108 – Nigeria

NIGERIA M 2006 At a Glance T É G A O G R E Tahoua M A R D Tillaberi A D E NIGER A N

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e Population (mn) 134.4 r N A Zinder M m a Niamey Ri be Lac� Bol u Yo Maradi Diffa ug ad Tchad m o Dosso Sokoto Katsina K Kaura� Population Growth (annual %) 2.1 M a Namoda ra d S G i na Birnin Kebbi o a e a a g r G d k e a ot r a gu d o e u a N'Djamena ejia m d g ad a a H J N Gusau m

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r a B O u K é no Kishi Yola Garoua ué GDP (Current US$ bn) 116.4 Bida Abuja Keffi o Igboho Jalingo r a Shaki Lafiagi F A Dimlang� K Lafia I a 2042 m T ad N Hoséré� Llorin A M Mts SHEBSHI L Vokré� ue A 2049 m Ikirun Ben s TOGO Ila t Oyo Inisa M Llora Lokoja GDP Growth (annual %) Oshogbo na 5.3 i Ede V Ado-Ekiti o é Firditi r r Makurdi Tchabal� é Iwo Ikare 1500 m a Llesha F b Mbabo� M IkerreOka Okene D Ikire K o 2460 m É

Abeokuta at A O U A r M sin n Mts� D A Ngaoundéré D e a g 'A Abomey a L A g Idah A GOTEL D E Ijebu-IgboOndo i la M f Y Lokossa Shagamu N U Ijebu-Ode 2019 m D Uromi IF Mushin Epe Eha-Amufu Ngol-Kedju� S GDP Per Capita (US$) 866 Porto Novo Ikorodu Hill� S Enugu 2000 m A Cotonou M Benin City�Asaba Abakaliki bam Awka M D C LA Onitsha j ES ES V ES Bamenda é D � r Bouar O TE Sapele e C Ihiala Ugep m 2679 m Warri AfikpoCOLLINES� m Owerri OBAN Lo BafoussamN

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g K CAMEROUN I b C a I Port Harcourt Oron San é H Opobo Mont� Bertoua I E S Cameroun � Douala D N IG ER 4100 m External Debt (US$ mn) U U BIA FR A 4,800 D BA IE Buea Yaoundé Malabo g Pico de� N yo n GOLFE DE GUINEE Santa Isabel� 3008 m Ile de Bioko� Guinée Equatoriale D ja External Debt/GDP (%) 3.5 Ebolowa O C E A N � Pointe Epote N tem K om ATLANTIQUE GUINEE� GABON CONGO CPI Inflation (annual %) 8.6 SovereignEQUATORIALE Ratings GEOATLAS - Copyright1998 Graphi-Ogre Exports of goods and services (% of GDP) 53.7 Long Local0 km 100 200 300 400 km Foreign Term Currency Currency Gross Official Reserves (US$ bn) 37 Fitch BB BB – Gross Official Reserves (in months of imports) 11.7 UNDP HDI Ranking 159 S&P BB BB – Source: AfDB, IMF, UNCTAD, UNDP, UN Population Division

1. overview of Financial System which had been set at 13%. The MRR has now been The Central Bank of Nigeria (CBN) is the country’s replaced with the Monetary Policy Rate (MPR) set at autonomous monetary authority. Established in 1958, 10%. the CBN is the banker and financial adviser to the All financial sector regulatory agencies in Nigeria Federal Government, acts as the lender of last resort are part of the Financial Services Regulation to banks, is responsible for setting monetary policy, Coordinating Committee (FSRCC), which and ensures the smooth functioning of the financial coordinates supervisory activities across the various system. The central bank is guided by various financial sectors. regulations, including the Central Bank of Nigeria Act of 1958 as amended in a series of Decrees, Non-Bank Financial Sector the last one in 1999 being the CBN Decree 1999 The banking and insurance sectors each have a Amendment. separate regulatory authority and supervisory body, N For over 20 years, the aim of monetary policy has the Central Bank of Nigeria and the National Insurance been to develop a market-oriented financial system for Commission (NAICOM) respectively. effective mobilisation of financial savings and efficient Since 2005, these regulators have implemented resource allocation. The main instrument of the sweeping reforms of these financial sectors, aimed market-based framework is Open Market Operations. at restoring the health of the financial system. The This is complemented by reserve requirements and CBN enforced a new regulation for banks to increase discount window operations. their minimum capital base to NGN 25 bn (USD The Apex authority, in late 2006, abolished its 190 mn), from a previous NGN 2 bn (USD 16 mn). prime rate, the Minimum Rediscount Rate (MRR), This sparked a series of mergers and acquisitions as Nigeria – 109 banks sought to consolidate their market positions, continent, behind South-Africa and Egypt. Banking reducing the number of banks from 89 to 25 more and conglomerate stocks have historically been the healthy institutions. These 25 private banks form most active on the NSE. There is also a commodity the largest component of the financial system, with exchange, the Abuja Commodities Exchange, which the 10 largest of them accounting for over 60% of was established in 2006. the aggregate assets and 72% of liabilities. It is Nigeria’s bond market has for many years been expected that with the increase in market share and overshadowed by its equity market. There have been shareholders value, a second wave of market-driven recent efforts by the regulatory authorities to develop banking consolidation will occur. a thriving bond market in the country. The market Subsequently, in October 2006, the Government, offers bonds issued by the Federal Government and through the CBN, allocated USD 7 bn of its growing sub-national State issuers. Government debt issues foreign exchange reserves (USD 45 bn as at January re-emerged in 2003, and the Federal Government, 2007) to be jointly managed by domestic and through the Debt Management Office (DMO), now international fund managers. 14 of the 25 commercial frequently issues bonds. Total government bonds banks were allocated USD 500 mn each to manage outstanding stood at NGN 750 bn (USD 6 bn) at the with foreign partners. These alliances aim to transfer end of the first quarter of 2007. technical expertise from the foreign institutions to the Recent developments in the financial system have domestic firms, in order to enhance overall operational been positive, specifically the strengthening of capabilities of the sector. financial institutions, and also the improvements in The insurance sector in Nigeria just emerged from capital markets. Banks are increasingly developing an 18-month consolidation phase in February 2007 that investment banking capabilities, as opposed to enforced a minimum capital base of NGN 3 bn for general strictly only retail banking, which is evidence of an insurance and NGN 2 bn for life insurance. There are evolving financial market. There is now a great deal now 71 firms, down from 104 that had been in operation, of international interest, and indeed participation, which have brought the industry capitalisation to over in the Nigerian financial system, from investments NGN 200 bn from a pre-consolidation level of NGN in stocks and treasury bonds to private equity 30 bn. Demand for insurance services in the country investments. This trend is expected to continue has historically been low due to a lack of capacity and as economic and political fundamentals, such as low insurance awareness. The recapitalisation exercise reduced inflation, improving growth rates, fiscal aims to increase the sectors underwriting and retention accountability, and transparency, are expected to capacity to encourage growth, thereby improving the be maintained. industry’s health and profitability. 2. Fixed Income Markets

Capital Markets Government Securities Regulated by the Securities and Exchange Government securities are the sole debt instrument Commission (SEC), the Nigerian capital market is issued frequently in the bond market. These securities centered on one stock exchange, the Nigerian Stock are issued by the Debt Management Office, a semi- Exchange (NSE). Established in 1961, with a total of autonomous body established in 2001. The DMO is 19 securities listed for trading, there are 289 listed charged with the responsibility of managing Nigeria’s securities, with a stock market capitalisation of some external and domestic debt and also to carry out a USD 46 bn as at January 2007. number of reforms to make the government bond The country boasts the third-largest stock market more liquid through increased issuance of exchange by market capitalisation in the African government securities. 110 – Nigeria

Primary market bills are issued in 91-, 182-, and 365- with a set issuance calendar). Government bonds day tenors. In a bid to restructure the debt stock, follow an actual / 365 day count basis. the DMO, since 2004, has issued less of the 91-day With lower inflation, rates offered on Government bills and more 365-day and longer dated paper. The securities have experienced a significant decline restructuring was to guard against the highly uneven across the entire yield curve since the beginning of weekly issuance programme that created rollover 2006. Over this period, the 3-month treasury bill rate and interest rate risks to the Government, to reduce came down from 12% in 2005 to about 7% in 2007. volatility in the short-term rate market, and to sustain, The 7-year bond issued in June 2006 yielded 16%, revive and develop a deep and liquid secondary and in March 2007, a new 7-year yielded 10.75%. market for Government bonds. This has been mostly due to reduced inflation levels Federal Government of Nigeria (FGN) bonds (estimated at 9.4% for 2006), and an increased outstanding are in fixed and floating 3-, 5-, 7- and 10- amount of liquidity in the market. year maturities. Since the establishment of a frequent benchmark issuance program for the FGN bonds in Federal Government of Nigeria (FGN) Yield Curve

2003, the yield curve has been characterised by 3- 10 , 5- and 7-year fixed rate treasury benchmark issues % 8 only. New fixed rate 10 year bonds are expected to be 6 launched under this issuance program by December 3-mth 6-mth 1-yr 3-yr 5-yr 7-yr 2007. NGN 445 bn worth of these bonds were issued Source: Central Bank of Nigeria, march 2007 in 2006, nearly 10% above the NGN 408 bn scheduled issuance for the year. Total bond market capitalisation In 2006, the Government had special auctions stood at NGN 621.37 bn (USD 44.8 bn) by the end of outside of its benchmark programme, to pay January 2007. FGN bonds are listed on the NSE. outstanding debts to pension funds and contractors. The market is based on a multiple-price system for These bonds were fully subscribed with 100% treasury bills (auctioned on a weekly basis) and single- allocation. The details of the auction are presented price auction for treasury bonds (offered in accordance in table 1.

Table 1 SPECIAL GOVERNMENT AUCTIONS Date FGN Auction Offer Size (NGN’ mn) Coupon (%) Tenor (yr) July 2006 3rd FGN Bond 2009 Series 11 20,000 12.5% 3 Sep 2006 3rd FGN Bond 2011 Series 13 20,000 13.6% 5

Commercial banks, discount houses and non-bank financial institutions are the major investors in FGN N securities. With the enactment of the Pension Reform Act of 2004 that brought about the licensing of 19 specialist firms dedicated to managing the working population’s funds, it is anticipated that there will be a further increase in the demand for FGN bonds. As at the first quarter of 2007, pension funds assets under management was estimated at NGN 800 bn (USD 6.2 bn).

Non-Central Goverment Issuance They have all been revenue bonds, with the specific Seven of the 36 states of Nigeria have raised funds purpose of raising financing for development projects. from the debt capital market. These state bonds have The bonds are all floating rate issues. The details of the the full trust and backing of the Federal Government. offerings are presented in table 2. Nigeria – 111

Table 2 Outstanding NIGERIAN STATE BONDS State Issue Tenor Offer Size Coupon Floating Rate Reference pricing Government Year (NGN’ mn) (%) 2000 7.0 1,000 21.0 MRR + 2.5%, subject to min. 21% max. 25%

Delta State 2000 7.0 3,500 18.5 MRR +2.5%, subject to min. 15%, max. 22% 2002 7.0 15,000 19.5 T-bill + 4% Cross Rivers State 2004 3.5 4,000 20.5 MRR+5.5%, subject to min. 18.5%, max. 25% 2004 4.0 1,500 19.0 MRR +4%, subject to min. 15%, max. 25%

Historically, manufacturing companies were With a boom in the banking and the telecoms frequent issuers of corporate debentures, but have sectors, and the huge infrastructure requirements been absent from the market for the past decade as resulting from the Government’s privatisation plans, they have increasingly sought funding from banks all areas that would likely require long-term financing, and the equity market. However, with the emergence it is expected that corporations will increasingly look of a thriving bond market, corporate institutions are to the bond market for their funding needs. increasingly looking to raise debt funding via the Currently, transaction fees are being reviewed capital market. Thus far, a big impediment to this has by the relevant authorities, and this is expected to been the high cost of public debt issuance in the motivate corporates to seek debt financing from the domestic market. The SEC, NSE and other regulatory bond market. institutions have historically charged high fees for SEC rules require issuers seeking to enter the such public debt capital raising. This has caused bond market to have a local credit rating. A local many corporations to issue debt through private ratings agency, Agusto and Co., awards domestic placements, rather than public issuance and listing. ratings to companies.

Table 3 RECENT CORPORATE BONDS IN NIGERIA (2006) TINAPA ACCESS BANK Amount (NGN bn) 10 10 13.15 Tenor (years) 18 8 3 Coupon 14% 16% FGN 3-yr + 200bp Redemption Hard Bullet Redeemable Convertible Placement Method Private Public Listing Not Listed Not Listed

Secondary Market The FGN bonds have historically been traded over-the-counter (OTC) and regulated by the DMO, although the bonds may be listed on the NSE for retail distribution. Secondary trading in Nigerian debt instruments is in its infancy. One of the key steps in deepening the bond market has been the establishment of a Primary Dealer panel in June 2006. There are now 10 banks and 5 discount houses appointed as primary market dealers in FGN bonds. These banks are obligated to underwrite and quote two-way prices in FGN bonds, in a bid to stimulate a more liquid secondary market. The most active tenors in the market are the 3-year (approx. 56% of market turnover) and 5-year bonds (approx. 40% of market turnover). 112 – Nigeria

Transactions are settled on a T+3 basis and are as in 2006 they were only offered up to 180 days. cleared by the Central Securities Clearing Settlement Authorised dealers are now allowed to engage in (CSCS). swap transactions between themselves or with retail/wholesale customers. These transactions are 3. Foreign Exchange restricted to a maximum tenor of three years. The Nigerian Naira (NGN) is a managed floating In 2006, the Abuja Commodities Exchange was currency. The currency is not fully convertible, although set up to develop the trading of futures and options the CBN plans to implement full convertibility in the on commodities, although this is yet to become an near future. active market. The official foreign exchange market is currently two tiered: Central Bank of Nigeria (CBN) and Inter- 5. Participation of Foreign bank windows. The CBN window is a managed float Investors and Issuers via a bi-weekly Wholesale Dutch Auction System Foreigners are allowed to participate in the bond (WDAS), where foreign exchange is sold directly to markets, but can only invest in securities with a tenor authorized dealers. The WDAS replaced the Dutch of 1-year and above. However, they can also invest Auction System in early 2006 in an attempt to bridge in Commercial Papers, Bankers Acceptances and the gap between the official rate and the rate of the Negotiable Certificates of Deposits of a tenor less illegal parallel foreign exchange market that existed. than one year. The interbank market is driven by market demand and 2006 saw foreign investors buying over 50% of supply, but usually anchors off the CBN. FGN securities in both the primary and secondary There is an active market for other currencies, markets. Such participation is expected to increase such as the Euro and British Pound, as the CBN only as further positive reforms take place in the market. sells USD at its bi-weekly auction. As of November Foreign investors have also participated in the 2006, the South African Rand was officially added international debt offerings of Nigerian institutions. to the list of foreign currencies offered in the foreign exchange market. The African Development Bank (AfDB), in NGN Per Unit of USD ( Year End ) January 2007, raised Naira Denominated funds 140 in the international capital market with the launch of a USD 100 million Euro-bond issue 130 linked to the Nigerian Naira. This deal marked 120 the first time a supranational institution raised funds denominated in Nigerian Naira, and 110 displayed foreign investors confidence in the N 100 macro-economic fundamentals of the country. 2001 2002 2003 2004 2005 2006 Ultimately, the AfDB aims to raise long-term Naira Source: Bloomberg funds in the domestic market for the purpose of on-lending to local clients in need of long-term 4. derivatives Naira funding. By so doing, the AfDB intends to There are no fixed income derivative securities contribute to Nigeria’s bond market development available in the Nigerian capital market. Foreign through its issuance and listing of top rated exchange forwards are in existence and subject to securities that will compliment the FGN bonds. a maximum tenor of three years, a recent change Nigeria – 113

6. investment Taxation 7. Key Contacts

There is no capital gains tax on the sale of investment • Central Bank of Nigeria in the capital market. Withholding tax on investment Mailing Address: P.M.B. 0187, Garki Abuja, Nigeria income is currently 10%. Nigeria has tax treaties with Other Address: Zaria Street, Garki, Abuja, Nigeria Czechoslovakia, France, Netherlands, Pakistan and Tel: +234-9-2342132-4/234332-6 the United Kingdom. Fax: +234-9-23435363 E-mail: [email protected] Web: www.cenbank.org

• The Nigerian Stock , Mailing Address: P.O. Box 2457, Lagos, Nigeria Other Address: Stock Exchange House, 8th, 9th and 23rd Floor, 2/4 Customs Street, Lagos, Nigeria Tel: +234-1-2660287 Fax: +234-1-2668724 E-mail: [email protected] Web: www.nigerianstockexchange.com

• Securities and Exchange Commission Mailing Address: P.M.B. 315 Garki-Abuja, Nigeria Other Address: Tower 421, Constitution Avenue, Central Business District, Abuja, Nigeria Tel: +234-9-2346272-3 Fax: +234-9-2346276 E-mail: [email protected] Web: www.secngr.org