11, 2020 / 05:30 AM / By Proshare
Research / Header Image Credit: EcoGraphics
Markets have a way of exciting users or traders; they delight, pressure and at times deflate. Markets for equities, debts and other financial assets centre around mood swings, vision and carefully crafted strategy. Those who depend on mood swings and tea leaves to trade live tragic lives. Those who see images in the clouds become frustrated, while those who apply careful methodology potentially make decent returns on their investments. Even when things go awry, number-crunchers and context analyzers still get off the hook better than others. The wider the markets and the more diversified the asset classes people invest in, the better the opportunity for superior rewards relative to risks.
As equity and debt trading move across borders, Nigerian investors, in larger numbers, are taking a closer look at the merits and demerits of a unified African trading platform. Given the commencement of the African Continental Free Trade Agreement (AfCFTA) in January 2021, the need for a unified digital trading platform has become compelling. African fintech companies have attempted to unlock the doors to payment solutions nationally, but they are still picking the locks of unified continental markets.
Africa in Relief
The African continent has 1.3bn people and a gross domestic product (GDP) size (excluding Nigeria) of roughly US$2trn (slightly lower than the market capitalization of Apple Inc. on the New York Stock Exchange (NYSE)). Although the continent's GDP size may not be staggering, it is large enough to draw global investor interest during a COVID-19-induced liquidity glut.
To grow its GDP, Africa needs to make capital mobilization a more accessible enterprise. Investors require a continent-wide database of business opportunities in the different sub-regions with inflation-adjusted market yields regularly published. Financial markets need to stage themselves in the shop window for investors to eyeball investment opportunities and decide what fits and what does not. Continental investors should assess equity or debt investment from Johannesburg to Harari, Casablanca to Dar es Salam, and Cairo to Accra. The continental movement of capital needs to be seamless, fast and secure. With the continent's considerable natural resources and large workforce, African economies can grow at blinding rates of between 8% and 10% per annum until 2030 (see chart below).
Africa's market yields are the world's best, despite concerns over fiscal balance and rising domestic inflation rates. At the same time countries, like Nigeria (3.71%), Egypt (3.14%), and Botswana (0.71%) have seen slow growth rates year-to-date (YTD), other markets like Ghana (46.75%), Mauritius (18.11%) and Casablanca (17.84%) have been flying (see chart below).
Like most global economies, African economies have seen inflation rates surge as post-COVID-19 economic challenges lead to supply chain disruptions, energy shortages and other cost-push pressures. For Nigeria, inflation has tapered to lower values over the last seven months than the first three months of 2021 and has fallen from the previous fifteen months from January 2020. The inflation rate in Nigeria was 16.63% in September compared to 18.17% in March 2021.
Rising inflation rates suggest higher nominal interest rates and higher required rates of investment return; with interest rates rising, bond prices begin to fall as investors expect higher bond yields. In Nigeria, coupon rates on bonds have been higher than other large African economies. Inflation has risen differentially on the continent but has been especially troublesome in Nigeria (see Illustration below).
Financial investments across Africa would become increasingly attractive but the subject of high uncertainty and volatility. In an environment of high global liquidity, cash will seek out the most viable risk/return relationships across the continent, and Africa's low investment base provides new opportunities; however, investors will be wary of the continents low COVID-19 vaccine coverage, high-risk political situations (for example, military coups) and rising social unrest and insurgency. Political risk factors could put a damper on investment attractiveness.
The Rise of Fintech; the Missing Middle
While political factors may smear Africa's investment opportunities, the rise of its Fintech sector has left the world breathless and in awe. The financial service sector in countries like Nigeria, South Africa, Egypt and Kenya have navigated around the weak continent narrative to stand as an example of private-sector creativity, imagination and resilience.
However, most of the gains have been concentrated in the money market involving payment and settlement systems, leaving the capital market in the lurch. The recent Central Bank of Nigeria (CBN) approval-in-principle (AIP) to telecommunications companies MTN Nigeria and Airtel Africa to carry out payment service banking in the country underlines the digital disruption in the money market.
The African Exchange Linkages Programme (AELP), the product of collaboration between the African Securities Exchanges Association (ASEA) and the African Export-Import Bank, leans into an era of prospective cross-border capital market trading. Gen Z and Y's rise in Nigeria has pivoted investment towards offshore markets, searching for superior returns in Africa and beyond. Digital platforms such as Bamboo and Chaka have led the charge towards equity trading in foreign markets by a young Nigerian population anxious to drop the shackles of physical location.
The New Investment Sandboxes
Trading across country boundaries has become the option for younger African demography unwilling to allow history rather than imagination to dictate their future. A younger generation of African investors expect trading platforms to show speed, agility and responsiveness, as three of the most critical service delivery characteristics highlighted in Proshare's 7th Annual Online Trading Ranking Report.
If capital flows are to improve amongst African countries, economists have emphasized the need for capital to move freely within the continent in search of superior market returns. Although desirable, this will not happen quickly as restraints on capital movement amongst countries and domestic fiscal and monetary policies aimed at economic expansion and inflation rate declines hurt foreign exchange markets. The foreign exchange management of capital market payment and settlement platforms
A truckload of problems such as capital movement restrictions, foreign exchange translation difficulties and domestic regulation differences would hinder capital flows and the ability of investors to trade in multiple continental markets. Lina Tonui, Project manager of AELP, noted the challenges while discussing the need for African Exchanges to get closer as she spoke at a Proshare Nigeria Limited organized Webinar with the theme,
According to Tonui "Research has shown that regional integration has the potential to help capital markets overcome these constraints. Developing domestic capital markets can be done through a regional approach, facilitating cross-border trading, harmonizing market infrastructure, investor education, and removing capital transactions and movement constraints. The absence of restrictions on capital mobility increases the allocation of international financial resources into an economy".
Tonui further explained that "To address the liquidity challenges facing African capital markets, the AELP aims to support cross-border investment flows amongst participating Securities Exchanges. The Project's primary objectives are:
While the AELP might provide a cross-border trading framework, the trading platforms that would ensure payments and settlements may have to be forged by the AFREXIM in collaboration with the African Development Bank (AfDB) or the Pan African Payment Settlement System (PAPSS). The trading activity would likely occur through two significant channels online and digital mobile. According to Emmanuel Ogunji, Chief Financial Officer of eTranzact, the cross-continental trading of capital market instruments would involve the following digital observations (see illustration below):
Ogunji further noted that online trading "would involve Blockchain technology and DLT, AI and Robo Advisors and Big Data. These represent the future of the business and describe the defining moments of the continent's capital market over the next few years" (see Illustration below).
Even though the continent's commodities market has lagged behind both the equities and debt markets, cross-border commodity transactions on a network of linked platforms across the continent remain a near-term possibility. According to Oluwafunto Olasemo, Vice President Financial Markets, AFEX Commodities Exchange, "Activities on the exchange in 2021 significantly outpaced that of 2020. The growth was attributable to the increased awareness of stakeholders in the potential of the domestic commodities market, to boost the productivity of both staples and export commodities to the typical household and general economy. Compared to 2020, the number of deals, contracts, and value traded surged by 213%, 400%, and 413% (Yo-Y), respectively. The year also saw the rollout and adoption of alternative financial products linked to commodities. Players in the capital market fully subscribed to the fixed income instruments listed on the exchange. We believe our role as a market infrastructure enables us to promote growth in the primary sector which translates to inclusive and sustainable economic development".
The rise in commodity activities in 2021 raises hope that African capital markets would be more price efficient and liquid with unified trading floors. The ability of investors to rebalance their investment portfolios across asset classes and countries on the continent could lead to significant growth in the continent's gross domestic product (GDP). With more countries coming to terms with the realities of the African Continental Free Trade Agreement Area (AfCTFA), competitive Africa is on the cusp of being born.
AfCFTA and Nigeria; Benefits of a Competitive Tableau
Being the largest economy and the most populous nation in Africa, Nigeria is poised to gain significantly from the trade and investment opportunities presented by the African Continental Free Trade Area (AfCFTA). With over $500billion in GDP and a population of over 200 million, Nigeria has the largest market and capacity for expansion into other African markets. Whereas the decision to establish the AfCFTA was taken in 2012 by the Heads of State and Government of the African Union (AU) at the 18th Ordinary Session and the Agreement became effective in May 2019 when 22 ratifications were received, the official start of trade under the AfCFTA came into effect at the beginning of this year, on January 1, 2021. Nonetheless, the full implementation of trading may take a little longer as countries still have to negotiate different aspects of the Agreement and develop implementation plans to domesticate the Agreement.
The AfCFTA has been the world's largest free trade area since establishing the World Trade Organisation (WTO). Its primary objective is to create a single market for goods and services facilitated by the movement of persons and resources to deepen the economic integration of the African continent within the Pan-African vision of an integrated, prosperous, and peaceful Africa enshrined in Agenda 2063. When the world recovers from the pandemic, the AfCFTA offers post-COVID-19 collaborative opportunities to support Africa's economic recovery and growth plans. For a country like Nigeria, playing a significant role in existing regional economic communities (RECs), AfCFTA provides a platform to consolidate and expand its leadership role in Africa. The benefits of AfCFTA for Nigeria may be more significant, leveraging existing development in sectors where the country has a comparative advantage.
The Nigerian Trading Pie
The AfCFTA's main objective is to create a single market for goods and services on the continent to increase trading among member nations. The strategy for the AfCFTA is to implement protocols to eliminate tariffs and non-tariff barriers to trade. Nigeria accounts for about 75% of the ECOWAS free trade area export volumes due to its size and significant crude oil exports. The continental trade agreement presents expanded opportunities for Nigeria in a larger market. The ECOWAS treaty provides access to free trade among 15 West African countries. AfCFTA treaty offers access to 54 African countries with a combined GDP of US$2.6trn and a population of 1.3billion people.
The United Nations Economic Commission for Africa estimated that eliminating tariffs and non-tariff barriers with the AfCFTA will boost intra-African trade by 52.3%. However, African countries mainly trade in primary products for markets outside the continent, leaving the continental input-output matrix full of wide gaps that signify a lack of complementarity of production or processing activities. AfCFTA offers Nigeria the opportunity to take advantage of the value-added products shortages in Africa by diversifying its export base from mainly extractive products to industrial goods and expansion in services.
The AfCFTA is committed to expanding intra-African trade through the coordination of trade liberalisation and implementation of trade facilitation instruments across Africa. Specifically, the Agreement mandates member countries to simplify and harmonize international trade procedures, logistics to expedite importation and transit processes. Nigeria's membership of the WTO Trade Facilitation Agreement (WTO TFA) and its ratification of the AfCFTA agreement will foster the resolution of persistent trade facilitation challenges in Nigeria in readiness for trading under AfCFTA.
One of the specific objectives of the AfCFTA is to establish a mechanism for the settlement of disputes concerning trade rights and obligations among member countries. This offers Nigeria the opportunity to play its game right without cruel and discriminatory treatment from other African countries. However, the concern for many private sector players is the lack of a concrete dispute resolution framework for non-state actors, which may dampen the hope of attracting private investors under the AfCFTA.
According to PwC's MSME Survey 2020, MSMEs in Nigeria accounts for about 96% of total businesses, account for about 75% of the workforce, and contribute about 50% to the country's Gross Domestic Product (GDP). One of the most significant opportunities offered by the AfCFTA to SMEs is market access. The Agreement provides Nigerian SMEs access to essential factors for their growth on a global scale, such as open borders, better-structured value chains, and improved contracts.
Successful implementation of the AfCFTA protocols is estimated to double Africa's manufacturing capacity from $500 billion in 2015 to $1 trillion in 2025, thereby creating 14 million stable jobs. In that regard, the AfCFTA will support the industrial policy of Nigeria through the negotiated and agreed exclusions on the tariff lines to protect infant industries. Similarly, AfCFTA provides a platform for Nigerian manufacturers and financial service providers to connect to more regional and continental value chains.
With the existing expansion of Nigeria's financial institutions into the African market, AfCFTA offers Nigeria the opportunity to penetrate deeper into the African market by investing in new fintech platforms, providing trade finance facilities, mobilising savings, and investing in industrial development. The quest to use more technology in securities trading and link exchanges in Africa is a mission to connect African securities exchanges, promote the issuance of innovative financial products, and boost cross-border investment flow in Africa. Opening the Nigerian capital market to intra-African capital market activities, with its current growth trajectory, will enhance its vision of becoming a leading financial hub for capital formation in Africa.
The Pan African Payment Settlement System (PAPSS)
"The introduction of PAPSS provides central banks with greater transparency and control as we now have a single window into all cross-border transactions emanating from our various jurisdictions and across the continent."-Godwin Emefiele, Governor of Central Bank of Nigeria, and Chairman of the PAPSS Governing Council
Mr. Wamkele Mene, the Secretary-General of the African Continental Free Trade Area (AfCFTA) Secretariat, in a Quarterly Press Briefing on AfCFTA, prophesied that despite there being 42 currencies on the continent, Africa would one day have a common currency that eases the bottlenecks of intracontinental business. He said the cost of converting currencies on the continent amounts to $5 billion a year, which can be considered revenue foregone.
The AfCFTA secretariat intends to eliminate or at best significantly reduce the costs to convert currencies in Africa. Fortunately, the African Export-Import Bank (Afreximbank), a Pan-African multilateral financial institution, in third-quarter 2021 announced the operational roll-out of an innovative online financing infrastructure for intra-African trade. While the system is not a common currency itself, as projected by the AfCFTA scribe, it is a platform that allows African countries to trade in local currencies. Specifically, the Afreximbank, in collaboration with the AfCFTA secretariat, rolled out an initiative known as the Pan-African Payment and Settlement System (PAPSS). The PAPSS was developed as a centralized payment and settlement framework to bolster the implementation of the AfCFTA trading in local currencies within the African markets.
The system was developed in collaboration with Africa's Central Banks as an integrated platform for commercial banks, payment service providers, and fintech across Africa to connect as participants. According to the Afreximbank, a successful pilot phase of the PAPSS was done by the joint effort of the West Africa Monetary Institute (WAMI) and the Afreximbank within the West African Monetary Zone (WAMZ), where some live transactions were done with instant settlement. Upon successive conduct of the pilot phase, the PAPSS came into being on September 28, 2021.
The Governing Team of PAPSS is currently on the advanced discussion stage with other regional institutions and nations to expand the system's connectivity across the continent. To ensure the financial security of the system, Afreximbank provides payment guarantees on the settlement system and overdraft facilities to all participants and settlement agents. The Afreximbank had also approved US$500 million as a pilot clearing and settlement fund to accelerate the conclusion of the payment system in WAMZ and expansion to other regions.
Operation of the PAPSS
The PAPSS supports three main processes: instant/near instant payment, pre-funding, and net settlement.
The PAPSS will enhance instant or near-instant payment between a sender of funds in an African country and the fund's receiver in another African country. The payment would commence through the sender's financial institutions in the local currency to the PAPSS platform and to the receiver's financial institutions in the receiver's local currency (See Illustration below).
Direct participants-mainly banks and other financial intermediaries who have settlement accounts with relevant central banks- will issue direct credit instruction to initiate settlement on the central banks' real-time gross settlement (RTGS) systems and the PAPSS. Then, the RTGS credits the pre-funded account of the direct participant and alerts the PAPSS platform. The PAPSS, in turn, credits the clearing account of the direct participants. Indirect participants-those with no settlement account with the country's central bank, have to leverage sponsorship agreement to fund or defund their clearing accounts through the direct participants (See Illustration below).
The PAPSS will enforce account settlement among participating central banks within 24 hours, specifically at 11:00 am UTC daily. The PAPSS will determine the net settlement position of each participating central bank at the end of the trading session and initiate credit or debit payment mandate to the RTGS of central banks (See Illustration below).
Benefits of the PAPSS
The Pan-African Payment and Settlement System is set to resolve one of the critical concerns in implementing AfCFTA and intra-African trade. The payment system will allow payments for intra-African trade in local currencies and save Africa multibillion dollars in payment and settlement charges, thereby boosting intra-Africa trade. The benefits of PAPSS varies across the stakeholders, such as the African countries/market, financial intermediaries, and customers. The PAPSS will ease the pressure on foreign exchange and enhance financial inclusion opportunities for African markets. Financial intermediaries will leverage the system to improve their instant and secure cross-border payment channels to African traders. More importantly, PAPSS will help Africa's Fintechs scale up their operations and innovative ideas by providing opportunities to new markets with settlement platforms. Other participants such as corporations, SMEs, and private traders will have access to various payment facilities and improved working capital (See Illustration below).
The 7th Online Trading Ranking Report folds into 11 sections. Section 1 takes on issues centred on the evolution of the African continental asset trading environment. The section reviews major African capital markets and speaks to the need for a unified approach involving a web of integrated continental trading floors that enable investors to trade debt, equity, commodities and other assets across countries. The section notes efforts of institutions such as the African Exchanges Linkage Project (AELP) and the AFREXIM Bank-supported Pan-African Payment Settlement System (PAPSS). The section equally takes a cursory look at the role of technology in market evolution.
Section 2 of the report takes a birds-eye view of the market and gives insights into how Nigeria's capital market trading floors behaved post-COVID-19's eye of the storm. The section gave a rundown of activities across financial markets for the year and provided a rich data menu for investors' asset review.
In Section 3, the report reviews previous Online Trading Ranking reports to provide context to the recent survey and analysis. The report boldly extended its coverage to include fintech operations. The companies in this part of capital market trading operations received ranks in line with their perceived performance by clients.
Section 4 of the report gives a list of market operators arranged in the market segment they operate. The section provides readers with an abridged directory of registered industry players and their market category.
At the heart of the report is Section 5, where the survey outcome is displayed and interpreted. The section ranks trading platforms according to the response of users of the different platforms and the rank given for service delivery quality, speed, agility and innovativeness, among other criteria. The survey enables users of online services to assess the relative user experience and interface-friendliness (UX/UI) of the operators and provides operators with insights into where their services meet or exceed clients' expectations or fall short.
The survey provides operators with speedy competitor service comparison, which could prompt a service repositioning strategy that improves the customer's experiential journey.
Section 6 of the report reviewed Regulatory Technology and examined how upgrading tech's regulatory oversight has improved the trading environment and supported greater transparency and efficiency.
Section 7 dealt with the surveys' methodology and explained how the poll was conducted and the results collated to provide insights into client/user experience.
Section 8 refers to the report's conclusion and highlights the importance of market convergence across regulations/regulators and best trading practices across Africa. The section explained how the intersection of oversight and trading platforms across the African continent could improve trading activities' fairness, efficiency, and agility. It reviewed the opportunities open to investors within a continental market of competing assets and country risks. The section shined a torch on how the probable could manifest in the possible.
Section 9 of the report covers references related reports and videos while Section 10 treates acknowledgements. The last section of the report Section 11, provides the relevant disclaimers.
Do feel free to share your opinions/observations and feedback with us vide email@example.com. Thank you.
For: Proshare Editorial Board
Teslim Shitta-Bey Saheed Kiaribe
Managing Editor Director, Research
Downloadable Versions of 2021 Report (PDF)
Previous Online Trading Reports