Democracy day: Some reflections on democratising Nigerian capital market

Since the return to democracy, the Nigerian capital market has grown in leaps and bounds resulting in improved service delivery and enhanced market access for operators.  

As an aside, the occasion of Democracy Day this year provides an opportunity to reflect on progress towards democratizing the nation’s capital market. Essentially, by democratization, I mean mass participation and easy access to a broad range of capital market products and services. On this score, remarkable progress has been made especially since the return of the country to civil rule in 1999. On the supply side, the menu of available asset classes has been expanded to include Exchange Traded Funds, FGN Bonds and non interest capital market products such as Sukuk. Market infrastructure has been strengthened with the platforms for over-the counter trading namely NASD and FMDQ now established. The commodity trading ecosystem is gaining traction with new Exchanges opening their doors for business. 

Interestingly, the return to civil rule in Nigeria in 1999 also coincided with the introduction of the Automated Trading System by the then Nigerian Stock Exchange. Ever since, the journey to democratizing the capital market via innovative products and services has been notable: the T+3 settlement cycle took off in 2000; ditto for Trade alert in 2005. The first REIT was registered in 2007 while the first ETF-New Gold- birthed in 2011, same year the Alternative Securities Market (ASeM) was established. In 2013, the first Sukuk was floated by the Osun State government and the NSE also launched a new trading engine known as X- Gen. Full dematerialization of share certificates commenced in 2015 and the following year the implementation of the e-DividendMandate Management System (e-DMMS) took off. In 2017, the Securities and Exchange Commission commenced implementation of theDirect Cash Settlement scheme while in 2019, the NSE launched the Growth Board for SMEs and only recently in the wake of the COVID’19 pandemic, introduced the e-filing portal to enable issuers file information in electronic form. 

Democratising the market

It goes without saying therefore that democratization speaks to innovation aimed at improving service delivery as well as enhancing access to market and inclusive participation. I am aware that crowdfunding rules and regulations have been released by the SEC and the capital market seems set to welcome trading in financial derivatives with enabling rules and clearing platforms now in place. 

A significant milestone in capital market democratization was achieved following the recent completion of demutualization of the Nigerian Stock Exchange. The new entity-Nigerian Exchange Group- now has an improved governance structure. Its for-profit public limited liability status and subsequent listing on the NASD is expected to facilitate increased participation in the capital market not only by investors but also by issuers.


While these are encouraging developments, many roadblocks to capital market democratization can be seen. Despite progress made over the years, the capital market still suffers high exclusion rate evidenced by relatively low retail investors’ participation, small size of the Growth Board as only 9 SMEs are listed as well as low capital market literacy level especially in the North East and South East regions of the country. 

Furthermore, the provision of capital market services is concentrated in a few major cities especially Lagos and Abuja manifesting in low mutual fund penetration. According to data from the SEC, as of 31st December 2020, there were only 441,267 participants in mutual funds. This is an insignificant number given Nigeria’s huge adult population. Empirical studies have shown that mutual funds represent veritable channels of democratization and financial inclusion. Just a few days ago, Enhancing Financial Innovation and Access (EFInA) unveiled a survey report on ‘Access to Financial Services in Nigeria 2020’ which disclosed that ‘51 percent of Nigerian adults are using formal financial services, up from 49 percent in 2018 driven largely by banking’ adding that despite this growth, the country fell short of the National Financial Inclusion Strategy targets for 2020 which, in my view, may not be unconnected with the little attention being paid to capital market channels of financial inclusion.

Opening up the space

It bears repeating that in order to accelerate democratization of the Nigerian capital market, the market ecosystem should leverage Fintech to develop products and delivery systems to cater especially to low-income earners and youths. In this regard, it is vital that the capital market products are accessed on the mobile phone: either through the internet or Unstructured Supplementary Service Data (USSD). This is the experience of countries with high rate of financial inclusion.

Take the case of Kenya for example: in 2017, it became the first country in Africa to sell government bonds (M-Akiba bond) to citizens via their mobile phones, offered on M-Pesa and other mobile money networks in Kenya, such that investors can buy and sell the bonds on the Nairobi Securities Exchange via their phones. In 2020, the Central Bank of Kenya (CBK) launched a mobile-based service known as Treasury Mobile Direct (CBK-TMD)designed to facilitate investment in government securities using mobile phones. Similarly, in South Africa, online stockbroking platforms, such as EasyEquities, have made the stock market accessible to everyone with a smartphone. The platform has seen a steady increase of 1,000 to 2,000 new users per day according to its owner, Purple Group. Today, evidence abound that many young South Africans are using social media, online platforms and mobile apps to trade on local and global markets.

Indeed, the benefits of democratization of capital markets enjoyed by these countries via innovation and technology should spur Nigeria to find accommodation for digital assets given their allure to Millennials and Gen Zs. This demands greater synergy between the Exchanges, financial institutions and Telecom firms. Every effort should be made to promote online capital market education especially on popular social media platforms targeting young people while the government can support through increased investment in broadband infrastructure and promotion of mobile phone penetration. The promise of democratization and increased openness of the capital market is that individuals have a wider array of investment choices and small businesses have increased sources of capital which leads me to my final reflection: the emerging Commodity Market Trading Ecosystem in Nigeria.

In recent times, the development of the Nigerian capital market can be viewed from the prism of the growing number of Commodity Exchanges. Besides the government owned Nigeria Commodity Exchange; four other private Exchanges have been licensed by the SEC namely Afex Commodity Exchange, Lagos Commodity and Futures Exchange, Gazewa Commodity Exchange and Prime Commodity Exchange. Without any doubt, this is a welcome development considering the country’s endowments in oil and gas, agriculture and solid minerals. As a matter of fact, Nigeria has become the country with the highest number of Commodity Exchanges in Africa while the LCFE is set to be the first Energy Exchange in the entire continent. 

Considering other options

Against this backdrop, the commodity trading ecosystem in Nigeria deserves closer attention. To help galvanize its potentials, the government may well consider setting up a regulator separate from the SEC.  I do not think doing so would amount to duplication of functions as often argued.  It will be recalled that when an independent SEC was to emerge in 1979 from the then Capital Issues Commission established in 1973 which was an appendage of the Central Bank of Nigeria, there were those who felt it was not necessary. Today, they have been proved wrong. The success story of the Nigerian capital market cannot be complete without a special mention of the role of the Securities and Exchange Commission.

As a leading commodity-based economy in Africa and in the spirit of democratization of the capital market which equally speaks to decentralization, a specialized government agency can be set up to oversee this growing and specialized sector of the capital market. The Board of the new agency will have representatives from the SEC and the CBN with staff from these key institutions assisting with its take-off.  This may also require specific legislation to regulate commodities market akin to the Commodity Exchange Act in the United States which gives the Commodity Futures Trading Commission (CFTC), an independent agency of the US government established in 1974, the authority to regulate commodity market operators and commodity exchanges. It is instructive to note that decentralization of market regulation enhances specialization and effective market regulation as the experiences of the United States and Indonesia have shown. Up until 2014, the commodity market in India was regulated by the Forward Markets Commission (FMC).  In Africa, Ethiopia is reputed to have a thriving commodities market regulated by the Ethiopia Commodity Exchange Authority.

It must be recognised that unlike countries with integrated market regulation such as South Africa where the Financial Sector Conduct Authority (FSCA) is responsible for supervising and overseeing banks, insurance companies, retirement funds and indeed all financial services companies, Nigeria’s financial system operates a different model  of independent regulators in the area of banking, insurance, pension funds and capital markets. It is for good reason that countries running integrated models are beginning to amend their regulatory structure and embrace decentralization. In 2013 for instance, the Financial Services Authority (FSA) which was the agency that regulated financial services in the United Kingdom was split into the Financial Conduct Authority and the Prudential Regulation Authority of the Bank of England. The point in all these is; the establishment of a separate regulator for the commodity market will turbo-charge the development of the commodity trading ecosystem in Nigeria. 

All said, it is gratifying to note the positive disposition of regulators towards innovation and Fintech which would help crystalize the promise of capital market democratization in Nigeria. Happy Democracy Day!

Uche Uwaleke is a Professor of Capital Market at the Nasarawa State University and the President of the Association of Capital Market Academics of Nigeria.