The small and medium scale enterprises (SMEs) sub-sector is vital to the economy for so many reasons. One is its potential to create jobs for the growing army of the unemployed. But access to loanable funds has been one of its greatest challenges. Director-General, Securities and Exchange Commission (SEC), Ms Aruma Oteh, says the capital market could mobilise ‘patient capital’for the SMEs. She says the cash needed to bridge the huge infrastructure gap in the country could also be sourced from the capital market. Oteh, who was re-elected chair, Africa and Middle East Regional Committee (AMERC), International Organisation of Securities Commissions (IOSCO), for another two years, spoke on the significance of her re-election and efforts of the group to restore investors’ confidence. Oteh spoke with some reporters including, Assistant Editor Nduka Chiejina, in Abuja.
How can the SMEs sub-sector tap from the capital market?
I think first and foremost is the recognition globally about the importance of SMEs because they are the ones who create jobs. I think there is a greater focus on how SMEs can be supported. In our own country, President Goodluck Jonathan recently set up an SME Council. He set up a Job Board, all of which are focused on how we can practically address the challenges we are facing with SMEs.
I believe our capital market is an absolutely important solution for a number of reasons. The first one is that we need economies of scale. We need to provide funding at reasonable cost; the capital that is patient so that people could grow their businesses. Banking finance is not patient. It is short term, sometimes particularly in AME where the interest rates are relatively high. What we need is capital that would be there for a long time. A market-based finance that is short term (would certainly not help SMEs) and there is a global recognition of that. This is why some of the things we are focusing at the meeting in Brazil is really the value that capital markets bring to SMEs. If they can enable SMEs, have them to list, which is why a lot of the discussions are around how to better support SMEs to list in the Nigerian Stock Exchange (NSE), the alternative securities market modelled after what you have in the UK, the one in Johannesburg where you have got one enterprise that have advisers who basically nurture them and guide them through the process of listing on the exchange and staying on the exchange.
You have models such as what you have in Egypt where you have a dedicated exchange, the Nile Exchange to SMEs. But some of the more interesting things we are seeing is Crowd Funding; being able to raise money via internet by people who basically are interested in that particular initiative. We are seeing in a number of Asian countries the securitisation of loans that are given by SMEs. There is a lot of best practice around the world, but there is also lessons from experiences that have not gone well which are useful.
I think what is great is that today, everyone is relying on IOSCO. The G-20 has asked IOSCO to provide its research notes so that they could essentially scale up the lessons of good practice.
How viable is the capital market for infrastructure funding?
It is interesting that you bring up infrastructure. SME financing and infrastructure are two areas that IOSCO feels that market based financing can help tackle. With infrastructure, it is clearly an area that is important to the development of any nation. Some of the statistics show that Africa’s GDP (gross domestic product) shrinks by two per cent because of the weakness of infrastructure. We know that our needs in terms of infrastructure in Nigeria is over $3.9trillion over the next 30 years. The Africa Development Bank (AfDB) said in the next 10 years we would need about $350billion. Therefore, the issue is with the challenges government are facing and with banking finance being short term coupled with some of the more difficult regulatory requirements that banks are facing, the alternative is basically to structure different kinds of vehicles that allow you to go to the capital market and raise money.
So you can either have project finance where the specific structure that is set up, where the flows that are received from that particular infrastructure project are used to meet the obligations from that particular structure. So you can have securitisation; you can have project finance; you can have a variety of options which are available in the capital market.
Just as SMEs finance needs patient capital, it also needs you to match the requirement of certain investors with the different structures that infrastructure can provide. It can be structured such that you can have predictable cash flow which is what some investors require. It can be structured such that you can match long term liabilities with long term assets. So, it also gives you an opportunity that other kinds of vehicles may not give you. It is great that we are focusing on infrastructure as well.
What are you doing about financial literacy?
Financial literacy is an area that IOSCO has focused on so much. In Nigeria, we have also focused this important issue. But I think it is better to step back and talk about why IOSCO exists. IOSCO is the global standard setter for capital markets around the world. Therefore, when you are a member of IOSCO, when you meet the requirements of becoming a member, an investor has confidence that they can invest in your market because they believe you are abiding by global best practices. So confidence building is very important in the capital market. The second thing that builds confidence is the knowledge you have; that you are familiar with what is being offered to you. The moral lesson from the global financial crisis is that people, particularly retail investors must be armed with knowledge so that they are not investing in things they are not familiar with. The agenda of financial literacy at the individual country level or IOSCO level is very important.
With respect to Nigeria, we have a capital market literacy plan which we will launch in November at our capital markets stakeholders retreat because essentially, we think that is key. If we build financially literate citizens, we will transform Nigeria because people would be able to save wisely, spend wisely and invest wisely. My own guidance always to Nigerians and prospective investors is that if you don’t understand it, don’t invest in it.
Nigeria is having a third shot as chair of AMERC, what does this mean?
First and foremost, I think the starting point should be International Organisation of Securities Commission (IOSCO), which has 200 members that cover 95 per cent of the capital markets around the world. So, to have qualified as Nigerian is very important. The way that we work at IOSCO is to organise ourselves through technical committees and also by regions. There is an American region, there is an Asia Pacific region; there is Europe region and there is an Africa Middle East (AME) region which, potentially, has 70 capital markets.But there are 24 of us today, regulators who have met the requirements to become members of IOSCO. First, being members of IOSCO means we have met the requirements to abide by global best practices. So, when domestic or international investors look at our markets, they can feel comfortable and confident that these are markets that operate on global best practices, that are world class.
I think, therefore to lead the AME, shows that there is confidence in us as Nigerians that first, we will be a good example. Secondly, that we will be able to make sure that the issues that affect the Africa Middle East Council are brought to the table. As the chair of AME region, we are also on the board of IOSCO, which basically decides what happens for all the capital markets around the world. So, the confidence that members have in us to be able to represent them adequately, be at the table when issues are being raised is also very important.
And I think it is also an evidence of the hardwork that we have done as chair and secretariat for AMERC, I mean people have seen what we have done over the years and have decided that they would like us to continue. So I think it is based on the good work that we have done and also based on the fact that we are a good role model in terms of what we are doing in our own markets. Also, that we can basically represent them on the board of IOSCO.
How were you able to bring Africa and the Middle East together?
Actually, my perspective is different and I think it also comes from having led the AMERC of IOSCO. I think there is a lot that we share. There are lots of common narratives. I think the level of poverty, the youthful population, the traditional cultures are worth looking at.
We have very traditional societies that have cultures that have come from several thousands of years; we fortunately are countries that have a high number of people who are very poor, whether in Africa or the Middle East. We have a youth population which is a positive one if managed properly and a time bomb if not managed properly. We are basically the future of the world. If you look at some of the fastest growing economies in the world, they are actually in these regions. The opportunities for the world basically exists in AME.
What that means is that you can leverage the capital markets, which I believe is an opportunity for any country to ride on to realise its potentials. Some of the things that the capital market can do is provide funding for large companies or small companies or for governments for infrastructural development.
The countries in AME have huge needs for infrastructure, setting up Small and Medium Scale Enterprises (SMEs), to be able to create jobs.
Jobs is an issue not only for AME but also for all countries of the world.
Being able to support SMEs is also important and the capital market can do that. The capital market can also ensure that as these countries are building systems, they are building systems that are based on best corporate governance practices because funds are directed at entities that merit it, the entities that deserve it, the higher performance entities. So having the capital markets fuel corporate governance is also something that is promoting and fostering capital markets.
The third thing which is very important is the issue of creating wealth. I think for many of these countries, ensuring that the living standards of the people is rising. This is important and capital markets create wealth either through enabling young people or older people who have ideas to be able to promote these ideas, raise money for those ideas but also to have people participate in the success of those companies.
So, those are wealth and income distribution characteristics of capital markets. I think those things are important particularly for any country in the world, but more so for these newer economies that, in my opinion, are the future of the world.
What are the focus this year’s conference?
First, the theme for the conference is ‘Market Based Financing, Global Growth Looking Ahead.’ I think there is a general realisation all over the world that banking finance is not going to help us address some of the challenges we face. One is the stronger and stricter regulation of banks particularly with the entrance of the requirement where they are supposed to put up capital for loans; that they make and and that. This is something that has come out on the heels of the global financial crisis as well. I think it is a challenge because governments no longer have the resources that they had to support the development of their economies and so there is a greater emphasis on alternatives. If you look at what the Financial Stability Board is looking at, what the Bank for International Settlement at, if you look at what G-20 is looking at, everyone is looking at what alternatives that available.
And the alternative is market based finance because there is a lot more that can happen in that fore. Therefore, it is pertinent that IOSCO is focusing on this theme now. And that is why we are having discussion on how we can scale up the support to SMEs across the world; what are the lessons from around the world that we can learn; how can we make sure that infrastructure financing is available while ensuring that the environment controls the risks that investors have to face by focusing on infrastructure. In short, the issues are: What are some of the lessons from around the world? What are some of the alternative approaches? This is why there are discussions within IOSCO about the benefits of non-interest financial products and Islamic finance.
You have seen countries such as the UK, Japan and others announce that they are going to go to the markets to do ‘Sukuk’. So you are finding non-traditional borrowers also looking at non-traditional markets. So for us in Nigeria, it is very interesting to learn from the experience of others; we listened in the AMERC meetings to the other countries from the region with respect to Islamic finance. And I think Egypt’s example where they have a comprehensive law which basically focuses on non interest financial product and if you then want to focus on Islamic finance, it is a subset of that and also very interesting.
I think it is interesting that other countries such as South Africa have been actively using these instruments, Islamic finance instruments, and they are available to both the Muslims and non Muslims population. Similarly, Kenya and also a country such as Zambia are also looking at it. We in Nigeria are looking at it because it is clearly an area that other countries are looking at and we are trying to see whether it can help us in our financial inclusion agenda so that we can ensure that it helps us address some of the challenges that we face in Nigeria. Whether it be that some people feel excluded and therefore, to some extent, it could help us address some of the social cohesion and security challenges that we face in our own country. It is very interesting to look at the examples that other countries have had in this area.
IOSCO chair, Greg Medcraft said issues with banking and funds are not coming the way it used to. What is your reaction to this?
I think if you assess, and in my opinion, the countries in AME have been very serious about implementing global best practices. What we have seen particularly in the last four years that I have been chair of the AMERC region is that countries are particular about building world class capital markets. Whether from South Africa to North Africa, from Zambia to Algeria, I think everyone wants their capital market to be the first port of call for investors, whether domestic or international. When I listened to the country presentations as to what each individual country is doing, I was very excited about what we have achieved in the last four years. I think everyone recognises the value of people not saying these are developed markets and these are undeveloped markets. Everyone wants to be a world class market and it is very exciting for me.
I also think we have seen the benefit. You have seen a number of countries doing very well. Some of the countries in MEA have been the top performing markets across the world. Our country both in 2012 and 2013 was among the top performing. Other countries in the region, UAE (United Arab Emirates) and a number of others were also among the top performing. Some of the issues we talk about in Nigeria, I hear other countries talk about them, which is to make sure that our markets have the right depth and breath, there is sufficient listings so that investors can have variety of stocks to choose from; that there is enough liquidity so that investors can enter and exit the market when they want to, such that that capital market operators are meant to operate on global best practice and that when people do the wrong things, they are brought to book by the regulator.
We share experiences about what we are all doing across the region and some of the things that we are doing in Nigeria, we see in other parts of Africa.
I tnink that confidence is being rebuilt; it does take time to rebuild trust when trust is broken, so I must say that I am actually impressed with how quickly a number of the markets in AME region have been able to rebuild trust.
