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Nigerian Banks May Shun Retail Bonds Amid Push for Transparency

Nigeria’s plan to expand bond trading to retail investors in Africa’s most populous nation is likely to be shunned by the banks that control 80 percent of a debt market that has grown almost fourfold since 2007.

Trading, which was previously restricted to institutional investors through the over-the-counter market, where banks and brokers set prices with typical minimum trades of 100 million naira ($636,000), begins today on the Nigerian Stock Exchange. (NGSEINDX) Live prices will be provided on securities for retail investors. Access Bank Plc (ACCESS), Nigeria’s fourth-largest lender, and Fidelity Bank Plc (FIDELITY) aren’t participating and said retail bonds will be more expensive than the OTC market.

The regulator of sub-Saharan Africa’s second-largest bourse wants to bring bond trading under its control and improve transparency, Securities & Exchange Commission Director General Arunma Oteh said in a Dec. 21 interview. The introduction of retail trading follows a “long drawn-out battle” between the bourse and banks, which helped start bond trading, said Kunle Ezun, a Lagos-based fixed income and currencies analyst at Ecobank Transnational Inc. (ETI)

“The market operators who have acted as primary market dealers or as market makers in the secondary market would want to hold on strongly to the bond market,” Ezun said in e-mailed comments on Jan. 29. “The banks have come a long way, building the bond market from nothing, assuming market and operational risks on behalf of the government.”

Low Demand

Nigeria’s bond market has rallied since JPMorgan Chase & Co., the world’s biggest underwriter of emerging-market debt, said in August it would add the country’s securities to its benchmark GBI-EM index. Barclays Plc will add Nigeria to its local-currency government bond index in March.

“There is isn’t much demand for bonds at the retail level,” Dapo Olagunju, the Lagos-based group treasurer at Access Bank, said in an e-mailed reply to questions on Jan. 28. The appointed market makers “will have to draw pricing from the OTC market, which essentially will make the trades on the exchange more expensive relative to the OTC market.”

Yields on the Nigerian government’s 16.39 percent naira debt due January 2022 have dropped 490 basis points since the start of August to 11.26 percent, according to yesterday’s prices compiled by Bloomberg. That compares with a 13 basis- point decline in South African government bond yields due in March 2021 to 6.53 percent over the period and 9 basis points for 10-year notes to 6.86 percent.

Deepen Market

The exchange of Africa’s biggest oil producer is aiming for a market value of $1 trillion by 2016 from $64.2 billion, according to data compiled by Bloomberg. The volume and value of stocks on the Nigerian bourse plunged following a debt crisis in 2008 and 2009 that threatened the country’s banking industry with collapse.

Nigeria’s outstanding government bonds totalled 6.5 trillion naira at the end of last year, while the face value of government bonds trading on the OTC market for the week through Jan. 11 was 285 billion naira, according to the Debt Management Office in Abuja.

The retail market “does not replace the OTC trading, rather it complements it and is there to deepen the bond market,” Dipo Omotoso, assistant general manager of product management at the exchange, said Jan. 30 in a phone interview from Lagos, the commercial capital. “Awareness of fixed-income securities is growing among the retail investors now and they’re looking beyond traditional equities to other asset classes, because of what happened in the aftermath of the 2008 crash.”

Collect Data

The bourse will wait three months after retail trading has started to collect data on the size of the exchange driven market, said Omotoso, declining to estimate potential capitalization and average size of trades. An increase in volumes will help reduce trading costs over time, the bourse’s Omotoso said.

“For now banks would not be using the platform, the platform would be mostly for stock brokers,” Uche Onwubuya, a bond trader at Fidelity Bank, said in an e-mailed reply to questions on Jan. 28. “Smaller chunks of bonds would be sold to retail investors. Currently because of the huge volumes traded in the normal OTC market, this market is dominated by banks and pension fund administrators.”

The exchange appointed six market makers for fixed-income securities on Jan. 15 in preparation for trading of the assets on the local bourse. The market makers, who have to have 500 million naira in cash and easily traded assets, are Capital Bancorp Plc and Cordros Capital Ltd., ESS/Dunn Loren Merrifield, FSDH Securities Ltd., Greenwich Securities Ltd. and GTB Securities Ltd. Traders and treasurers at banks including Skye Bank Plc, First City Monument Bank Ltd. and Diamond Bank Plc, didn’t immediately respond to e-mailed requests for comment.

“The banks haven’t done that much marketing at the retail end,” said Olagunju. “The retail platform may be what is needed to unlock the market.”

To contact the reporter on this story: Chris Kay in Abuja at ckay5@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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