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Home Companies Corporate Updates

The Importance of Stock Exchange to Nigerian Businesses and the Economy

NM Partners by NM Partners
January 11, 2023
in Corporate Updates, Sectors
NGX, Temi Popoola

Chief Executive Officer, NGX, Mr. Temi Popoola

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Nigeria, an enterprising country, accounts for more new businesses in Africa. In 2020 alone, the number of start-ups in Nigeria was estimated to be around 3,300 – the highest in Africa – ahead of 660 and 600 start-ups for South Africa and Kenya respectively, according to Statista.

According to a World Bank report, SMEs provide at least 45% of the jobs and 33% of the GDP in emerging economies alone. It submits that start-ups and existing businesses of micro-to-large scale contribute to half of the total gross domestic product and are the engines that foster economic growth.

However, many businesses suffer a high rate of failure; with some financial experts estimating that around 80% of businesses shut down within the first three to five years while Wee Tracker places the average failure rate for Nigerian start-ups at around 61%. Businesses typically face major constraints of inadequate access to capital, near absence of an enabling environment, inconsistent government policies, and lack of a proper corporate governance structure, all of which are impediments to business growth, sustainability, and survival.

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In the Nigerian economy, where there is an availability of skilled labour force, no paucity of business opportunities but a prevalent funding gap, the stock market serves a very important barometer for promoting enterprises and engendering economic growth. It is therefore necessary to highlight the roles Stock Exchanges play in ensuring business sustainability and by extension economic development.

Roles of Stock Market in Emerging Market/ Economic Development

Well-functioning stock markets enable economic growth and development by facilitating the mobilisation of financial resources between businesses and institutions that need capital to innovate and grow; and qualified investors that seek capital appreciation and investment returns. Stock Markets provide funding platforms for Governments and Institutions to raise funds for the actualization of developmental projects, and Businesses to raise funds for growth, expansion, and sustainability.

Without stock markets, businesses would largely resort to borrowing huge loans which must be repaid with interests – these interests majorly put huge constraints on the liquidity of businesses especially for SMEs.

Fortunately, businesses in both the developed and developing world can issue shares to the public, raising vast amount of cash that doesn’t come along with a repayment burden. (Public companies are under no obligation to pay dividends, especially when they incur losses).

When businesses have access to such capital, they can easily expand their operations and create more job opportunities. From a national perspective, this will lower unemployment levels, and enable government to earn more revenue from business taxes.

(As at the end of 2016, there were nearly 50,000 companies listed on 81 exchange groups around the world.

The combined market capitalization of these companies was approximately $70 trillion.  While many people think of stock markets as representing large companies, the companies listed on these markets [which in many instances include dedicated markets for small and medium-sized companies] range in size from a market capitalization of less than $10 million to well over $100 billion).

Given the importance of SMEs to economies, Exchanges all over the world are developing markets with focus on capital formation for SMEs — the number and scale of SME platforms has grown significantly over the last 12 years in response to demands to improve SME access to finance. As at end of 2016, there were over 7,000 companies listed on various SME platforms across the World Federation of Exchanges (WFE) in over 40 countries.

Corporate Governance and Sustainability

While financing is at the heart of what exchanges do, Stock Exchanges have also historically played a strong role in the development of capital market institutions, standards, and corporate practices. More recently, this traditional role of promoting good governance has expanded to include the introduction of capital market policies and instruments designed to promote more sustainable investment practices, address the challenges posed by climate change, and support the achievement of the Sustainable Development Goals (SDGs).

These ESG practices are being promoted through various stock exchange-related instruments. The growth in membership of the United Nations Sustainable Stock Exchanges (SSE) initiative, which has more than tripled over the years and the establishment of the WFE’s Sustainability Working Group (SWG), can both be seen as proxies for the increasing attention exchanges are giving sustainability.

Many exchanges are promoting greater ESG disclosure among listed companies via voluntary guidance, listing rules, and training activities while some stock exchanges have introduced programmes to help SMEs to develop their management capacity, strengthen their governance structures to innovate, and grow (see image below).

Liquidity

Source: UNCTAD

Creation of Liquidity

Stock markets may affect economic activities through the creation of liquidity. It contributes to economic development by enhancing the liquidity of capital investments through secondary market mechanism. Many profitable investments require a long-term commitment of capital, but investors are often reluctant to relinquish control of their savings for long periods. Liquid equity markets make investment less risky–and more attractive–because they allow savers to acquire an asset–equity–and to sell it quickly and cheaply if they need access to their savings or want to alter their portfolios.

At the same time, companies enjoy permanent access to capital raised through equity issues. Recent studies suggest that, over the past two decades, stock market liquidity has been a catalyst for long-run growth in developing countries. A liquid equity market allows savers to sell their shares easily, thereby permitting firms to raise equity capital on favourable terms.

The empirical evidence, however, strongly supports the belief that greater stock market liquidity boosts — or at least precedes — economic growth. Stock Markets provide a trading platform for governments too. Sometimes a local, state, or national government may need more money to develop a community housing estate, build a water treatment plant or initiate any other public projects.

Instead of increasing taxes to raise the required revenue, it can issue bonds through the stock market. When investors buy these bonds, the government can raise the money it needs to launch various projects that can ease the cost of living or even create jobs for locals. In the long run, this improves the economy.

Benefits of Stock Exchange to Unlisted Businesses?

Growth companies and SMEs can leverage the Stock Market to raise long tenured funds for strategic and sustainable goals through many of the Capital Market offerings way of listing any of the underlisted instruments:

  • Equities
  • Debts
  • Exchange Traded Funds
  • Mutual Funds

Enhanced Visibility and International Exposure

The Stock Market is an enabler of enterprise which goes beyond lubricating access to funding. One of the major benefits of listing is the enhancement of the corporate image of listed companies and repositioning for internal exposure and opportunities.

The stock market is a visible platform and companies that participate in the Exchange enjoy brand recognition and marketing on a local and international level. Brand recognition can boost customer confidence in the business and, in turn, enhance financial performance. For example, in 2021, research findings published in Borsa İstanbul Review by researchers at the Central Bank of the Republic of Turkey, Structural Economic Research Department, show that stock market listing has a sizable positive impact on the growth of manufacturing firms.

The researchers found that listed manufacturing firms “become significantly larger in the post-listing period compared to their private counterparts as their number of employees, total assets, and sales increase significantly.”

Raising Equity Funds Through Stock Market Mitigates the Risk from Losses

Equity is important for businesses operating in Nigeria, especially start-ups where the gestation to profitability phase tends to take at least two years. In the case of debt, whether the start-up or established business makes a profit or loss, they are under an obligation to service debt and repay the principal.

Even when the business can meet its interest and principal payment obligation regularly, debt can negatively impact business cash flow and hamper the availability of capital for day-to-day business operations.

Meanwhile, businesses that use equity are only expected to pay dividends out of the profit they make. In other words, when businesses make a loss, their capital owners usually do not take any dividends. Nigerian businesses stand more to benefit from this kind of “patient” capital.

Furthermore, equity imposes less burden on businesses than debt, especially in periods of contractionary monetary policy, where interest rates are raised to combat inflation. It is important to point out that an elevated interest rate environment, which makes financing expensive, also disincentivizes consumer spending.

Therefore, businesses might face slower sales and limited or no top and bottom-line expansion. This situation only hurts businesses that lean on debt because they operate in an unprofitable environment and cannot make enough sales to repay debt.

Increased Corporate Governance & Support Mechanism/Framework for Sustainability

Listing on the stock market is not complicated and it incentivises businesses to improve their corporate governance, culture, and ethical practice. In other words, businesses that list will likely operate optimally, ethically, and with a better governance structure.

This transformation is important for many businesses to inspire better employee and customer loyalty, improve their interaction with stakeholders and communities and even boost their financial performance. A survey by Salesforce suggests that 80% of customers regard ethical behaviour to be an important consideration in their decision to be loyal to a brand.

Notes

  1. WFE – The Role of Exchanges in Fostering Economic Growth https://unctad.org/en/PublicationsLibrary/WFE_UNCTAD_2017_en.pdf
  2. The United Nations Conference on Trade and Development (UNCTAD) https://sseinitiative.org/all-news/stock-exchanges-fostering-economic-growth-and-sustainable-development/
Tags: stock market
NM Partners

NM Partners

"NM Partners" encompasses a diverse range of articles and content published on behalf of various organizations, including corporate entities, government and non-governmental institutions, academic bodies, and key stakeholders in the economic sphere. This content spectrum covers press releases, formal announcements, specialized content, product promotions, and a variety of corporate communications tailored to engage our readership. Notably, a portion of these articles are sponsored content. At Nairametrics, while we provide a platform for these diverse voices, it is important to clarify that our relationship with the content under "NM Partners" does not imply endorsement or affiliation. The responsibility for the content accuracy and viewpoints expressed rests solely with the respective contributors. Nairametrics maintains a firm commitment to editorial independence and integrity. Consequently, we do not assume responsibility for any of the content published under "NM Partners." For any inquiries, comments, or feedback regarding the content featured in this section, we encourage open communication and can be reached at info@nairametrics.com. Additionally, we invite our readers and contributors to familiarize themselves with our Paid Post Guidelines, which outline the standards and processes governing paid content on our platform.

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Comments 1

  1. Oforah Ndirika Anthony says:
    February 21, 2023 at 8:43 pm

    Pls i need the importance of stock exchange

    Reply

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