Islamic finance is an alternative source of funding. But because of the country’s secularity, the issue is being looked at from the religion prism. Chartered Institute of Stockbrokers (CIS) President Ariyo Olushekun argues that religion should not be allowed to becloud the issue. Islamic finance, he tells Capital Market Editor TAOFIK SALAKO, in this interview, has “bright prospects”.
What is your assessment of the capital market vis-à-vis the economy?
The market is in good shape. The recovery of the market is stabilising, we can say that the market has recovered from what happened in 2008 and now it is stabilising. The resilience is showing, there has been a lot of profit-taking in the last few weeks, but the impact of this has not been as bad as you would have expected if the market is not strong. From about 40,000 index, we are somewhere around 38,000 points now, given the level of gain we had witnessed and the lack of confidence we have had in the past, that is not a huge drop.
The signal we are getting is that the market could move back as more funds come in to the market. Particularly, we are seeing a lot of local investors. Right now; I think the ratio is 50:50, foreign to local and among the domestic investors, we are seeing more institutional investors. So, more and more investors are returning to the market and they are taking positions.
In terms of capital issues, we are beginning to see more now. The companies are beginning to build more confidence that they will be able to raise whatever amount they want from the capital market. So, they are also returning. And the market is responding, it’s showing capability to provide funds for those companies which need funds. So, I think the market is in good stead, we have gone through the bad time, but we have been able to put reform in place; every stakeholder in the market has made significant efforts to bring the market back on the right track, what we are seeing now is the result of those efforts that have been made in the past.
If the market is fast recovering, why have we not seen the primary market being active, where are the public offers?
The primary market is building up day-by- day, don’t forget the cost of raising funds is relatively more and the process is long, so companies will have to be very sure that they have high level of confidence of success before they can commence the public offer process. But in recent times, you can see an increase in the number of capital issues generally. So, that aspect of the market is also recovering slowly.
How do we ensure sustainable development of the market?
The reform will have to continue, we need to do everything we can to sustain and even build on the current level of investor confidence. We need to embark on capacity building on the part of all stakeholders- operators, regulators, investors, everybody that has a role to play in the market. We need to enhance their knowledge of the market. That is where the Institute has been doing a lot of work, trying to organise courses for its members so that their knowledge is enhanced.
We keep organising training and retraining programmes. In addition, the institute has been organising workshops and annual conferences on the economy, dealing with recent issues. On the part of the Securities and Exchange Commission (SEC) itself, it recently inaugurated Master Plan Committees to develop a master plan for the different segments of the market- one, for the market in general; two, for the new product, non-interest product, so that we can be able to bring in that segment of the population that abhor usury and kind of fixed-returns. SEC also set up a capital market literacy master plan with the objective of developing a framework for educating all stakeholders of the market.
On the part of the Nigerian Stock Exchange (NSE), it has started a new trading platform. it has been training its dealing members and has introduced many new products. All these will help credible price discovery and trading in the market. So, all the stakeholders need to play their roles for this to continue. However, I think the government will need to, as much as possible, bring down the interest rate.
If interest rates are low, and they should be low otherwise they put so much pressure and impede the progress of the real sector. If interest rates are reasonably low, it makes it easy for people to come to the capital market for their investment activities. But if interest rates are unreasonably high, you will see people becoming risk-averse and they just place their funds in the money market to get fixed returns.
Besides interest rate, are there other fiscal, or legislative incentives for long-term market growth?
It is important for government to have incentives in place to encourage companies to access the market. Task incentives are very important to encourage participation. The government is on the right track by granting tax waivers on the contract stamp. But there is much more to be done; withholding tax will need to be removed from dividend. Companies that are quoted should also be made to pay less tax, you may reduce corporate tax from 30 per cent to 20 per cent for quoted companies, they should be more encouraged. We also want to see companies in major sectors of the economy being listed in the market. Now, we have different platforms on which they can be listed, we have the Nigerian Stock Exchange, we have NASD, we have the FMDQ, and the Abuja Securities and Commodities Exchange. So, the options are many, what government has to do in that area is that for the companies being privatised there should be a clause in the agreement that will compel them to get listed within a short period; two to three years. A minimum percentage of their issued shares should be in the hand of the public, 10 to 20 per cent, so that everybody has an opportunity to own shares and partake in the companies.
For the telecommunications companies, their licenses will soon be due for renewal. This presents an opportunity for government to make sure they also get listed; they should also make available some 10 to 20 per cent of their shares available to the general public. They are making a lot of money from Nigerians; there is nothing wrong in Nigerians also being able to partake in such profit. The oil companies, which are the country’s mainstay, should be encouraged to get listed. That way you get more people and investments into the market.
What is your view on the consolidation of the stockbroking industry?
Consolidation is a business decision; you don’t force people to take such decision, it’s not natural; it’s something that should come up as a matter of course. Nigeria is a vast country; you have people in the hinterland, people in different levels, living in different parts of the country. If you are going to grow the number of investors, we need operators that will be able to reach out to these people. Right now, the number of investors is about five million; there five million include multiple accounts by some investors that, for instance, have three to five accounts. If you remove these multiple accounts, we may be having like four million investors or thereabout. Five million over a population of 170 million is one over 34; America has a population of 300 million and has over 100 million investors that are playing in her market, that is one-third; one over three as against one over 34 that we are currently on. So, if that is the case and we have a plan to move that to about 40 to 50 million from five million, which means we want at least a quarter of our population to participate in the market, it’s not something that you will leave for the mega firms. People must be allowed to operate at different levels. The big firms may not be interested in going to market somebody in Ode-Omu, Nguru and all that, they may not want to go to the hinterlands. We need brokers who must operate at that level, who will be able to go to all those places. What you can have is a tier structure; you have people operating at different level, carry different risks and then, they are able to play their part. Every N5,000, every N10,000 that Mr Owolabi has in Ikere-Ekiti; that Alhaji Adamu has in Gusau; that Mr Chukwuka has in Onitsha, we want every bit of this money to come into the market. If you want this to happen, then you leave people to operate at different levels. Going all out to say we must reduce number of operators is not the right thing to do. What we need to do is to delineate areas in which everybody can operate so that you have people operating at different levels and playing different roles; all of them working towards one goal-developing the market.
What about the inkling on new capital base for operators?
Well, we have been hearing that, we don’t know exactly what is going to happen. But it’s very important that share capital should not be a one-size-fits-all. Share capital should be a function of the risks that you are taking. It shouldn’t even be a matter of coming up with a figure, what needs to happen is to lay down certain things that need to be in place, then let those things translate into particular amount. As a result of this, then one will know the share capital one needs to operate the way one wants to operate.
But if you have a figure now, then you are going to be chasing a moving target because by the time inflation comes in or foreign exchange rate goes up, the amount you are mentioning as share capital now, will become small in some years time and then you will need to raise share capital again. No! what you need to put in place are the things that need to be provided for as an operator to function at a certain level and then you derive your share capital from that; based on the risks you want to carry and the infrastructure you need to have. This will last forever unlike when you come up with a particular amount now and after some years, the amount becomes small.
We must also note that most operators in the capital market, especially the stockbrokers, are intermediaries, they do not carry as much risks as banks and insurance companies carry. Banks carry risks because they have taken deposits from their customers and lent these deposits to other people, so if customers come for their money, they need to at least have a proportion of what they have lent in-house so that they are able to pay customers when they come for their money; that’s the way to maintain confidence. Insurance companies on the other hand have taken premium from people against promises that if something happened, just make your claim, we will indemnify you. So, they also need to have some money, they need to have adequate funds to be able to meet those claims as they are presented in order to also retain confidence.
When people invest in the market, they only pass their money through brokers; if it is in the primary market, to the company raising the money, the money does not stay with the broker; if it is in the secondary market, they are passing the money from the buyer to the seller through brokers. So, the broker is not giving any promise like banks or insurance companies do. We should not be raising minimum share capital just because others within the sector have done that. No! We have to look at what risk everybody is carrying. Would you ask insurance brokers to raise their share capital just because insurance companies have raised their capital? Or would we have estate valuers or estate agents to raise capital? Even if you are buying a house worth N1 billion or more, you are only passing the money through the estate agent; he doesn’t require that kind of money to do that kind of business. The point is that as intermediaries-stockbrokers, issuing houses, they do not require so much financial capital.
There are two types of capital that are required and very crucial- the integrity capital and the intellectual capital. Those are the things that will sell this market; those are the things we are selling. Really, it is dangerous for brokers to have excessive, huge share capital. If the brokers or issuing houses are excessively capitalised, the investors in those firms also want returns. Now, the stockbroking firm is not going to be placing its money with the bank, it is not going to be importing rice or stock fish, it is not going to invest in properties because even the market regulations do not encourage that, so, it will also have to invest its own money in the market. When these firms are investing heavily in the market, it means they are competing with investors, so the temptation to do their transactions at more favourable terms than transactions of their clients will become higher. So, really, it is good to be adequately capitalised, but it is not good to be excessively capitalised. And what is excessive capital? Capital that is beyond your need; capital that is beyond the risk you are carrying.
Is it really necessary to demutualise the Exchange?
Demutualisation of the Exchange is not bad; it is going to bring about efficiency, it makes the Exchange to be more productive, more efficient. It provides opportunity for owners of the Exchange that is, dealing members, to be able to generate some incomes from their investments. We have invested for a long time. So, on its own, it is not bad, but it has to be done properly. It should be done in a fair and transparent way. Every stakeholder that is involved should feel comfortable with the way it is being done.
What will amount to being fair in your own view?
If you are going to demutualise the Exchange, some people own the Exchange, they must play major roles, they must be the deciders, it is not for some people or regulatory authorities to come and decide things for them. Everything that needs to be done, they must do it willingly. SEC as the overall regulatory authority in the market needs to set guidelines and those guidelines should not be related to a particular exchange, they should be guidelines that can serve for the particular exchange you want to demutualise now and they should be good for any future demutualisation. So, it shouldn’t be something you are just tailoring to serve an end. Then, the Exchange on its own must consult with its owner; it is not something for the council or management to decide on. They are in the process, however, we need to emphasise this consultation, we need to encourage them to do that to the fullest.
In recent times, we have seen many companies opting for voluntary delisting, what could be responsible for this?
We need to do things to encourage listed companies to remain listed because it doesn’t make sense if you are marketing to get more company to be listed and the listed ones are exiting the market. It should be attractive to those already there. If those who are in are leaving, it does not attract those who are outside. That is without prejudice to the right of the companies to delist, if they want to. I’m saying we shouldn’t make it attractive to them. We should find out why they are leaving. They are not many, but even if it is one, you need to find out why they are leaving so that we can see how to satisfy them. However, where I am not comfortable is in the area of companies not only delisting but also paying off Nigerian investors. You cannot say because you want to enhance the profitability of the company and Nigerians, from whom you are going to make the profit, should leave. No, it is not right, it is not fair. You rely on patronage of Nigerians to make the expansion plan work, to make the company more profitable and you are saying those people that are so critical to future profitability of the company should exit the company, it is not fair, it is an insult on this country and everything should be done to reject it. If you want to delist, there is a difference between delisting and asking Nigerians to exit. It is never done anywhere, in any country; that you now ask the indigenes of that country to leave the company just because you are about to invest more money and the company is likely to do better in future; that is even the more reason why they should stay.
Against the background of recent efforts to develop alternative finance, what are the prospects of Islamic finance in the Nigerian market?
The prospects are very bright because as we speak we have a very significant proportion of our population who strongly believe that because of the nature of the capital market and the dictates of their religion, they cannot invest in the market, so we need to develop products that will be attractive to them; that we can use to channel their funds into the market and it is not limited to any religion. The one that is popular is Islamic finance. Some Christians also do not like certain things, some do not like alcohol, some cannot put their money in companies producing arms and ammunitions some cannot put their money into companies that are gambling and all that. So, all these funds are outside the market, we need to bring them in, call them any name. If Sango worshippers need certain product, develop it, call it Sango worshippers’ product and use it to bring their money into the market. The same thing applies to everybody. I don’t think it is limited to any religion. What we want is to improve the depth of the market by introducing products and instruments that will channel funds, savings into this market so that those who have projects will be able to raise limitless amount of money.
What is CIS doing to broaden human capital capacity in the area of this alternative finance?
Well, we keep developing courses, we keep developing training programmes and we keep reviewing the syllabus for our examinations. We introduce new things into this syllabus and programme from time to time, this is not going to be different. It is a continuous thing for us, we have done courses in this area in the past, there are aspects of our syllabus that deal with this area. Our members are right now adequately equipped.
