‘Low transaction volume bane of stock brokerage’

• Expert laments dominance of foreign investors in capital market

THE Managing Director of Securities Africa Financial Limited, Folabi Afolayan has identified volume of transactions as a major challenge facing stockbroking firms in Nigeria.

   According to him, institutions, mainly foreign ones, have been dominating the market while the domestic retail investors have not sufficiently returned to the market since the financial crisis of 2008/2009. 

   He pointed out that there are a few stockbrokers working with these foreign institutions who collectively control the major volumes traded in the market. 

   “ Foreign investors are also very sensitive and any information that reflects uncertainty in politics and government policies trigger a fast withdrawal from the market which results in high levels of volatility. 

   “Thus, the market still suffers from confidence issues within the domestic sector. We need increased level of domestic participation to improve the volume of trades and to contain the high volatility currently being experienced in the market. Other challenges, according to him include the issue of brokerage commission, as well as the increase in regulatory costs of doing business. 

   “Of course operational costs or what I will call high infrastructural deficit costs is a common challenge across board for anyone running a business in Nigeria as you try to maintain a good and conducive working environment and service a level of redundancy. Other issues like increasing operational and regulatory costs are quite common to all regulated businesses. “

   Afolayan pointed out that awareness of the benefits of the Capital market and traded securities is quite low in Nigeria. 

   “If you measure the NSE market penetration, measured as a ratio of turnover to GDP. It is estimated at 1.67per cent, which is dismal, compared to a country like Kenya, which has 4.08per cent market penetration. “

To solve the issue of awareness, he said both operators and the regulators should make concerted effort. 

  “The regulators, SEC & NSE have tried to address this recently with increased educational efforts, collaboration with Nollywood and by reaching out to ordinary Nigerians, but I think these efforts can even be more strategic.”

   He stressed the need to engage policymakers to make financial literacy, especially knowledge of the capital market, a compulsory part of the school curriculum right from the primary school level, noting that this is a medium term strategy but should improve awareness.

    In terms of confidence, he noted that domestic retail investors are yet to regain the boldness to come back to the market after the market crash of 2008/2009. 

“There is also the perception that the market is not transparent and the number of illiquid stocks on the bourse has not helped this as some investors are still looking for ways to sell some of their holdings.”

   He urged the Nigerian Stock Exchange and Securities and Exchange Commission to boost its market making mechanism to allow for improved liquidity. 

  “All clogs in the way of proper market making such as the proper framework for short selling, securities lending and attractive reward system will need to be addressed. For institutions, a number of them especially the Pension Fund Administrators (PFAs) have complained about the limited number of securities available for them to trade on.

    “So efforts to bring in the telcos, power plants and attract IPOs using proper incentives will help improve confidence and participation amongst this group. Whilst the Pension law allows PFA’s to invest up to 25per cent  of their Assets Under Management (AUM) into Quoted Equities, the total exposure from that group has only been 16per cent of their AUM, leaving them with a lot of headroom,” he added.