The full impact of the Central Bank of Nigeria’s (CBN’s) increase in Loan to Deposit Ratio (LDR) to 65 per cent for banks will be seen in their 2020 earnings. Also, sustaining stability in the foreign exchange market and funding for Small and Medium Enterprises (SMEs) are some of the issues that will be discussed at the the Financial Market Dealers Association of Nigeria (FMDA) market-development conference, titled: “The Nigerian Financial Market – An Agent for Growth and Development.” It holds in Lagos on December 6. FMDA President Mrs. Adetoun Dosunmu speaks with COLLINS NWEZE on key issues driving the financial markets and what investors should expect in the coming year.
What is your general overview of the Nigerian financial markets and areas you think need
government or regulatory support?
The Nigerian financial market has great potentials to drive growth and sustainable economic development, with the advent of new products and the use of technology to enhance financial inclusion. The government can support by providing an enabling environment to support lending to the real sector thereby driving economic activities – both in the formal and informal sectors. This will ultimately lead to economic growth. For sustainable economic growth, there must be a deliberate collaboration between the government, the financial sector and the real sector.
What are your thoughts on corporate governance practices in the financial markets and what should be done to strengthen it in the overall interest of stakeholders?
The core principle of corporate governance in Nigeria is on how to make those in the management of the companies more accountable, responsible and sensitive to the interests of shareholders, creditors and members of the public. We now have transparent, accountable and ethical business structures in line with global best practices. I believe the regular audit exercises being conducted by the different regulatory bodies on different levels ensure that corporate governance is enshrined in the management of financial institutions in Nigeria and regular updates of the principles are done and as when necessary. In addition, the CBN has consistently taken steps, including issuance of circulars that guide banks and discount houses regarding monitoring compliance on implementation of the Code of Corporate Governance and submission of quarterly returns.
You were recently elected President of FMDA. What is your vision for the association and immediate priorities for the group’s members?
The Financial Markets Dealers Association of Nigeria (FMDA) has consistently contributed to the development of the financial sector by collaborating with the government and financial markets regulatory bodies in formulating policies on monetary issues as well as creating awareness of financial markets products through education, technical advice and networking events. The FMDA’s vision is promoting efficient market practices by encouraging high standards of conduct and professionalism. The association’s priority among others is to contribute to the growth and development of our financial markets as well as the protection of the interest of members in the exercise of their dealing/trading activities.Our immediate priorities are to create structured and regular meetings with the Central Bank of Nigeria and other regulatory agencies in financial markets. We will also build members’ capacity in new products with continuous learning and knowledge sharing on best global practices.
The FMDA will be organising the second Financial Markets Conference in Lagos on December 6 with the theme: The Nigerian Financial Market – An Agent for Growth and Development. Why has the association decided to play up this segment of the market at this time?
In 1999, Nigeria had a dream, it was coined The Vision 20:2020 – Nigeria will become one of the first 20 economies in the world by the year 2020 but as at today, even with an estimated population of over 200 million and it being largest economy in Africa , we are yet to live up to that potential. Though the economy had in 2017 come out of recession, its first in 27 years, the World Bank projects growth to be a mere 2.1 per cent in 2020 whilst the population is projected to double by 2050.
Looking at these projections seems to be very dire compared to the vision that was conceived over 20 years ago. The FMDA is well aware of the fact that for an economy to grow and be sustainable, a vibrant financial market is a necessity whilst Small and Medium Scale Enterprises (SMEs) are required to create employment for a ballooning population. This we see as the recipe for growth and development of the Nigerian economy in the very near future and we believe that the theme of the conference is quite appropriate for such a time as this. The conference will serve as an avenue for all market participants, regulators, policy makers and the general public to rub minds, share and collaborate on driving growth and development of our country especially with the government’s commitment to fostering rapid growth in the real sector.
Who are the stakeholders expected to attend this programme and what will be your preferred likely takeaways towards business growth?
We look to have in attendance, SMEs, Regulators (CBN, FMDQ OTC Securities Exchange (FMDQ), Nigeria Deposit Insurance Corporation, Debt Management Office, Securities and Exchange Commission, other government agencies, Deposit Money Banks/financial market participants, corporate treasurers, fund managers and the general public. On my preferred take ways, I will like to see collaborative engagements between the financial markets and corporates, entrepreneurs, small/medium business level owners – with targeted ways of fostering business engagements on both sides of the divide, with resultant increase in lending to the real sectors and ultimately in the medium term accelerated growth and development of our economy.
This year’s conference is bringing in top government officials – the Honourable Speaker, Federal House of Representatives, Hon. Femi Gbajabiamila is the Special Guest. Are there certain areas of financial markets operation in your view that need legislative intervention?
As the market evolves in line with best global practices, new products will be developed and traded, this will result in international participants in our markets thereby creating liquidity in these products. There is therefore the need for a new legal framework that will require legislative support that will give comfort to investors – both local and international and ease operational challenges in trading these products. We believe the forum will be an avenue of collaboration between the market and the legislature on these matters and much more. Also, the sub-theme of the conference – “Unlocking Real Sector Development: SMEs as an Agent of Growth and Development International Monetary Fund Perspective” will be presented by IMF Country Chief, Amine Mati; the Role of Small and Medium enterprises Development Agency of Nigeria (SMEDAN) in Enhancing Sustainable Business Growth for SMEs will be presented by SMEDAN Director General, Dikko Radda and Intermediary Role of Banks – SMEs As Springboard of National Economic Growth and Development – Managing Director/CEO Sterling Bank Plc, Abubakar Suleiman are focused on SMEs development.
What are your thoughts on the state of the SMEs in the country and what should be done to lift their operations?
The SMEs have been discovered to be a key driver for any country’s economic growth. And as seen all over the world, the SME sector is the backbone of major developed economies, as well as an important contributor to employment. With the significant contribution of SMEs to the Nigerian economy, I believe the sector needs support from all and sundry. The government can provide an enabling environment for them to function, transportation and stable power supply comes easily to mind. Imagine the impact of the reduction in the cost of transporting goods and services from one point to the other or the effect on their bottom line if you remove the cost of generating electricity to power their businesses. Taxation is also an issue, some states charge multiple taxes which have become huge burden on SMEs. The financial markets can also provide access to reasonable priced credits to grow and expand their business operations. Again, due to the complexities of dealing with the formal financial markets, many resort to the informal lending sector which is quite expensive. Generally speaking, doing business in Nigeria is pretty expensive, this stalls their ability to expand and grow their businesses, generate more employment and contribute to economic development.
What is your 2020 forecast on the performance of financial institutions and the equities market?
Just using a back of the envelope approach, I think the market will be slightly positive in 2020. After closing down for two consecutive years (-18 per cent in 2018 and -14 per cent year to date), we see the market closing up by around +10 per cent in 2020. The supporting catalysts are depressed equity valuation which is supportive for most stocks. Almost all the names are cheap, with most of them trading near or close to their trough price to earnings multiples. Also, with the regulatory stance of the CBN, particularly the restriction on Open Market Operation (OMO) Bills, we expect to see some asset class rotation into equities as investors search for yields.
There is also strong outlook for oil prices on the back of geopolitical events and current policy stance of the US Fed- recent reduction of interest rates among others are expected to help in boosting the market.
I expect to see the full impact of the increase in Loan to Deposit Ratio (LDR) policy on the financial institutions’ earnings by 2020, which might have flat impact on their earnings vis-à-vis 2019 results as banks adapt to a higher risk asset earning environment. The border closure if it progresses into 2020 might also have an impact on lending, as Nigerians look inwards to meet demand for exported products.
What role do you think that improved risk management framework could play in building a sustainable financial sector and better funded SMEs?
Adequate risk management framework is key to having a sustainable financial sector. Any rational investor or finance provider would only deploy capital having done its due diligence by identifying all the risks involved in the venture as well as ways to mitigated all risks – both known and perceived. A risk management framework provides the tools to ensure that this is done as well as reduce exposures to unfavourable markets and economic conditions. In addition, a robust risk management framework ensures that only SMEs that are well structured have access to credit.
What should be done to boost local and foreign investments into the Nigerian economy?
Several factors influence investment decisions in any given economy. They include an open market that is transparent; an enabling environment-adequate infrastructure, attractive tax incentives/breaks, targeted sectoral initiatives to drive investment in non-oil sectors; access to credit; a skilled workforce/cheap labour amongst others are necessary to drive investments in any economy.
Would you kindly share perspectives on the Nigerian forex market and in your view factors responsible for the level of stability witnessed in the market the last couple of years?
The Nigerian forex market has been quite stable at N360 to N362 to dollar since the introduction of the Investors & Exporters’ forex window by the CBN in 2017, with the CBN being the major supplier of forex to the market through the various intervention windows. The price of crude oil averaging $63 per barrel and the sovereign Eurobond issues have helped to shore up the country’s reserves to $40.5 billion in October 2019 to accommodate 11.9 months of imports. The CBN has demonstrated the willingness to meet demand at the different intervention windows and has proven to be capable of doing so throughout this year. I do not foresee a change in the exchange rate in the nearest future.