Nigeria greets new bond platform with caution

By:
Chris Wright
Published on:

Retail investors targeted; liquidity constraints remain

As foreign capital flocks to African debt, Nigeria is giving its retail investors a chance to join the party. The country is opening a new fixed-income trading platform on the Nigerian Stock Exchange. But opinion is mixed on the opportunity it will provide.

The fixed-income market-making system was launched in Lagos on January 29 to enable retail investors to trade debt issued by the federal and state governments and by corporations. The new platform pledges continuous two-way quotes through the exchange’s automated trading system, according to a presentation by Dipo Omotoso, head of product development at the NSE.

There is not a huge pool of paper to choose from: 56 listed bonds in total, 24 of them federal, 13 state and 19 corporate, worth N5.93 trillion ($37.7 billion) between them. However, six market makers have been appointed: Capital Bancorp, Cordros Capital, ESS/Dunn Loren Merrifield, FSDH Securities, Greenwich Trust and Investment One Stockbrokers.

It is easy to see why retail investors could want a piece of the action. Ever since JPMorgan elevated Nigerian government bonds to its emerging market government bond index in August, demand for the securities has pulled yields on naira-denominated 10-year bonds from 16.39% on August 14 to 11.22% in early February. The NSE says total bond market capitalization grew by 55.6% in 2012.

But the new trading platform has met with a cautious response. Some fear that banks will prefer to stick with the existing over-the-counter market and in any case are unlikely to wish to prompt retail investors to take money out of deposits to deploy in the debt markets.

"It’s all about liquidity," said Wale Shonibare, managing director for investment banking at UBA Capital, responding to questions from Euromoney and others at the UK-Nigeria bilateral conference in London last month. "Bonds [in Nigeria] are traditionally bought by institutional players and held to maturity, [often] for treasury management purposes. If you want Joe Blogs to come in, he should be able to get out quickly."

Shonibare stressed the importance of market makers to maintain two-way pricing and spoke of "a healthy scepticism that we have the liquidity to allow this to happen quickly". He suggested a better option would be the development of professionally managed collective investment schemes.

Peter Sullivan, managing director in the public sector group at Citi, reckons it is also a question of whether the country is ready. "When you think about the level of financial exclusion, you are still talking about a very small retail base," he says.