The bond securities component of the fixed income market has been experiencing a sort of revival in Nigeria. In a determined step to rejuvenate the market which the federal government existed from for 17 years, The Minister of Finance, Dr. Okonjo Iweala, launched the N150 billion Government Bond in 2003. The bond was intended to part-finance governments deficit and provide non-inflationary financing option for domestic debt, which has a pension arrears component of N2 trillion. Similarly, the Governments of Delta, Edo, Ekiti, Yobe, Lagos, Akwa Ibom and Cross Rivers States have raised debt stocks ranging between N2billion and N15 billion since Year 2000 to provide long-term financing for some specific projects. Only recently, the newly formed Transnational Corporation of Nigeria (Transcorp) Plc floated an ambitious N500 billion bond to assist the mega institution to take off. However, these local transactions are a far cry from the bourgeoning world global bond market which has been estimated at over $47 trillion.

Bonds are loan contracts which governments and private corporations issue to investors in order to raise long-term finance. A bond contract would specify the percentage interest to be paid and the due date for repayment of the principal. Hence loan securities pose low risk to investors. Bonds are crucial in financing development because they have long maturity dates from when they are issued. But for nearly two decades, the Nigerian bond market was practically dormant without trading activities on even those that were listed on the Nigerian Stock Exchange (NSE).

It is not a coincidence that the period of lull in the bond market in Nigeria was during the regimes of military dictatorship, especially between 1986 and 1999.  The institutional nature of the bond market which is mostly dominated by government loan stocks cannot flourish under an indeterminable rapidly changing socio-economic environment the country witnessed during this period. For instance, the high interest rates that rule the money market since the introduction of the Structural Adjustment Programme (SAP) rendered uncompetitive the secured fixed income security market. Thus the market was relegated to the background such that a deliberate programme to create awareness of the market to sustain the momentous activities it is beginning to witness is a remedy stakeholders in the market are now grappling with.

In accordance with a recommendation of the International Finance Corporation (IFC), the Debt Management Office (DMO) recently inaugurated the Bond Market Steering Committee.  The committee is headed by Dr. Okonjo Iweala, who had helped the Federal Government to setup the DMO in 2001 prior to her appointment as Finance Minister while she was Vice President at the World Bank. At the inauguration, she said "the Steering Committee is a consensus-building body comprising major public and private sector stakeholders in the bond market. Its principal objective is to ensure speedy development of the market by driving the implementation of collective decisions, coordinating and harmonizing the activities of all stakeholders, as well as determine the overall structure of the market, among other things". The composition of the committee represents the private and public sectors stakeholding of the market which the newly licensed Pension Fund Administrators (PFAs) can invest in to dilute their portfolios.

Recently the government unveiled a plan to securitize the accumulated pension arrears owed the country's senior citizens, as well as local contractors whose payments are not accommodated in the N25 billion budgeted for paying local contractors this year. The plan is in alignment with the disposition of this government to expeditious deal with both its external and domestic debt overhang. Last year, the government secured a debt cancellation deal with the Paris Club which presented a debt exit option for the country. The government embraced and celebrated this deal, and about two weeks ago, the country got a positive Sovereign Credit Ratings by the Standard and Poor's  -  a United Kingdom based credit rating organization.

In the meantime, the DMO is facilitating secondary market transactions on bonds and other government securities by instituting Primary Dealers/Market Makers (PD/MM) in the market. In this regard, the DMO has invited banks, discounts houses, and securities dealers, to apply for licenses to function as PD/MMs. The PD/MMs will be required to take up, market and distribute the primary issues of FGN securities and support the FGN issuance programme and maintain an effective two-way price quotes in the FGN securities in which they have committed to deal.

However, a N2 billion minimum shareholders fund is required by a securities dealer organization that aspires to acquire the DMO PD/MM license. For an applicant to be successful, it must have proven adequate capacity to manage securities it wants to take up and capacity to install and maintain designated information technology (IT) and telecommunications links with DMO and other PD/MMs, amongst others.

In an insightful lecture given by Tony Elumelu, CEO of UBA Group, a financial services conglomerate, he pointed out that the banks can help provide credit information on Small and Medium Scale Enterprises (SME) which might want to access the securitized bond market, since SMEs are generally characterized by poor financial book keeping. He said: "one of the reasons the banking relationship is so important to small business finance is that banks can efficiently gain valuable information on a small business over the course of their relationship and then use this information to help make pricing and credit decisions." He maintained that "it would be far easier for the banks to introduce these firms to the capital market since the bulk of the information required is readily available with the banks." This will help break the barrier of financial information which often poses a high hurdle for the SMEs, thereby stall their access to credit and capacity to grow.

As the Bond Market Steering Committee continues with its work with a view to helping to deepen the capital market, it is important that the country's socio-economic and political systems uphold integrity and rule of law. It is in this regard that the succession upheaval which is heating up the system must be managed in a way that will produce a credible outcome. This will indeed sustain the gains of the present initiatives.

                                                 19/03/2006

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