Professor Uche Uwaleke – In this interview with our correspondent in Abuja, Professor Uche Uwaleke, Nigeria’s first professor of capital market, examines the challenges and prospects of the country’s capital market, maintaining that it has a lot of potentials for driving inclusive economic growth, if only enabling government policies can be put in place.
You have been pronounced the first Professor of capital markets in Nigeria. What was the journey like and what should the market be expecting from you?
First and foremost, i am thankful to the almighty God for making it possible for me to achieve this feat. It has not been easy, having roughed it all through the ranks to the position of a full professor. Right from the first day I took up appointment as an Assistant Lecturer at the Nasarawa State University Keffi in January 2004, I made up my mind to carve a niche for myself in the field of Finance. I had just qualified as a Chartered Accountant, having passed the final stage of the ICAN professional exams in November of the previous year. Recognising the practical relevance of other key professional bodies to finance-oriented research, i also had to sit for and pass the examinations of the Chartered Institute of Stockbrokers, the Institute of Capital Market Registrars as well as the Chartered Institute of Bankers of Nigeria. As a matter of fact, after qualifying as a Chartered Stockbroker in 2007, I had to undergo apprenticeship training, sponsored by Tower Assets Management Limited, for some weeks on the floor of the Nigerian Stock Exchange and became a Dealing Clerk after passing another round of examinations in Lagos.
It is now on record that Nasarawa State University is the first to appoint a full Professor of capital market on the basis of full-time teaching and Research in any University in Nigeria. So, I thank God for that. My multidisciplinary background equipped me for these achievements with a B.Sc degree in Accounting, a Masters in Economics (specialising in Finance) and a PhD in finance.
Regarding what to expect, one of the first things I did following my appointment as a Professor of capital market was to organize a Colloquium in Abuja in which panellists that included Dr O. J Nnanna the Deputy Governor (Economic Policy) of the CBN, Ms Mary Uduk, Ag DG SEC and Mr Adekoje, the President of CIS, examined the role of fiscal and monetary policies in deepening the capital market. The colloquium was chaired by Dr Suleyman Ndanusa a former Director General of SEC. So, more of such conversions that bring capital market issues to the front burner should be expected. My University is also establishing the Institute for Capital Markets Research and has tipped me as the pioneer Director.
Talking about the role of monetary policy in deepening the capital market, what is your take on the tight monetary policy stance of the CBN, as well as measures put in place by the apex bank to strengthen the naira?
Quite frankly, not a few Nigerians expect that the positive developments in the economy in recent times (including retreating inflation) powered by a rebound in crude oil price and output ought to have provided some scope for loosening monetary policy. Monetary policy easing, in the opinion of many, would improve credit delivery to the real sector, reduce cost of capital for firms leading to more job opportunities and spur the stock market.
Be that as it may, it is important to realize that the CBN, like its counterparts all over the world, faces what is known as the ‘policy trilemma’ or ‘impossible trinity’ which expresses the limited options available to Central Banks in setting monetary policy. In view of the primary mandate of the CBN which is to maintain price stability, it will be near impossible for the apex bank to pursue lower inflation and interest rates, maintain exchange rate stability and shore up foreign exchange reserves all at the same time.
Therefore, an accommodative monetary policy at this time can only be at the expense of the progress already made in the area of exchange rate stability—which is itself a prerequisite for achieving lower inflation rate.A lower Monetary Policy Rate for instance is capable of putting pressure on the exchange rate and worsen inflationary pressures. Headline inflation may be receding but the current level (at 11.23 per cent) is still in breach of the CBN’s upper reference band of 9 per cent. Besides, in view of rising interest rates in the US in particular, a lower MPR is capable of instigating capital flows out of the country. If you look at the latest NSE report on foreign transactions, it clearly indicated that for the month of May 2018, foreign portfolio outflows increased by over a hundred per cent while portfolio inflows declined which is not unconnected with the normalization of monetary policy by the United States’ Federal Reserve. There is also the threat to disinflation from pre-election spending and the incessant herdsmen attacks on farming communities to consider. That said, i think the CBN can help lift the capital market by acting as a market maker of last resort through helping to provide the much needed liquidity in the stock market. The apex bank can also encourage Micro finance banks to list on the Alternative Securities Market as a way of enhancing their corporate governance.
On the measures put in place by the CBN to strengthen the naira, the one that stands out is the restriction of access to the official foreign exchange market with respect to import of 41 categories of items which has proved in many respects, to be the launch pad for the rebirth of import substitution in Nigeria as local manufacturers are regaining their production strength. In the light of testimonies from local manufacturers regarding the production of many of the 41 items marked ‘’not valid for forex’’ especially toothpicks, tomato paste, and rice (supported by the Anchor Borrower scheme), the policy should be sustained by the CBN till the products are in a position to compete with foreign ones.
What, then, is your view, concerning the CBN’S currency SWAP deal with China?
I think the swap deal is being established in the context of the rapidly growing bilateral trade between China and Nigeria. Therefore, the currency swap would boost trade between China and Nigeria. It is also expected to bolster Nigeria’s foreign exchange reserves and strengthen the naira since Nigerian traders, who import mainly from China, can now conclude their transactions in the yuan instead of the dollar. Already, the CBN has commenced the sale of yuan and i think in the long run we should begin to see the naira appreciating in all the segments of the foreign exchange market.
What can you say about the challenges and prospects of the capital market in Nigeria?
A major challenge of the Nigerian capital market is the fact that its size is small relative to the country’s economy. At less than 20 per cent of the country’s GDP, the current size of the capital market constrains its role in national economic development. Market liquidity as measured by trading volume and turnover is comparatively low.
The issuer base is not diversified. More specifically, industry composition in the stock market is concentrated in a few sectors namely consumer goods (especially Nestle and Nigerian Breweries) and industrial goods (driven by Dangote Cement). Just the other day, the major equity index (NSEASI) closed positive primarily because of a N5 gain in the stock of Dangote Cement and the following day when the same stock lost N3, the market closed in the red. So you get the point. One reason for this is that most of the systemically important corporations such as the International Oil and Telecom Companies are not listed on the stock exchange. It is in this light that the market welcomes the announcement that MTN plans to list soon. Again, foreign investors are significant players in the equities market often dictating the pace of market activity. This leaves the market vulnerable to external shocks. At another level, the private bond market is very small compared to that for the government. Thus the private fixed income market is not a significant long-term financing source for companies due in part to the crowding out effect from government borrowings.
Nevertheless, the Nigerian capital market has a lot of prospects. In the last ten years or so, remarkable progress has been made. The menu of available asset classes has been expanded to include Exchange Traded Funds. Market infrastructure has been modernized and strengthened with the Platforms for Over-the-Counter trading namely the NASD and FMDQ now established. The regulators have also undertaken a number of confidence-building measures among which are the establishment of the National Investors Protection Fund, the Direct Cash Settlement scheme, e-dividend and the Corporate Governance scorecard for companies listed on the Nigerian Stock Exchange.
It goes without saying that the country’s huge population and size of the economy present a lot of growth opportunities for the capital market. To be able to leverage on these however, the role of the government cannot be over emphasized given that the performance of the market is strongly tied to the macro economy. Therefore, enabling government policies are needed to realize the full potentials of the Nigerian capital market.
Do you think the introduction of capital market studies in our Institutions of higher learning will help address some of the challenges you earlier mentioned?
I strongly think so. This is because unlike the money market under which short term bank products largely fall, studies have shown that the level of awareness concerning the capital market- which deals in medium to long term products- is low in Nigeria. In fact, a survey by Ernst & Young (EY), a global professional services firm, had put the capital market literacy level in the country at just 16 per cent. Little wonder retail investor participation in the market is said to be a mere 2 per cent compared to Malaysia’s 9 per cent or South Africa’s 15 per cent. Earlier on I talked about the dominance of foreign investors whose investments are at best transitory. Undoubtedly, widening the domestic retail investor base would help to de-risk the market and detach it from the apron-string of foreign investors. This will require a great deal of education efforts including developing capital markets courses in tertiary educational institutions with a huge youthful population. Without a doubt, any effective strategy for ramping up retail investor participation should leverage on the current demographics in the country which is in favour of a large youthful population.
Malaysia, for example, is currently implementing the second Capital Market Plan (2011- 2020) which hopes to increase retail investor participation through various financial literacy initiatives implemented in Malaysian Universities. Indeed, one lesson from the Malaysian experience is that the Universities can serve as veritable channels of capital market literacy.
Finally, the latest GDP report by the National Bureau of Statistics indicated that the country’s GDP actually dropped in Q1 of 2018 compared to the previous quarter that is Q4 of 2017. What advice do you have for the government to sustain a positive growth trajectory?
The fact is, the economy may have technically exited the recession but real GDP growth of about 1.95 percent in Q1 of 2018 driven chiefly by the oil and gas sector, remains weak and vulnerable to exogenous shocks. A number of important job elastic sub-sectors such as transportation, manufacturing and construction are still in the negative territory. Therefore, for the economy to regain traction, the government should intensify efforts at implementing the 2018 budget particularly directing capital spending at the growth-stimulating sectors of the economy in line with the Economic Recovery and Growth Plan. In its effort to once again achieve high economic growth targets, the government should not lose sight of the fact that GDP growth is only a means to an end. Until the country makes a significant leap in the Human Development Index, indicative of an improvement in the citizens’ standard of living, inclusive growth will remain a mirage.
To help bring this about, capital market development in Nigeria should be a key policy issue going forward to foster savings and investments for inclusive growth. Indeed, the Nigerian capital market presents various untapped opportunities for sustainable economic growth and it is time the government recognized this by paying close attention to the affairs of the nation’s capital market.