Reports from the Nigerian capital market indicate declined corporate borrowing, induced by hike in interest rates. FESTUS OKOROMADU in this report reviews various efforts by stakeholders to resuscitate the bond market as an alternative source of funds for economic development.
Borrowing, which is the core component of business, appears to have encountered serious challenges within the Nigeria business ecosystem in 2024 due to several factors.
First, the Monetary Policy Committee of the Central Bank of Nigeria maintained what some economists described as ‘a hawkish stance’ throughout the year, as the MPC hiked rates by more than 800 points to 27.5 per cent to tackle inflation.
Consequently, the high-interest environment created by it led to an increase in the cost of borrowing, especially from the commercial banks.
This situation was bemoaned by players in the private sector who said it was crippling their businesses.
Speaking to the development, the National President of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Dele Kelvin Oye, said there was a disconnect between the CBN’s hawkish stance and the needs of the economy.
“The Central Bank’s high-interest regime, coupled with bond yields exceeding 20 per cent, led local banks to prefer investing in bonds over supporting businesses”
“High interest rates—peaking at 35-40 per cent—reflect a central banking system that appears disconnected from the needs of its populace and businesses. The Nigeria 10-year Government Bond Yield reached an all-time high of 21.25 per cent in August 2024. The Central Bank’s high-interest regime, coupled with bond yields exceeding 20 per cent, led local banks to prefer investing in bonds over supporting businesses. This trend discourages entrepreneurship and diminishes economic growth,” he said.
Similarly, the CBN in its latest economic report revealed that Nigerians including businesses appetite for loans declined for the third consecutive month in October.
According to the report, Nigerians have been focusing more on loan repayment since August, which saw the consumer credit outstanding decline by 3.70 percent to N4.69 trillion in August, then N4.25 trillion in September before settling at N3.50 trillion at the end of October 2024, indicating a 17.64 percent dip month-on-month.
At the end of October, the report said that the decline in consumer credit outstanding followed the decline in personal and retail loans to N2.41 trillion (-23.49 percent) and N1.09 trillion (-0.91 percent), from N3.15 trillion and N1.10 trillion, respectively, in September.
Personal loans maintained their dominance, accounting for 68.95 percent of total consumer credit, albeit lower than the 74.14 percent in the preceding month, while retail loans constituted the balance.
Similarly, the report indicated that sectoral credit utilisation moderated by 5.13 percent to N58.37 trillion compared with N58.57 trillion in the preceding month.
Declined borrowings in the capital market
According to a PwC report last July, the capital market did not perform better in terms of stimulating borrowing by corporate entities, as corporate bonds also suffered a decline during the year.
The PwC half year report stated that, “There was an 83% decline in corporate bond issuances in H1 2024.”
It stressed that, “Only one corporate bond was issued making it the lowest corporate bond issuance in the last five years. The bond was issued by Eat & Go Finance SPV PLC. Three corporate bonds valued at N47.15 billion were however issued between July 2023 and June 2024.”
Blaming fiscal policies for the situation, the report stated that, “Companies have steered away from issuing bonds due to the fast-rising cost of borrowing. This is a direct result of the Central Bank’s decision to increase the monetary policy rate to curb inflation.”
Further confirming the trend, the FMDQ and asset management firm Afrinvest Securities limited in its 2024 review and 2025 outlook report, stated that the number of commercial papers (CPs) and corporate bonds issued in 2024 declined just as the amount raised via these instruments dipped on the back of a high-yield environment.
The report which was released earlier this month, stated that the number of commercial papers issued during the year 2024 dipped by 5 percent to 133 from 140 in 2023.
The amount issued also declined. It dropped to N790 billion from N900 billion, translating to a 12.2 percent dip. The average discount rate also increased to 27 percent from 16.4 percent in the previous year.
According to the report, Dangote companies such as Dangote Sugar Refinery and Dangote Cement topped the list of top CP issuances in 2024 at 5 and 4 issuances to raise N141.8 billion and N119.4 billion, respectively.
Other top players in the CP space include Flour Mills, which raised N104.1 billion from 4 issuances; Dufil Prima Food issued 5 CPs to raise N52.3 billion; Coronation Merchant Bank issued 2 CPs to raise about N32.4 billion; Coleman Technical Industries raised N30 billion from 4 CP issuances.
TGI Foods SPV Plc issued two CPs with which it raised N29 billion; Lagos Free Zone Company also issued two CPs to secure N24.1 billion additional funding; Mecure Industries issued four commercial papers to raise N21.9 billion; JohnVents Industries issued two papers to get N18.8 billion; and Daraju Industries issued the highest number of commercial papers in the year, 12, to raise N18.2 billion, which is about 2.3 percent of the total CP issuances in the year.
The likes of Fidson Healthcare Plc, Skymark Partners, Valency Agro Nigeria, and C&I Leasing issued three, nine, three, and one CPs to raise N17.3 billion, N10.7 billion, N9.4 billion, and N8.1 billion, respectively.
Similarly, in the corporate bonds space, issuances became costlier than the previous year, which has seen the number of issuances drop to 1.0 from 4.0 and the amount raised crash to N1.2 billion from N94.5 billion in 2023, a 98.8 percent plummeting as the average coupon rate rose to 18 percent from 15.7 percent. It has an outstanding value balance of N1.15 billion.
However, on the platform of the Nigerian Exchange Limited, a few corporate bond transactions were also recorded. Findings by The Point show that MTN Nigeria Plc executed a 16 series N250 billion Commercial Paper Issuance Programme during the year.
“The Nigerian capital market continues to grapple with high transaction costs, information asymmetry, monetary tightening, low trading volumes, and wide bid-ask spreads, all of which stifle liquidity”
In the same vein, the Edo State based oil Palm firm, Presco Plc approached the market to raise N100 billion series 1 bond under its N150 billion bond programme.
SEC’s move to stimulate bond market
Conscious of the importance of the Bond market as an instrument investment culture as well as to help provide liquidity for business, the management of the Nigeria Securities and Exchange Commission has set up plans to deepen the market in 2025.
Toward this end, SEC has expressed commitment to improve the regulatory framework as it regards borrowing by governments and corporations during the year.
The Director General of the Commission, Emomotimi Agama, said this has become important given the critical role borrowing plays in the financial system.
“Improving the framework for borrowing is very important because borrowing is part of the financial system and we can only make much of the move we want to make if there is enough funding. Hence, we want to be sure of sustainability in both government borrowing, municipal and state governments particularly with the new Supreme Court order regarding the 774 local government areas receiving direct subvention from the Federal Government.
“It therefore becomes important that we have in the management of such resources via strategic and focused borrowing to help the developments in those sectors,” he said, while speaking on his plans for the 2025 financial year.
According to the SEC Director General, the Commission will change the landscape for the corporate entities with the new rules on Central Counter Parties adding that the new rules on CCPs have become so critical for Nigeria’s development, especially for corporates in raising capital.
“As a Commission we have established those new rules and they are going to be functional in 2025. We want to make borrowing a seamless and effortless process for Nigerian companies.
“It is very important that as we drive the growth of the Nigerian capital market, we also drive new products and new opportunities for every Nigerian. Nigeria for a long time has been seen as a mono product market, but the Year 2025 will be different because we will continue to drive the process of introducing derivatives into the capital market.
“That is not possible without the laws and regulations that will help us do this better. To build confidence in derivatives trading, we hope to provide a clear direction of these transactions. To build confidence in derivatives trading, we aim to provide a clear exemption of these transactions from general insolvency laws, creating a safer and more predictable trading environment,” he stated.
Agama said the Commission is creating a safer trading environment, building confidence and attracting more players to the market, hence, it must provide enabling regulations and laws.
Last month, SEC launched an enlightenment initiative tagged #investnigeria to attract more Nigerians to the capital market.
A statement by Agama highlighted the campaign’s objective of promoting investment in the capital market through education and advertising.
He emphasised that advertising is crucial in increasing financial literacy and connecting investors with opportunities.
According to Agama, “Some reasons why advertising can be effective ways to promote investment in the capital market are that it can educate potential investors about the benefits and opportunities of investing in the capital market. The campaigns improve literacy by helping investors understand various investment products, risks, and rewards.”
He added that the campaign would inform investors about opportunities such as initial public offerings, bonds, and mutual funds, noting that the initiative would drive economic growth by fostering increased investment, leading to job creation, enhanced liquidity, and market efficiency.
“Encouraging investment in the capital market can lead to increased economic activity, job creation, and GDP growth. Advertising can attract domestic and foreign investment, leading to increased capital formation and development of the capital market,” he explained.
The campaign also aims to promote transparency, disclosure, and competition in the capital market, making it more accessible to local and foreign investors. To achieve this, SEC plans to deploy various media strategies, including billboards, social media, online advertising, and email marketing.
Agama disclosed that the Commission would collaborate with financial influencers, bloggers, and thought leaders to promote investment opportunities while organising seminars, workshops, and conferences to educate potential investors.
“We will also leverage media coverage to raise awareness about the capital market and investment opportunities,” he said.
He stressed the need for investor education, saying, “One of the ways by which you can protect investors is by equipping them with knowledge and giving them the know-how to discern between what is a good investment and what is not.”
He further noted that the SEC is committed to continuous education in the capital market. “The market is knowledge-based, and we are committed to ensuring that information is made available to the investing public,” he stated.
The Securities and Exchange Commission is exploring blockchain technology to boost trust and transparency in the capital market.
NGX’s efforts to improve Bond market
On its part, the Nigerian Exchange Limited in May 2024, held a bond webinar aimed at bringing retail investors, trading license holders and regulators in the Nigerian capital market under a common forum to create awareness of savings bond products and enhance participation and liquidity of bonds in the secondary market.
The NGX stated that the programme is to deepen the savings culture among retail investors, reduce the barrier to contributing to national development for all Nigerians irrespective of income level, provide insights that will enable participants to benefit from the favourable returns available in the capital market and improve the liquidity of the bond in the secondary market.
Reviewing the performance of bonds in the market during the year, NGX stated that, the Department Management Office (DMO), on behalf of the Federal government, had launched a retail investment programme ‘Federal Government of Nigeria (FGN) Savings Bond’ to help enhance the savings culture among Nigerians while providing all citizens irrespective of income level, an opportunity to contribute to national development; as well as the comparatively favourable returns available in the capital market.
According to NGX, the FGN savings bond is safe and backed by the full faith and credit of the Federal Government of Nigeria, with quarterly coupon payments to bondholders.
The NGX recorded N11.23 billion in FFN bond listings which constituted FGN savings bonds with maturities ranging between 2024 and 2026.
Lagos State Government issued the only bond by a sub-sovereign entity with its N137.33 billion series 1V, 10-year 13 per cent, Fixed Rate Bonds due 2031 under its N500 billion debt issuance programme.
The corporate bond segment recorded N112.4 billion senior unsecured bond listing from Dangote Industries Funding Plc and N31.36 billion in Sukuk Issuances from Taj Bank and Family Homes under their respective Sukuk Issuance programmes.
The exchange stated further that Meristem Stockbrokers Limited topped the chart of the fixed income transactions in the first quarter of 2023 by value as they accounted for 16 percent of the total value of trades with N143.7 million in trades.
Experts’ perspectives
However, Proshare Nigeria, a foremost capital market analysis firm it is 2024 market performance, noted that the Nigerian capital market continues to grapple with high transaction costs, information asymmetry, monetary tightening, low trading volumes, and wide bid-ask spreads, all of which stifle liquidity.
The report underscores the potentials of leveraging the equity market through commented efforts to harness the bond market as a cheaper source of funds for corporate entities so as to unlock liquidity and stimulate domestic and foreign investment.
According to a recent study conducted by a lecturer from Jigawa State College of Education and Legal Studies, Salisu Abdullalli, there is an intricate relationship between macroeconomic factors and the performance of Nigeria’s bond market, stressing that bond is a vital tool for financing infrastructure and business growth.
The study identified some element hindering the market growth as increased fiscal deficit pointing out that as the government’s budget gap widens it becomes harder for the bond market to flourish. While factors like GDP per capita inflation rates, interest rates and the scale of banking operations are also found to be detrimental to the bond market’s growth.
Abdullalli highlighted the need for strategic fiscal management of the country’s economy to unlock the full potential of its bond market.
He advocated for engagement with the evolving financial landscape for policies that can foster a thriving bond market which ultimately will be beneficial to broadening the nation’s economy.
