FINANCIAL MARKETS IN NIGERIA: A DESCRIPTIVE ANALYSIS

BY

OBI IWUAGWU, PHD

1.0. INTRODUCTION

Financial markets play dominant roles in the economic development of nations given that they
facilitate the mobilization of savings and transfer of funds to investors. They act as primary
mobilizers of financial resources for long term investment through financial intermediation. This
is considering that they bring buyers and sellers together in the trade of financial securities such
as bonds, equities, currencies, derivatives, commodities and other fungible financial items. 1 At
any given time, there will always be people who have more funds than they would require and
will thus be willing to save such funds. At the same time, there will always be people ready to
undertake specific businesses but either lack the necessary funds or do not have sufficient funds
to do so. Hence, most economies of the world rely principally upon the market system to carry
out the complex task of allocating scarce resources. 2 The Financial Market is thus a specialized
market responsible for channeling financial resources from the surplus units (savers) to the
deficit units (those who needed additional funds) to carry out some form of economic activities
and consists of all financial institutions that receive financial resources from the surplus units of
the economy in the form of savings and transfer them to the deficit units through lending
activities.3

As the economy grows, and becomes more complex, the financial sector needs to keep pace.
Banks need to grow and become more sophisticated in their ability to assess prospects for risks
and returns; and, in parallel, there needs to be the development of other financial sources of
investment capital. Sustained and rapid growth, needs to be underpinned by a broadening and
deepening of the financial system, capable of serving the needs of all parts of the economy. It is
obvious that those economies that have sustained rapid growth over the long term have
experienced enormous structural change, as they have shifted from being predominantly rural
and agricultural to a more urban, manufacturing-and-service-based structure. 4 Also as economies
develop, the financial system becomes increasingly important either as a facilitator of economic
growth (if it is performing its functions and developing with the rest of the economy) or as an
inhibitor (if it remains underdeveloped). This was certainly the history of the industrialized
countries. As they grew in the eighteenth, nineteenth and twentieth centuries, their financial
systems grew in depth and breadth. In the 19th century, London achieved its status as the world's
leading financial center, because the financial sector had developed rapidly in order to serve the
needs of British industry and British exporters. As it grew in order to support Britain's economic
growth, it also became a major contributor to that growth - and, for that matter, to growth in
1
Ogenekaro Afiemo (2013), “The Nigerian Money Market”, Understanding Monetary Policy Series, 27, Central
Bank of Nigeria
2
M. Jalloh (2009) “The Role of Financial Markets in Economic Growth”, Paper presented at the WAIFEM Regional
Course on Operations and Regulation of Capital Market, Accra, Ghana, July 27 – 31, 2009.
3
Ibid
4
Anne Krueger (2006), “Financial Markets and Economic Growth”, (Tokyo: IMF External Relations Department)

1
other parts of the world as it exported capital and financial skills. In the 20 th century, New York
played a similar role in relation to the American economy. As New York developed as a
financial center to serve the needs of the dynamic and rapidly growing American economy, so it
developed the skills and services that could themselves be exported. And this process has
continued across the globe.5

The financial market broadly comprises of the Money and Capital Markets.

2.0. MONEY MARKET

Money Markets are markets for short term funds for lending and borrowing as well as for the
buying and selling of securities with original maturities of one year or less. Such markets provide
those with funds (banks, money managers and retail investors) the means for safe, liquid and
short term investments, and offer borrowers (banks, broker-dealers, hedge funds and non-
financial corporations) access to low-cost funds.6 They are called money markets mainly because
the assets that are bought and sold in them are of short term nature (with maturities ranging from
one day to one year), while they are also easily convertible into cash. 7 Money Markets are
usually targeted at meeting the short-term needs of large users of funds such as governments,
banks, corporations etc.

It is widely accepted that sustained money market development offers the means of improving a
country’s social and economic welfare through the advancement of financial intermediation in
the economy and by enhancing investment opportunities. Money markets help in allocating
capital by matching economic units that have capital with those in need of it. They also assist in
sharing risks on a variety of debt instruments and products. Given the different maturities and
rates of different products, liabilities and gains do not fall due at the same time, thereby offering
investors and borrowers flexible financing arrangements where overall risk is mitigated. A
diversified portfolio of assets hedges the investor against surprise market volatility or potential
loss. Thus promoting investments in more diversified areas of the economy, which is essential
for economic growth. In addition, the money market forms the first and primary channel for the
transmission and conduct of monetary policy. In fact, it signals the position of the Central Bank,
and the operational mechanism of the money market serves as the primary conduct of key policy
rates to the economy, and in particular the price level.8

Participants in money markets include commercial banks, governments, corporations,

government-sponsored enterprises, money market mutual funds, futures market exchanges,
brokers and dealers, and the central bank. In the Nigerian context, the money market comprises
the interbank funds market and short-term securities market with the Debt Management Office
(DMO), the Central Bank of Nigeria (CBN), Nigerian Deposit Insurance Corporation (NDIC),
the Federal Ministry of Finance (FMF), Deposit Money Banks (DMBs), Discount Houses and

5
Anne Krueger (2006), “Financial Markets and Economic Growth”, (Tokyo: IMF External Relations Department)
6
Randall Dodd (2012) “What are Money Markets?”, Finance and Development, 46 - 47
7
Ibid
8
Ogenekaro Afiemo (2013)

2
the investing public as active participants. The CBN and NDIC form the main regulatory and
supervisory bodies of Nigeria’s Money Market.9

Several factors make the existence of money markets imperative among which the following are
prominent:

i. They provide the machinery for government short-term financing requirements;

ii. Money markets enable nations to establish monetary autonomy;
iii. They help to domesticate the credit base by providing local investment outlets for the
retention of funds and for the investment of funds repatriated from abroad as a result
of government persuasions to that effect;
iv. They also assist the central bank to undertake vigorous monetary policy.10

It is evident based on the foregoing that the money market helps to achieve macroeconomic
growth and stability by aiding the transmission of monetary policy, improving financial
intermediary and promoting the efficient allocation of capital. 11 One could also say that the
primary functions of the money market include: to maintain monetary equilibrium by keeping a
balance between the demand for and supply of money for short term monetary transactions;
promote economic growth especially by making funds available to various units in the economy
such as agriculture, SMEs etc.; facilitate trade and industry by providing adequate finance and by
providing facility of discounting bills of exchange for trade and industry; help to implement
monetary policy; enable capital formation by making available investment avenues for short term
periods; and provide non-inflationary sources of finance to government.12

As earlier stated, Nigeria’s Money Market is regulated by the Central Bank of Nigeria (CBN)
and the Nigerian Deposit Insurance Corporation (NDIC). Whereas the CBN as the apex
regulatory authority of Nigeria’s financial system has the primary responsibility of ensuring price
and monetary stability, it also formulates policies to control the amount of money in circulation,
supervise financial institutions, influence rates and credit prevalent in the economy and by
extension the supply of money in the economy.13 The NDIC on the other hand complements the
CBN in the regulation and supervision of deposit taking institutions. It further provides deposit
insurance and related services in the banking industry, especially to foster confidence and
provide a safety net for depositors. In addition, the NDIC provides advice to the CBN in the
liquidation of distressed banks and manages the assets of distressed banks till they are fully
liquidated.14

Instruments traded in the Money Market include Treasury Bills, Treasury Certificates, Certificate
of Deposits, Bankers Acceptances, Commercial Papers and Call Money.

2.1. Treasury Bills

9
Ibid
10
http://info-naija.blogspot.com.ng/2009/03/nigerian-n, assessed 8th April, 2016
11
Ogenekaro Afiemo (2013)
12
Gaurav Akrani (2010), “Money Market – Concept, Meaning, Definition and Functions”, http://kalyan-
city.blogspot.com.ng/2010/09/money-market-concept-meaning.html, assessed on 9th April, 2016
13
Ibid
14
Ibid

3
These are government guaranteed debt instruments issued by the Central Bank. What this implies
is that people who buy treasury bills are indirectly lending to the federal government. Treasury
Bills are usually sold at a discount and are considered risk free. Individuals, banks, discount
houses and fund managers invest in them. Their tenors are usually between three months and one
year from the date of issue. Treasury Bills provide government with a highly flexible and
relatively cheap means of borrowing cash. Nigeria’s first Treasury Bills were issued in April
1960 and was provided for under the Treasury Ordinance of 1959. Treasury Bills also have the
advantage of high liquidity, while the associated risk of loss of value is relatively low. Moreover,
interest received on them is not subjected to withholding tax, while they could be used as
collateral for loans and other credit facilities.15

2.2. Treasury Certificates

Treasury Certificates are medium-term government securities, which mature after a period of one
to two years and are intended to bridge the gap between the treasury bill and long term
government securities. They are similar to Treasury Bills but are issued at par or face value and
pay fixed interest rates. These fixed interest rates are called coupon rates. Thus, each issue
promises to pay a coupon rate of interest and the investor collects this interest by tearing coupons
off the edge of the certificate and cashing the coupon at a bank; post office, or other specified
federal office. Each coupon is imprinted a year from the date of issue. In the Nigerian context,
their rates became market-determined like treasury bills following the deregulation of interest
rates.16

2.3. Certificate of Deposit

Certificates of Deposits are time deposits held with a commercial bank. Their maturity dates
range from three months to 12 months. They indicate that the individual has money with a
commercial bank and thus, the bank is indebted to such a person. Interest is paid on maturity,
while the individual is not expected to withdraw the fund prior to its maturity. In case this is
done, such a person pays some penal charges on the interest already accrued on the money.
Certificates of Deposit offer slightly higher charges than treasury bills primarily because of the
presence of the default risk. However, interest received on them are subject to 10% withholding
tax, while deposits above two hundred thousand Naira (N200, 000) are guaranteed by the NDIC.

2.4. Bankers Acceptances

These are short-term investment instruments. It is an avenue for corporate and individual
investors to invest surplus funds. With it, the individual or company can draw a draft and instruct
the bank to pay a certain sum of money to a specified person at a stated date. Once the bank
accepts the draft by stamping and signing it, it becomes an obligation of the bank to pay a third
party who has invested in it even if the company is unable to repay the draft. Bankers
Acceptances are usually sold at a discount, which means that investors pay the discounted value
and receive the full value at maturity. Interest on it is payable upfront, while the rates are usually

15
www.NigeriaBusinessPortal.com, assessed 8th April, 2016
16
http://info-naija.blogspot.com.ng/2009/03/nigerian-n, assessed 8th April, 2016

4
higher than those of treasury bills and bank deposits. Their tenors also range from 31 days to 364
days. It is regarded as a secure investment because of the bank guarantee given, which means
that the individual can only lose his/her money if the bank goes under.17
2.5. Commercial Papers

These are also regarded as commercial bills. They are short-term promissory notes issued by the
CBN with maturity dates varying from 50 to 270 days. Commercial papers are also sold by
major companies (blue-chips, large, old, safe, well-known, national companies) to obtain a loan.
Such notes are usually not backed by any collaterals, rather, they rely on the high credit rating of
the issuing companies. Issuers of commercial papers normally maintain open lines of credit (i.e.
unused borrowing powers at banks), sufficient to pay back all of their commercial papers
outstanding. Issuers operate in this form since this type of credit can be obtained more quickly
and easily than can bank loans.18 As an unsecured debt instrument, commercial papers usually
trade at a discount. They were first introduced in Nigeria in 1962 essentially to fund the export
marketing operations of the then Northern Nigerian Marketing Board.

2.6. Call Money

These are monies lent by banks with short-term repayment notices (e.g. 24 hours or overnight).
Overnight deposits are bank reserves that are loaned from banks with excess reserves to banks
with insufficient reserves. This type of borrowing is mostly done in order to acquire the legal
reserves, which the CBN examiners require banks to maintain. They also act as cushion, which
absorbs the immediate shock of liquidity pressures in the market. Call Money was introduced in
Nigeria in 1962.19 It usually has the lowest interest rate in the money market and is subject to
withholding tax.

The choice of which instrument to patronize in the Money Market, largely depends on the
investor. However, this also depends on a number of factors including, availability of funds,
security of instrument and rate of returns. In any case, many consider Treasury Bills to be the
safest instrument given that they are federal government indebtedness, followed by Certificates
of Deposit (being direct indebtedness of the bank), and Bankers Acceptances since they are
equally guaranteed by the bank. Commercial Papers come last, being the direct indebtedness of
companies. Interest rates on each of these instruments depends on the bank, tenor and the amount
involved. However, one can also negotiate the interest especially if the amount involved is
much.20

3.0. CAPITAL MARKET

Unlike the Money Market, Capital Markets mobilize long-term debt and equity finance for
investments in long-term assets. They also help to strengthen corporate financial structure and
improve the general solvency of the financial system. 21 Indeed, the capital market is the prime
motor that drives any economy on its path to growth and development because it is responsible
17
www.NigeriaBusinessPortal.com, assessed 8th April, 2016
18
http://info-naija.blogspot.com.ng/2009/03/nigerian-n, assessed 8th April, 2016
19
http://info-naija.blogspot.com.ng/2009/03/nigerian-n, assessed 8th April, 2016
20
www.NigeriaBusinessPortal.com, assessed 8th April, 2016
21
M. Jalloh (2009)

5
for long-term-growth capital formation. The money market only complements the capital market
by providing the necessary working capital to support gross fixed capital formation. 22 In general
terms, capital markets comprise the complex of institution and mechanism through which
intermediate term funds and long-term funds are pooled and made available to business,
government and individual. They also comprise the processes by which securities already
outstanding are transferred. Indeed, the capital market has no fixed location and deals on medium
and long term funds, and has government, individual and business firms as participants, while it
ensures liquidity as it provides market for both new and old securities.23

Essentially, capital markets are markets for trading securities. They channel savings and
investment between suppliers of capital such as retail investors and institutional investors and
users of capital like businesses, government and individuals and an economy. A developed,
dynamic and vibrant capital market contributes significantly to speedy economic growth and
development. This is given that it mobilizes funds from people for further investments in the
productive channels of the economy, activating idle monetary resources and putting them in
proper investments. Capital markets also help in capital formation. Through the mobilization of
idle resources, they generate savings; such mobilized savings are then made available to various
segments of the economy such as agriculture, industry etc. The capital market also provides an
investment avenue for people who wish to invest resources for a longer period of time. It
provides suitable interest rate return to investors, while instruments such as bonds, equities, units
of mutual funds, insurance policies, etc., which are sold in such markets provide diverse
investment avenues for the public.24

The lack of an advanced and vibrant capital market in an economy could lead to the
underutilization of financial resources, even as a developed capital market provides access to
foreign capital for domestic industry. Capital Markets consist mainly of Stock (equity) and Debt
markets. In fact, the capital market provides an avenue for raising the long term financial needs
of business through equity and long term debt by attracting investors with a long term investment
horizon.25

Capital Markets play prominent roles in stimulating economic growth and development. Some of
these roles include:

i. Helping to mobilize domestic savings by facilitating the reallocation of financial

resources from dominant to more productive activities;

ii. Providing avenue for the divestiture of State Owned Enterprises (SOEs), whereby
shares in these companies may be sold through the Stock Exchange, thus allowing
members of the public to participate in the ownership of these companies. The
privatization of SOEs through the Stock Exchange helps to broaden the asset base by

22
Josiah Mary et al (2012) “Capital Market as a veritable source of Development in Nigerian Economy”, Journal of
Accounting and Taxation, 4, 1, 7 - 18
23
Ibid
24
“Pakistan Economic Survey 2011 -12”, www.finance.gov.pk/survey/chapters_15/06_Capital Markets.pdf
assessed 9th April, 2016
25
Ibid

6
 providing a means through which ordinary citizens can acquire a share in the
country’s assets;

iii. Assisting companies to raise long-term finance through equity and debt financing
(issuing shares and bonds respectively);
iv. Helping the public to buy shares or bonds, thus providing them with an alternative
method of investing their surplus savings;

v. Enabling companies to expand production, invest in more efficient productive

processes and improve competitiveness using capital raised through the issue of
shares, bonds and other instruments;

vi. Assisting in wealth creation and enhanced economic growth given that increased
investments by companies will ultimately translate into employment and income
generation as well as increased investment and production;

vii. Encouraging companies to observe better accounting and management practices,

through full disclosure requirements thereby leading to greater transparency in the
business sector and lower incidences of corruption;

viii. Enhancing the inflow of international capital especially when international investors
participate in debt and equity instruments.26

Generally speaking, the capital market exists to: promote solvency, efficiency and a competitive
financial sector; encourage corporate financial discipline and accountability; provide long term
financing requirements without increasing the tax burden of citizens; promote a stock market
culture; mobilize savings from surplus economic units for on-lending to deficit units; ensure
effective and efficient allocation of scarce financial resources; create avenue for the populace to
participate in the economy; reduce over-reliance on the money market for industrial financing;
and, provide seed money for venture capital development.27

Nigeria’s Capital Market consists of the following institutions: Securities and Exchange
Commission (SEC), which is the apex regulator of the market; Nigerian Stock Exchange; Abuja
Securities and Commodities Exchange (ASCE); Stockbroking firms, Issuing Houses, Investment
Advisers, Portfolio Managers, Investment and Securities Tribunal (IST); Registrars, and
Investors.

Capital Market Instruments are usually traded on the stock market. These instruments include
Ordinary Shares, Preference Shares and Debt Instruments.

3.1. Ordinary Shares

26
What are Capital Markets? www.bsl.gov.sl/pdf/capital%20MarketsPromotion.pdf, assessed on 9th April, 2016
27
O. Akpan (2011), “Overview of the Nigerian Capital Market”, http://www.sec.gov.ng/files/Portharcourt
%20Outreach%202011%20Okokon%20Akpan,%20SEC%20-%20Overview%20of%20Nigerian%20Capital%20Market-
27-29%20July%202011.pdf, assessed on 9th April, 2016

7
An ordinary share represents equity ownership in a joint stock company. Ordinary Shareholders
are entitled to any net profits made by their company after all expenses (including interest
charges and tax) have been paid and they generally receive some or all of these profits in the
form of dividends. In the event of the company being wound up they are entitled to any
remaining assets of the business after all debts and claims of preference shareholders have been
settled. Ordinary shareholders generally have voting rights at the company’s annual general
meetings, but this also depends on the number of shares that they hold. They are largely
considered as unsecured creditors.

3.2. Preference Shares

Preference shares constitute a major source of financing to companies. Holders of this type of
shares are entitled to fixed percentages of dividend before any dividend is paid to ordinary
shareholders. However, this can only be paid if sufficient distributable profits are available,
although with cumulative preference shares the right to an unpaid dividend is carried forward to
later years. At the same time, the arrears of dividend on cumulative preference shares must be
paid before any dividend is paid to ordinary shares. Preference shares have a nominal value and
dividend, which is paid at a fixed percentage of this amount. Preference shares can also be
redeemable or irredeemable.28

3.3. Debt Instrument (Bond)

A bond represents a method of long term borrowing by a corporation or government agency.

When a corporate bond is issued, it has a legal contract that goes with it, which contains the
provision of the loan in terms of the amount, interest and maturity period. These bonds are
usually purchased by commercial banks, insurance companies, pension funds and even
individuals. This form of financing is usually reserved for target companies or corporations and
it is because of this that they have prior claims on the firm’s asset in the event of liquidation.29

It is evident especially given the above that the capital market offers opportunity for both private
businesses and government to mobilize huge amounts of financial resources from the general
public through the sale of financial securities. Nevertheless, the capital market is however
divided into two: Primary Market and Secondary Market.30

3.4. Primary Market

The Primary Market deals with the trading of new securities. It is also known as the New Issue
Market (NIM) since it is a market for issuing long-term equity capital. In the primary market,
new securities are issued for the purpose of obtaining capital. Firms and public or government
institutions can raise funds from the primary market through making a new issue of stock (to
obtain equity financing) or bonds (to obtain debt financing). When a corporation is making a new
issue, it is called an Initial Public Offer (IPO) and the process is referred to as the ‘underwriting’
of the share issue. In the primary market, the securities are issued by the company that wishes to

28
Josiah Mary et al (2012)
29
Ibid
30
M. Jalloh (2009)

8
obtain capital and is sold directly to the investor. In exchange for the funds that the shareholder
contributes, a share certificate is issued to represent the interest held in the company. 31 Securities
in the primary market are traded through the help of issuing houses, Dealing/Brokerage Firms,
Investment Bankers and or Underwriters. The amount of money raised in the primary market
goes directly to the Issuing Company/Firm to finance its operations. 32 Funds raised from the
primary markets are usually channeled to capital investments such as retiring outstanding
securities, financing new plant or equipment, securing additional working capital, installing
modern IT infrastructure, branch expansion etc.33 It is important to note that in the primary
market the company is directly involved in the transaction (sale of its shares).

Capital or equity can be raised in the primary market by any of the following four ways:

a. Public Issue

As the name suggests, public issue means selling securities to the public at large, such as
IPO. It is the most vital method of selling financial securities;

b. Rights Issue

Whenever a company needs to raise supplementary equity capital, the shares have to be
offered to present shareholders on a pro-rata basis, which is known as the Rights Issue;

c. Private Placement

This is about selling securities to restricted number of classy investors. Thus frequent
investors, venture capital funds, mutual funds and banks all come under Private
Placement;

d. Preferential Allotment

This refers to when a listed company issues equity shares to a selected number of
investors at a price that may or may not be pertaining to the market price.34

3.5. Secondary Market

The Secondary Market on the other hand refers to the market where securities that have already
been issued are traded on a daily and continuous basis. Instruments that are usually traded on the
secondary market include stocks, bonds, options and futures. Certain mortgage loans can also be
sold to investors on the secondary market. Once a security has been purchased for the first time
by an investor on the primary market, the same security can be sold to another investor in the
31
“Difference Between Primary and Secondary Markets”, http://investpost.org/options/difference-between-
primary-and-secondary-markets/, assessed on 9th April, 2016
32
M. Jalloh (2009)
33
A. Odita, “Capital Market Operations, Players, Products, Efficiency, Index etc”, www.waifem-cbn.org/.../capital
%20Market%20Operations.pd..., assessed on 9th April, 2016
34
“What is Primary and Secondary Market”, http://www.financewalk.com/primary-market-secondary-market/,
assessed on 9th April, 2016

9
secondary market, which may be at a higher or lower price depending on the performance of the
security during its period of trading. Unlike the primary market, where the company is directly
involved in the transaction, in the secondary market, the company has no involvement since the
transaction occurs between investors.35

The secondary market is further divided into two:

a. Auction Market

The auction market is a place where buyers and sellers convene at a place and announce the rate
at which they are willing to sell or buy securities. They offer either the ‘bid’ or ‘ask’ prices,
publicly. Since all buyers and sellers are convening at the same place, there is no need for
investors to seek out profitable options. Everything is announced publicly and interested
investors can make their choice easily;

b. Dealer Market

In a dealer market, none of the parties convene at a common location. Instead, buying and selling
of securities happen through electronic networks in the form of fax machines, telephones or
custom order-matching machines. Interested sellers deliver their offer through these media,
which are then relayed over to the buyers through the medium of dealers. The dealers possess an
inventory of securities and earn their profit through the selling. A lot of dealers operate within
this market and therefore, a competition exists between them to deliver the best offer to their
investors. This forces them deliver the best price to the investors.36

The key actors/players in the capital market include Dealers/Stockbrokerage Firms, Company
Registrars, Issuing Houses, Mutual Fund Managers, Securities and Exchange Commission
(SEC), Central Security Clearing System (CSCS), Investors and the Stock Exchange.37

3.5.1. Stock Brokers

A stockbroker is a licensed member of a Stock Exchange that buys and sells financial securities
(shares and bonds) for his/her clients/customers. Such a person executes trade on the instruction
of his/her clients and gets compensation by levying some form of tax (i.e. a compensation) from
the proceeds of the trade. The commission attached is called ‘brokerage’. In the past, a flat rate
of 3% was charged as brokerage, later certain percentages were added according to the value of
the transaction. Presently, the entire amount of brokerage could be negotiated to a minimum of
2.75%. With the inclusion of Value Added Tax (VAT), Security and Exchange Commission
(SEC) fees, Nigeria Stock Exchange (NSE) fees and the Central Securities Clearing System
(CSCS) fees, the total cost of brokerage is approximately 4%.38
35
“Difference Between Primary and Secondary Markets”, http://investpost.org/options/difference-between-
primary-and-secondary-markets/, assessed on 9th April, 2016
36
“Difference Between Primary and Secondary Markets”, http://investpost.org/options/difference-between-
primary-and-secondary-markets/, assessed on 9th April, 2016
37
M. Jalloh (2009)
38
“The Nigerian Stock Exchange (2006), “The Nigerian Stock Exchange and You: Presentation Notes”(Abuja:
Corporate Affairs Division, NSE)

10
The functions of a stockbroker include:

a. To buy and sell securities on behalf of his/her clients;

b. Rendering advisory services to investors on the prospects of shares for sale or purchase;
c. Assisting investors to formulate workable plans for investment both in the short and long
term;
d. Assisting clients to get share certificates in the case of new issues and payments of
dividends;
e. Helping clients to fill share purchase forms, which are technical in nature and which
ordinary citizens may not understand; and
f. Managing the assets of clients in several companies and ensuring that they are
protected.39

A dealer on the other hand buys and sells financial securities on his/her own account. Such a
person ordinarily enters the market using his/her own financial resources, and as a result his/her
compensation depends on the outcome of the trade. An individual/institution can also act in the
capacity of a Stockbroker as well as a dealer in securities, in which case the person/institution is
referred to as a Dealer/Broker. In a Dealer/Broker setting, the individual can buy or sell
securities for him/herself or for some other person with the hope of making a commission.40

3.5.2. Registrars

Registrars are operators in the capital market charged with the responsibility of keeping records
on the ownership of a company’s securities. They ensure that details of the transfer of ownership
securities from one investor to another are well recorded to avoid confusion on claims arising
from benefits associated with holding such securities. Registrars prepare a range of analysis on
how securities should be allotted as well as a list of investors that qualify to receive dividend
from the company’s annual dividend disbursement to shareholders.41 In the event of an investor
having problems with his/her share certificate or dividend, the Registrar of the Company is
usually the person to be contacted. The duties of a Company Registrar include:

a. Acting as Agents to the Company that appointed them;

b. Registration of the shares and the names of the owners in the shareholders’ register;
c. Preparing share certificates and sending them to the shareholders;
d. Paying out approved dividends to shareholders; and
e. Processing proxies at Annual General Meetings.42

3.5.3. Issuing Houses

39
E. Ihekwoaba et al (2009), Business and Commerce for Schools and Colleges, (Lagos: Mukugamu & Brothers
Enterprises), 306
40
Ibid
41
Ibid
42
Central Bank of Nigeria (2007), Capital Market Dynamics in Nigeria: Structure, Transaction Cost and Efficiency
1980 – 2006 (Abuja: Research & Statistics Department), 37

11
Issuing Houses are institutions in the Capital Market charged with the responsibility of preparing
prospectus, packaging, timing, pricing, underwriting and the sale of new securities offered to the
public by companies and governments. Specifically, underwriting is the key business of the
issuing house. Packaging involves the determination of the selling point of an issue; the expected
returns in comparison with alternative existing returns in the capital markets; and the benefits
beyond immediate returns that could accrue to investors. An issuing house also determines the
best form of security that a company should bring to the market. It determines whether the
company should issue ordinary shares, debentures or a hybrid.43 Issuing Houses can normally
underwrite the offer of securities by providing the issuer with the required financial resources
and eventually selling the securities to the general public. That is, instead of the issuer having to
wait until the securities are sold, an Issuing House could buy the securities at a discount thereby
making the needed funds immediately available to the issuer.44

3.5.4. Mutual Fund Managers

These are non-bank financial institutions that mobilize financial resources from the general
public for investment in the capital market. As a result of his/her expertise in portfolio
management, a Mutual Fund Manager reduces the risk of investors by diversifying investment
from the pool of funds into various securities. Thus, by pooling resources from many individual
investors and investing in various securities in the capital market, a Mutual Fund Manager
reduces idiosyncratic risk through portfolio diversification.45

3.5.5. Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is the apex regulatory body of the capital
market. It is a federal government agency established by the Securities and Exchange
Commission Act No. 71 of 1979, and re-enacted as Decree No. 29 of 1988. The Commission
also operates within the provisions of other statutory enactments that relate to securities business,
corporate finance and investments in Nigeria. Significant among these are Investment and
Securities Act No. 45, 1999; Companies and Allied Matters Act, 1990, which vests the
administration of unit trust schemes in SEC; Trustees Investments Act of 1957 and 1962; and the
Technical Committee on Privatization and Commercialization Act of 1988 (replaced with
National Council on Privatization).46 The commission makes rules, regulates, registers,
investigates and undertakes market development functions relating to the capital market using
publications and public enlightenment programmes.

3.5.6. Central Securities Clearing System (CSCS)

The CSCS is the central depository for share certificates of companies listed on The Nigerian
Stock Exchange. It is a subsidiary of the Stock Exchange and performs the role of clearing and
settlement of transactions involving the buying and selling of securities. It performs this function
by maintaining a record of all traded securities on behalf of shareholders. It also facilitates the

43
Central Bank of Nigeria (2007), 36
44
M. Jalloh (2009)
45
Ibid
46
Central Bank of Nigeria (2007), 30 - 31

12
delivery (i.e. transfer of shares from sellers to buyers) and settlement (payment) of securities
transacted in a well-organized Stock Exchange.47 Nigeria’s CSCS was commissioned in 1997
and commenced full operation in April 1999. It is interfaced with the Automated Trading System
(ATS) and receives data relating to transactions from the Stock Exchange trading floors.

3.5.7. Investors

An investor is a person or institution who buys financial securities with the purpose of making
some financial returns. However, investors cannot buy securities directly from the Stock
Exchange except through registered stock brokers, who understand the workings of the stock
market.

3.5.8. Stock Exchange

A stock exchange is a licensed non-bank financial institution that provides platform for
transactions involving the buying and selling of financial securities in the secondary market. It is
also a place where debts and equity securities of varying types are traded to facilitate capital
mobilization. The Stock Exchange does the work of a Secondary Market by facilitating a formal
trading arrangement for financial securities.48 This could be through a trading floor or through an
electronic device like a computer. Business at the stock exchange is usually controlled by a
council of elected officials, who formulate policies, settle disputes and regulates admission of
new members.

4.0. THE NIGERIAN STOCK EXCHANGE (NSE)

The background history of the Nigerian Stock Exchange predates the country’s independence in
1960. Some of these events are well recorded in contemporary business history literature. 49 For
instance, it was said that in 1946, the British Colonial administration promulgated the Ten Year
Plan Local Loan Ordinance essentially to raise funds for the government to meet its
responsibilities. This Ordinance, we are told, which provided for the floatation of ten pounds per
unit, received an overwhelming response, although mostly from the United Kingdom, and was
oversubscribed by more than five hundred thousand pounds. Also, in 1951, there was another
effort to mobilize funds to finance public utilizes through the creation of a loan fund.50

The immediate history of the Nigerian Stock Exchange however goes back to September 15,
1960, when the Exchange incorporated. It eventually commenced business on June 5, 1961 as
the Lagos Stock Exchange, before transforming to the Nigerian Stock Exchange in December
1977 with branches established across the country. Aside the headquarters in Lagos, which was
established in 1961, other branches of the exchange include Kaduna (1978), Port Harcourt
(1980), Kano (1989), Onitsha (1990), Ibadan (1990), Abuja (1999), Yola (2002) and Benin
(2005). The exchange, which started with only 19 securities traded on its floors in 1961, now has

47
M. Jalloh (2009)
48
Ibid
49
M.Ogbeidi (2007), Fundamentals of Nigerian Business History (Ilishan-Remo: Babcock University Press), 107
50
Ibid, 107

13
several securities made up of government stocks/bonds, industrial loan (Debenture)/preference
stocks and equity/ordinary shares of companies. Most of the listed companies have
foreign/multinational affiliations and represent a profile of the various sectors of the economy,
ranging from automobile, banking, airlines, breweries through pharmaceuticals to agro-allied,
publishing, textile, petroleum and insurance companies.51

In recognition of the role of small and medium enterprises in the overall industrial development
of Nigeria’s economy, the NSE introduced the second-tier security market (SSM) in 1985 for the
listing of small and medium scale enterprises that are unable to meet the stringent requirements
of the first-tier market.52 The Exchange maintains an All-Share Index with 1984 as the base year
(1984=100). Only common stocks (ordinary shares) are included in the computation of the index.
The index is value weighted and is computed daily. Clearing, settlement and delivery of
securities on the exchange are done electronically by the Central Securities Clearing System
Limited (CSCS) a subsidiary of the stock exchange.53

The exchange was deregulated in 1993, thus making it possible for prices of new issues to be
determined by issuing houses in the first-tier market. Again, to take advantage of the vast
possibilities of internet technology, the Nigerian Stock Exchange transited to the Automated
Trading System (ATS) in 1999, thus leaving the old system of ‘Call Over’. The ATS enables
dealers to trade through a network of computers connected to a server. Presently, all the Trading
Floors of the Nigerian Stock Exchange are connected to the trading engine in Lagos for online
real time trading.54

In 2000, the NSE launched and commenced operation on its Trade Guarantee Fund (TGF)
Scheme aimed at arresting the risk of failed trade that may arise from the inability of a stock
broker to cover his/her purchase. In addition, the exchanged commenced the T+3 settlement
cycles in 2000 and launched its e-business platform/internet portal in 2002. These reforms were
aimed at improving the efficiency of the Nigerian Capital Market and encouraging greater
foreign capital inflow into the economy. Furthermore, the ‘Trade Alert’ was launched by the
exchange in 2005, to secure the market against unethical conducts, especially unauthorized sale
of clients shares. The device also functions as a medium for communicating market-related
information to subscribers. These developments have enhanced market liquidity, offered
opportunities for price discovery, and improved market efficiency in service delivery.55

4.1. Functions of the Nigerian Stock Exchange

The Nigerian Stock Exchange has several functions among which are:

a. Providing a central meeting place for members to buy and sell existing stocks and shares
and for granting quotations to new ones;
b. To provide opportunities for raising new or fresh capital;

51
“The Nigerian Stock Exchange (2006), 3
52
Central Bank of Nigeria (2007), 31
53
Ibid, 32
54
M.Ogbeidi (2007), 114
55
Central Bank of Nigeria (2007), 32 - 33

14
 c. To provide machinery for mobilizing private and public savings and making these
available for productive investments through stocks and shares. This facilitates
borrowings by both government and companies;
d. Providing useful information to potential and existing investors through advertising the
current price of securities;
e. Protect the public against fraud by prescribing some stringent conditions which an
organization wishing to be listed on a typical stock exchange should follow before it can
be listed;
f. To provide opportunities for the attraction of foreign capital for the nation’s
development;
g. Promoting increased participation by private and public sectors of the economy – where
shareholders can trade in shares of listed companies;
h. Help in the effective allocation of resources in the economy by assisting government to
implement its monetary policy; and
i. Enable new investors to invest in the capital market and old investors to realize their
money from their investment or reinvest the money in other viable new ones.56

4.2. Organization of the Stock Market – ‘Bulls’; ‘Bears’; and ‘Stags’

The Nigerian Stock Exchange is a well-organized market with numerous speculators, who
stimulate and arouse the interests of investors. This is important given that the carryout business
forecasts to determine prospects of buying and selling.

4.3. The Bulls

These are market speculators who are optimistic that prices of certain stocks will rise. On the
basis of their optimism, they encourage investors to buy in the hope of reselling in the future. As
they encourage their clients to buy in anticipation of improvements in the value of the share, this
in turn, increases the amount of dealings in the market. 57 Market speculators who operate under
this guise are said to be ‘bullish’. Thus, the market is said to be having a bullish trend once it is
doing well as reflected in share prices. From a different perspective, a speculator may buy
shares, for which he/she cannot or does not wish to pay at the time, in the hope that ‘during the
account’, i.e. before the date of payment, the price will have risen and he/she can then sell them
at a profit. A buyer who buys like this in the hope of a rise in prices is referred to as a "bull".

4.4. The Bears

The Bears are market speculators who perceive the market to be gloomy in anticipation of a fall
in prices. Speculators who operate under this name are thus said to be ‘bearish’. They encourage
their clients to sell such stocks to avoid a loss, since they believe that the prices will fall. Once
there is a downward movement and prices of shares are not good, the market is also said to be
witnessing a bearish trend. Put differently, Bears are pessimistic speculators who expect a fall in

56
L. Okoh and R. Ekane (2011), “Impact Assessment of the Role of Nigerian Stock Exchange on the Economic
Development of Nigeria”, International Journal of Economic Development Research and Investment, 2, 1, 184 –
190.
57
E. Ihekwoaba et al (2009), 308

15
share prices. They therefore sell any shares they have now, and even shares they do not have,
because, if prices fall as expected, the shares will be available in a few hours or a few days at
lower prices than at present.

4.5. The Stags

The Stag is a market speculator whose aim is to make profits from new issues of shares. He/she
buys these shares before they are listed, thus depriving small investors from having access to
them and eventually sells them at a higher price soon after they are listed. They help to buy up
the shares of new companies, which otherwise could remain as undersubscribed.58 Put
differently, Stags are speculators who operate in the ‘new issues’ market rather than on the
Stock Exchange, although they must use the Stock Exchange before they can realize any profit.
What a Stag does is to apply for shares that are just being issued and are likely to be
oversubscribed. He/she does not want to keep the shares, or invest in the company that is issuing
them, but simply to make a profit out of the issue. The stag expects that the stock, upon issue,
will quickly rise to a premium in the market, and he/she will then sell the stock at a profit.
However, the activities of ‘Stags’ have been greatly reduced in recent years.

5.0. CONCLUSION

It is evident based on the foregoing that Financial Markets help to efficiently direct the flow of
savings and investment in the economy in ways that facilitate the accumulation of capital and the
production of goods and services. In fact, the combination of well-developed financial markets
and institutions, as well as a diverse array of financial products and instruments, suits the needs
of borrowers and lenders and by extension that of the overall economy. Large financial markets
with lots of trading activity provide more liquidity for market participants than thinner markets
with few available securities and participants and thus limited trading opportunities. Functional
financial markets encompass the essential services that a developed financial sector provides for
technological innovation and economic growth—mobilizing savings, evaluating projects,
managing risk, monitoring managers and facilitating transactions.

We may therefore conclude that Nigeria’s economic growth especially since the 1990s could be
linked to the buoyant activities recorded during the period especially in the country’s financial
market, which has continually developed over the years. Hence, the need for the country’s
financial market to be more efficiently managed even as more activities are introduced to ensure
Nigeria’s sustained long-term economic development. Conversely, failure to develop the
financial market could also put an enormous brake on the country’s economic growth prospects
and, indeed, if the issue is not addressed, also thwart development efforts. Hence, given
Nigeria’s strong commitment to economic growth, the lesson is very clear: more attention needs
to be paid to financial market issues as growth proceeds, unless it is preferred to wait for a crisis
to force the necessary reforms.

58
E. Ihekwoaba et al (2009), 308

16