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The Central Bank said on Monday that reforms were necessary to improve the state of Nigeria’s corporate debt market.

Sanusi Lamido
Sanusi, the Central Bank Governor, said this in Switzerland yesterday,
adding that further reforms, including pensions and insurance, were
needed to enliven the corporate debt market.

“At the moment a
good corporate will be able to price its bonds at 200-300 basis points
above the risk-free (government bond),” a Reuters report quoted Mr.
Sanusi as saying. “The next challenge for us obviously is not so much
the demand side but the supply side, to ensure that the subscription is
not coming from bank liabilities but is coming from actual
institutional investors.”

Mr. Sanusi said
there has to be progress on the insurance reforms, pension reforms, and
progress on other capital market reforms to attract institutional
investors, so that it is actual real, long-term money that is going
into the subscription, and not savings and current accounts.

Reducing taxes

The government has
already agreed to waivers to reduce the taxes on interest income on
bonds, which had required corporates to issue with very high yields and
therefore limited bonds’ attractiveness.

“I think at the
moment most of the corporates are waiting for other macroeconomic
reforms,” Mr Sanusi said, explaining that it did not make sense to
raise money for a power project until the right regulatory framework
was in place. He added that bad loans are an issue, which is why “we
have got a number of distressed banks in Nigeria, while the asset
management company, which is coming into place soon, is likely to take
care of a substantial part of the bad loan problem”. The importance of
a strong and viable domestic bond market as an alternative source of
finance in emerging economies has been critically affirmed by the
global financial crisis playing a crucial role in bridging the funding
gaps that resulted from the near total freeze in global credit flows as
borrowers in less developed economies were forced to look to domestic
markets in order to meet their medium to long term capital needs.

Experts say the
development of the domestic bond market is one key ingredient required
to strengthen Nigeria’s financial system and limit its vulnerability to
external fiscal shocks in the future.

Addressing infrastructure gaps

However, the
Nigerian bond market is yet to develop an electronic trading platform
on the Nigerian Stock Exchange to facilitate bond trading in the
secondary market.

Ike Chioke,
managing director, Afrinvest, a finance research and analysis firm,
said for the Nigerian bond market to fully take its position and
attract more participants, there should be a framework for adopting
international best practice primarily in bond trading platforms and
settlements and a robust banking sector operating on sound market
principles.

“The introduction of corporate bond issuances (and sustained
liquidity) will alert many investors to the strategic advantage of
corporate bonds, and opportunities for diversification presented by the
move away from sovereign debt” he said.