CBN and Ministry of Finance, as well as active contributions from the OPS.
 

We believe that participants in capital markets share the same goal: To make them as efficient and effective as possible.
 

The ability to collect savings and allocate them to investment, and to allow all participants to defray risk, is at the heart of any successful modern economy. This requires effective regulation that not only mandates common standards, but also promotes accountability, responsibility and transparency, while at the same time encouraging innovation.
 

Effective regulation must not impose undue costs, if markets are to remain efficient and effective.
 

However, regulators should be conscious that the crisis has been so deep that there is a collective need to go back to the basic principles of financial regulation and supervision.
 

Whilst the current priority must be to restore financial stability – by identifying, measuring and controlling systemic risks – we believe there is a pressing need to review the supervision and regulation of capital markets in order to restore investor confidence.
 

As our contribution to the debate, we strongly recommend that each regulation be seen in the context of its role in creating effective capital markets based on the principles outlined above.
 

To reiterate these principles, professional participants must strive to be:

         Responsible: to understand their clients’ requirements and interests and act accordingly;

         Accountable: agents will be responsible when they are accountable, and those charged with holding agents to account must be ready, willing and able to do so; and

         Transparent: these conditions can only be met if independent agents have access to and provide relevant information that meets users’ needs.
 

All market participants should agree on these principles, as it is not possible to establish them by regulation alone. More so, the lobby to get the legislature to provide the legal backing required must be complemented by the lobby to get the international and local markets to appreciate why this approach is in their best interest – giving all that they have had to say about the changes that has taken place thus far!
 

This may prove to be an initially uncomfortable development, but soon enough, we will all realise that this is the fundamental shift we have long worked for and must work together to deliver. It allows us to link our economic sustainability goals with our financial market framework. That has always been the missing link and the key enabler for confidence dissipation. 

For as, and as investor pulse analysts, we aim to provide useful support to any future efforts at regulation and to ensure that these efforts translate into the promotion of best practice. Our best days lie ahead of us, not behind us!

End.