The need to reposition Nigeria’s macroeconomic space for competitiveness in the global economy took another step with the roll out of the new National Development Plan, NDP, (2021-2025) which implementations are expected to begin tomorrow, first working day of the year 2022.

The architects of the NDP have demonstrated that funding is the critical success factor, where resource mobilistaion and deployment are set to be private sector and public sector inter-dependent. Hence a very robust financial sector sub-plan has been integrated into the NDP.

READ ALSO:Fidelity Bank lights up Akwa Ibom Christmas Carols Festival

An excerpt from the synopsis has noted that the post-COVID-19 economic recovery demands aggressive resource mobilisation for private and public sector investments. 

A robust domestic financial sector and capital market has never been more critical as external investment inflows have tightened owing to broader uncertainties in the global economy. Diaspora remittances and official development assistance (ODA) have remained relatively stable, but these only contribute a small portion of what is required to finance the Nigerian economy. Consequently, it is imperative to increase the robustness and resilience of Nigeria’s financial sector to ensure availability of financial resources for economic growth and development.

Financial market structure

The Nigerian financial market is made up of the money market (largely dominated by banks), the capital market and other non-bank financial institutions. The Nigerian banking landscape has undergone significant changes in recent times, amidst regulations from the Central Bank of Nigeria (CBN) and innovations from the industry players.

The apex Bank is maintaining the stability and soundness of the banking institutions by enhancing its on-site and off-site supervision. It encourages banks and other financial institutions to channel credit to critical sectors of the economy and increased efforts are targeted at building a robust payment system. These efforts have assisted in achieving the Bank’s cashless policy, financial inclusion and digitisation of financial services, leveraging Fintechs and other financial agents. 

But Nigeria still has about 35 percent of its adult population financially excluded and the ultimate goal is to ensure that this gap is closed by 2025. Enrolment into the Bank Verification Number (BVN) system is about 50 million and this is anticipated to double by the end of the Plan. With the on-going integration of the BVN system with the National Identification Number (NIN), it is expected that access to financial services will become far easier going forward.

The Nigerian Capital Market is currently dominated by equities and bonds. These are largely listed on the Nigerian Exchange Limited, NGX (formerly Nigerian Stock Exchange) and Financial Market Dealer Quotation (FMDQ) Exchange. Others include Exchange Traded Products, other Collective Investment Schemes and Commodities. 

The FMDQ exchange also serves as a platform for trading market instruments such as Treasury Bills, commercial papers and foreign exchange. On the other hand, NASD OTC Exchange trades in securities of unlisted public companies. Several innovations have recently been introduced under the 10-year Capital Market Masterplan (2015-2025) which envisions the emergence of Nigeria as Africa’s most modern, efficient and internationally competitive market. 

These include the new regulation on derivatives and the registration of Central Counterparty (CCPs) aimed at the commencement of derivatives trading in Nigeria. To further expand the product space and align with recent developments in fintech, the Securities and Exchange Commission (SEC) in recent times has released rules and regulation of Warehousing and Collateral Management, Robo-advisory, Crowdfunding and other digital trading platforms.

The Non-Bank Financial Institutions (NBFIs) segment of the financial sector has consistently grown over the years. These consist of Pensions, Insurance, Development Finance Institutions (DFIs), Finance Companies and Primary Mortgage Institutions (PMIs). Individually, insurance and pension contribute more consistently with the former taking the lead until the reform of the Pension industry in 2004. In 2020, Pensions accounted for over 60 percent of the sector while DFIs and PMIs had almost the same total asset as the Insurance sector.

The improved performance of the NBFIs reflected implementation of significant reforms. The National Insurance Commission (NAICOM) has worked towards improving the effectiveness and efficiency of the insurance sector through investments in automation and risk-based supervision. It has also embarked on a recapitalisation exercise to increase the minimum paid-up share capital of insurance and reinsurance companies. Furthermore, the National Pension Commission (PenCom) recently introduced a multi-fund structure to align the age and risk profile of retirement savings account holders. PenCom is equally pursuing the micro pension plan to cover the self-employed and persons working in organizations with less than 3 employees. This is to ensure that the informal sector is brought under coverage and attain the industry’s strategic objective of covering 30 percent of the working population in Nigeria before 2025.

Thus, the three key components of the Nigerian financial system have recorded some level of growth over the years.

Challenges, Opportunities

Despite recent improvements, the financial sector requires further deepening in view of regional comparisons.

The equities segment of the capital market is yet to fully recover from the market crash of 2008-2009 caused by the global financial crisis and the investors’ apathy that followed thereafter. Also, the bond segment of the market is dominated by FGN bonds as corporate and sub-national issuers seek and compete for alternative sources of finance. There is the need to further deepen the market and expand the product offering to adequately finance Nigeria’s infrastructure and business investment needs.

While improvements have been recorded in the size of Nigerian banks over time, the banks are mostly used for the purpose of transactions as against savings, borrowing and other financial intermediation purposes. Deposits are typically skewed towards short-term funds rather than the more desirable long-term funds required for investments. In addition, improved efforts are still required to achieve the country’s financial inclusion goal and adequately finance the real sector, especially the MSMEs in the country.

NBFIs depth recorded appreciable growth between 2017 and 2020, reflecting the growth of Pension Funds, Insurance, Primary Mortgage Institutions (PMIs) and Development Finance institutions (DFIs). A major issue in this segment is the concentration of pension assets in government securities as Nigeria is yet to adopt a viable system for leveraging such huge assets to finance some of its critical infrastructure needs. Also, there is the problem of housing deficit in the country that the PMIs are yet to satisfactorily address. Insurance uptake is also still low in the country and there are discussions on how the sector can help insure risks in agriculture and other critical sectors of the economy.

Considering the constriction in funding and the growth in NBFIs, Nigeria can mobilize additional domestic capital through innovative instruments and measures.

 The decline in traditional sources of finance coupled with the growth in NBFIs presents an opportunity for Nigeria to crowd-in capital from pension funds and insurance assets through well-structured and risk-mitigated financial instruments. Besides providing the much-needed financing, this can also serve to broaden and deepen Nigeria’s financial markets.

There is also an opportunity to deepen Nigeria’s financial systems through increased financial inclusion and formalization of the economy. Nigeria has a large informal economy estimated at almost half of the GDP and financial inclusion estimated at 65 percent in 2020, which creates opportunities for further expansion of the financial system. It is, therefore, important to target formalization, financial literacy, and inclusion initiatives at a wide range of demographic segments and industries. Recent innovations in Fintech are enabling the extension of financial services to the underserved population and this will be leveraged in executing this new National Development Plan.

Covid-19 pandemic affects global exports and growth; but it presents opportunities for developing economies to attract inflows of capital, especially from more advanced economies that have injected substantial amounts of money to cushion the effects of the pandemic. Drawing lessons from countries like China, India and Brazil, Nigeria also stands the chance of attracting foreign capital inflows. This will be facilitated as Nigeria augments the current debt financing strategies with some opportunities to issue equities on government assets and allow qualified private players to manage relevant government assets in a transparent and result-oriented manner.

The Nigeria’s capital market and the entire financial system are well positioned to grow and contribute to the general development of the country when properly harnessed to raise funds to finance Nigeria’s infrastructure needs by issuing revenue bonds, securitising government assets and adopting other private finance arrangements, that allow private sector to provide services and infrastructure to the public in a transparent and competitive manner, thereby allowing for efficiency and improved revenue generation.

NDP 2021–2025 funding targets

This Plan’s objective is to raise liquidity thresholds in each segment of the financial system to the levels that will support the growth and development of Nigeria. It is to strategically optimize all components of the country’s balance sheet to unlock the liquidity required to support the stability, growth and transformation of the economy. 

There are four key strategies to be adopted in realising the goals set for the Financial Sector.

First is creating a Pool of Investable Assets: Nigeria requires a list of potential targets for securitisation, privatization, liberalization, and commercialization. The plan, therefore, is to create Asset Registers to know what Nigeria owns, their use-values and marketvalues. This will enable Nigeria to unlock liquidity by leveraging assets to issue large scale brownfield and greenfield equity as well as asset-based and asset-backed securities. Efforts will also be made to commercialize idle/underutilized lands and built structures by repurposing and redeveloping them to open new streams of large, growing, and securitise rental/leasing revenues for government. Further, relevant legal and policy frameworks will be reviewed to eliminate loopholes and impediments to successful asset transaction plans. Government will also put in place policies that will liberalize and remove barriers to attract and drive both domestic and foreign investment flows into such assets.

Next is to create a transparent one-stop automated online deal origination/consummation process for connecting projects listed in the investable asset register with global liquidity. This is necessary for Nigeria to attract FDI and remittances to meet high enough reserve thresholds to underpin exchange rate stability, growth acceleration, adequate economic/ social infrastructure, diversification and general economic development. To make this successful, the government will ensure transparency to reassure the populace that the public asset optimization efforts will serve the public rather than private interest. Also, a robust communication and media campaign strategy will be developed, including global roadshows, to drive global and regional awareness for the various assets on offer.

Third is to achieve Macroeconomic, Macro-Prudential, and Micro-Prudential Soundness: The financial sector will be leveraged and guided to achieve macroeconomic and financial stability. Efforts will be made to reduce the tendency for market institutions to invest heavily in government’s instruments at the expense of private borrowers while appropriate frameworks will also be developed to unlock pension assets for the development of infrastructure and mortgages. The framework for financial system coordination and stability will be strengthened and necessary regulatory and policy reforms will be made to foster and regulate the growth of the fintech sector.

The fourth is to Ensure Global Reconnection and African Realignment: A roadmap will be developed for the financial sector to facilitate the achievement of AfCFTA and ensure the integration of the Nigerian financial sector with the region.

Investment, Resource Allocation

Achieving the stated objectives for this sector requires huge investments, coming from relevant MDAs and industry players. For instance, core ministries like the Ministry of Finance, Budget and National Planning and the Ministry of Industry, Trade and Investment as well as Infrastructure Concession Regulatory Commission that are directly allocated capital expenditure from the budget will make investments in this sector to achieve the objectives. 

This will occur at the subnational level. Estimated total public investment to the sector during the plan period is N1.54 trillion. In addition, the primary regulators of each of the financial sector components will contribute to such investments. These agencies include the Central Bank of Nigeria, Securities and Exchange Commission, National Insurance Commission, the National Pension Commission.

Operators in the financial sector will also invest to achieve the goal of the Plan for this sector. Some of these players that are government owned are largely the DFIs, including the Bank of Industry, Development Bank of Nigeria, Bank of Agriculture, Nigeria Export Import Bank, Infrastructure Bank of Nigeria and Nigeria Sovereign Investment Authority. The investments of these government institutions will be leveraged to organise and support the private sector to realise the goals of the Plan.

In addition, private operators in the various segments of the financial sector will be coordinated to invest and achieve these objectives. These will include banks, insurance companies, exchanges and other market infrastructures, capital market operators, Pension Fund Administrators and Custodians, mortgage banks and finance companies, among others. Nigeria will also leverage the support of its development partners such as the World Bank, International Monetary Funds, African Development Bank, African Finance Corporation and International Finance Corporation to achieve the purpose of this Plan.