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By Chukwuma Umeorah
Even with enhanced regulations in place, investor confidence in Nigeria’s equities market remains fragile.
Investors, local and foreign, continue to tread cautiously, prioritising safety over opportunity.
The regulators, the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX) and by extension the Central Bank of Nigeria (CBN), have been actively working to ensure market stability through various reforms. While the newly passed Investment and Securities Bill (ISB) 2024 promises to address regulatory loopholes, introduce stronger investor protections, and enhance the market’s operational structure, broader macroeconomic and socio-political realities remain significant challenges for investor confidence.
According to David Adonri, Vice Chairman of Highcap Securities, the bill is “all-encompassing” in its coverage of capital market activities. Adonri highlighted the inclusion of previously unregulated sectors such as the commodities ecosystem and digital assets. Furthermore, the law introduces stricter penalties for violations and enhances investor protection.
“These areas were largely neglected in the ISA 2007,” Adonri noted. “The inclusion of digital assets and commodities exchanges provides a framework for regulating modern trading instruments while prohibiting pyramid and Ponzi schemes that have exploited unsuspecting investors.”
Indeed, these reforms mark a decisive step forward. However, the bill’s transformative impact hinges on its ability to address broader systemic challenges, such as the macroeconomic climate, foreign exchange volatility, and socio-political instability.
Why regulations are insufficient
While regulatory improvements are essential to maintain investor trust, Adonri cautions that they alone cannot guarantee increased market participation. “Generally, rules and regulations provide the foundation for trust and market integrity,” he said. “However, macroeconomic conditions play a more significant role in attracting investors.”
He added that Nigeria’s capital market was once a beacon for foreign investors. Before the 2007-2008 global financial crisis, foreign players dominated the Nigerian bourse, driven by favorable regulatory frameworks and robust economic conditions. However, today’s investors grapple with different realities, including double-digit inflation, exchange rate volatility, and geopolitical risks.
Adonri explained that these factors significantly overshadow the effects of regulatory advancements. “Investors are not just looking at the rules. They are considering the economic environment, currency stability, and the political landscape,” he said. “For foreign investors, the volatility of the naira and uncertainties around profit repatriation remain major deterrents.” A review of the Nigerian Stock Exchange (NGX) Domestic and Foreign Portfolio Investments Report revealed that foreign participation in the market dropped from 58 percent in 2014 to just 16 percent in 2022, underscoring the challenges of attracting foreign capital.
Although there have been some improvements since the beginning of President Bola Tinubu’s administration in May 2023, foreign investor participation has continued to fluctuate, highlighting cautious investor behaviour. As of October 2024, foreign investors accounted for only 17 per cent of total transactions on the NGX, a percentage many market operators believe could be higher with more favourable macroeconomic conditions.
Moreover, the exit of several major multinational corporations between 2020 and 2024 further highlights this trend. Companies such as Unilever, GlaxoSmithKline, among others, cited economic instability, currency volatility, and operational challenges as reasons for scaling back or leaving Nigeria altogether.
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According to Adonri, whether considering Foreign Direct Investments (FDIs) or Foreign Portfolio Investments (FPIs), investors must carefully assess the risks before committing their capital.
Inflation and currency volatility’s spoiler effect
Inflation, which continues to erode purchasing power, remains one of the most pressing concerns for investors. The CBN’s monetary tightening policies have not sufficiently tamed inflationary pressures, leaving both local and foreign investors wary of committing substantial funds to long-term investments.
Currency volatility further exacerbates the situation. For instance, an investor who entered the Nigerian market at an exchange rate of N450 to the dollar may find their returns significantly diminished if the naira weakens to N800 per dollar before they can repatriate profits. This uncertainty discourages long-term foreign investment in Nigeria’s capital market.
Sovereign risks and repatriation concerns
Foreign investors also factor in risks related to profit repatriation and the ease of moving capital in and out of the country. Delays or restrictions in accessing foreign exchange to repatriate profits deter potential investors. “When investors are unsure about their ability to repatriate returns or fear losses due to currency depreciation, they prefer to stay on the sidelines,” Adonri explained.
Socio-political factors
Beyond economic factors, socio-political instability is another critical determinant of investor confidence. Issues such as insecurity, political instability, and weak governance structures have created a cloud of uncertainty over Nigeria’s business environment. “Investors are always evaluating sovereign risks. The fear of political unrest or policy inconsistencies makes it difficult for them to fully trust the system, no matter how robust the regulatory framework is.”
The insecurity plaguing many parts of Nigeria, slow economic growth, coupled with high unemployment rates and fiscal challenges, paints a bleak picture for long-term investments. Investors perceive a higher risk of asset loss or operational disruption, discouraging significant capital inflows.
Road to confidence restoration
Stakeholders emphasise that for Nigeria to regain its position as a top destination for foreign and local investment, regulatory reforms must be complemented by macroeconomic stability and socio-political reforms. The CBN must prioritize policies that stabilize the naira and ensure that inflation remains within manageable levels. “Regulations can only do so much if the broader economic environment is not conducive.”
Adonri noted that while the ISB 2024 represents a major step forward in creating a robust regulatory framework for Nigeria’s capital market, its success in attracting investors depends on more than just legal provisions. Macroeconomic conditions, socio-political stability, and investor-friendly monetary policies are equally crucial in determining the market’s attractiveness.
“Regulations are the foundation. But the structure that sits on that foundation must include economic stability, political certainty, and a transparent operating environment. Without these, investors will continue to prioritize safety over opportunity, no matter how strong the regulatory framework appears.”
