After spending 20 years outside the country, Onyema says he came back to Nigeria because he saw an opportunity to make a difference after the country’s financial sector was knocked by the 2008 global financial crisis. The crisis forced several banks to close their doors and also put the Nigerian Stock Exchange under scrutiny. An investigation by the Nigerian Securities and Exchange Commission brought to light irregularities that resulted in the forced exit of the exchange’s then CEO, Ndi Okereke-Onyiuke. Onyema clearly had his work cut for him. “I found an exchange that had no governance in place. We had to do a lot of heavy lifting,” he says.
Onyema’s first priority was to restore investor confidence in the exchange by clarifying its rules. Before his arrival, it was plagued by allegations of insider trading; he wanted to show that there were consequences for bad behaviour. To ensure everyone was playing by the same rules, the exchange put in place a new electronic trading system, X-Stream, which is based on the one Nasdaq uses. Onyema says electronic trading’s efficiency, ease of access and speed have both improved transparency and increased market activity. “When you have electronic trading, you see trading volumes increase by a factor of four,” he says. The new system lets investors trade in equities and bonds and will soon allow them to trade in more sophisticated products like derivatives – a tradable securities contract that has its value derived from another asset.
X-Stream could very well be a game changer for the exchange, as the platform makes it easier for the bourse to extend its reach. Already shares can be traded over smartphones. It also enables investors to do high-frequency trading, a form of trading that uses computer algorithms to trade in large volumes with small changes in the price.
Onyema championed the introduction of “market makers” in the capital market. Sellers in Nigeria tend to hold onto their securities and buyers were reluctant to make an offer. It is hoped the market makers will increase activity by giving both a selling and buying price to those interested in the securities. An Investor Protection Fund is meant to compensate investors with genuine claims against insolvency, bankruptcy or negligence of a dealing member firm (stock broker), Onyema says, adding that the exchange is looking into the creation of interest- free investments.
The exchange is currently working on coming out with new indices, which value a group of shares that have similar traits. The hope is that investors will take advantage of patterns in the price movement of indices, which in turn will lead to increased trading on the exchange – one of Onyema’s major goals. As trades increase, the exchange becomes more robust. “The more people participating, the greater the chance a buyer will find a seller,” he says. To this end, the exchange is also trying to boost the number of companies it lists. Though the number of companies on the exchange has been static at around 200, Onyema emphasizes that he will not be chasing listings just for the sake of it. “We want to list a lot of companies but we want to list a lot of quality companies,” he says.
Nairobi – Africa’s Innovator
The Nairobi Securities Exchange has also made strides in recent years. In late 2012, it launched the NSE Broker Back Office (BBO) system in partnership with the Kenya Association of Stockbrokers and Investment Banks, the Capital Markets Authority (CMA) and the Central Depository and Settlement Corporation (CDSC). The new system has revolutionised share trading in Kenya. All the trades take place electronically. Not only does the system allow internet trading, it also leaves an electronic trail that is easy to audit. The change has had a measurable impact. “2013 was the best year yet in terms of equity market turnover for the Nairobi Securities Exchange,” says Ouma, the exchange’s head of market and product development.
In the last few years, the exchange has come out with products such as the FTSE NSE Kenya 15 Index and the FTSE NSE Kenya 25 Index, which value, respectively, its top 15 and 25 companies. It launched the Growth Enterprise Market Segment (GEMS) for mid-cap companies in January 2013. According to Ouma, it saw its first GEMS listing on 15 July, 2013. “This year, we shall launch a market segment for Real Estate Investment Trusts,” Ouma says. We also are looking to launch a market for derivatives before the end of 2014.” In 2013, the Nairobi Securities Exchange was recognised for these and other innovations when Africa Investor voted it the most innovative stock exchange in Africa.
Like its Nigerian counterpart, the Nairobi Securities Exchange is going through a process of demutualisation that has seen it become a company. Under the old structure, it was more like a club, which catered to members but had no real incentive to improve services. Now that it is a company, with 24 shareholders – several banks, the Kenyan government and Investor Compensation Fund – it has not only come out with new services but has a goal of providing them at a profit. Though the demutualization process has been ongoing since 2006, Ouma says the end is in sight. “According to the law, the Nairobi Securities Exchange has to apply to the CMA to be declared demutualised,” Ouma says. “The only outstanding issue was the matter of market access fees for new trading participants (shareholders in the exchange). This has since been agreed and we anticipate that we shall be declared demutualised before the end of the first quarter of 2014. The Nairobi Securities Exchange will then apply to the Capital Markets Authority for approval to raise capital and list on the Main Investment Market Segment. We hope to complete the entire process before the end of the second quarter 2014.”
A Long Way Yet To Go
Despite the improvements it has made, the lack of activity on the Nairobi exchange still holds it back. Ouma is not blind to this but says that “liquidity is a challenge for most African exchanges.” He adds that the Nairobi exchange is looking at other measures to spur trading, including the market makers Onyema mentions, as well as allowing securities lending and borrowing – the practice of lending and borrowing shares that are not owned by an investor or that they do own but do not intend to sell immediately. There are also plans to allow sponsored direct market access, a form of electronic trading that executes transactions cheaply and quickly.
Absa’s Gilmour acknowledges that Kenyan and Nigerian exchanges have made a lot of progress but says that in many ways they are still a long way off from catching up to the JSE. The JSE, for instance, become a member of the World Federation of Exchanges in 1961. The Kenyan and Nigerian exchanges are still only associate members. Some governments and offshore-asset managers will not invest in exchanges that do not have full membership. Though full membership in the World Federation eludes it, Nigeria’s exchange has recently become a member of the Intermarket Surveillance Group, which combats and identifies possible fraudulent and manipulative activities across markets.
Their trading numbers also suggest that the Kenyan and Nigerian exchanges have a long way to go. The total value in shares traded in 2012 was $409 billion on the JSE, $4.2 billion in Nigeria and $1.08 billion in Kenya, according to the ASEA Yearbook 2013.
Even if they lag behind Johannesburg’s exchange, the story for the smaller exchanges is a good one. As businesses, both are excelling. The Nigerian Stock Exchange produced a $3 million surplus (up from a $42,000 deficit) for the year to December 2012, while the Nairobi Exchange saw profit before tax jump from $1.22 million to $1.47 million over the same period. If investors cannot get shares through the exchanges, they could do worse than to become shareholders in the exchanges.
For Onyema and Ouma, however, their exchanges are not only a business but a way to drive development in their countries. Markets that let businesses raise capital broaden an economy’s base of funding and let small time investors – ordinary people – own shares in profitable companies.
By: Douglas Imaralu