Nigeria’s equity market finds itself ensnared in a troubling paradox. While the Nigerian Exchange (NGX) has delivered an impressive 36 percent year-to-date return, nearly ten companies have voluntarily delisted over the past two years, creating a stark contradiction between market performance and corporate confidence. This phenomenon reveals fundamental structural weaknesses that threaten the long-term viability of Nigeria’s capital formation engine.
The contrast with South Africa’s Johannesburg Stock Exchange illuminates the depth of Nigeria’s challenge. Where the JSE attracted eleven initial public offerings worth $7.6 billion during the same period, Nigeria managed merely three IPOs totaling $3.1 billion. This disparity transcends simple economic arithmetic; it reflects profound differences in market architecture, institutional depth, and investor sophistication that have accumulated over decades.
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The liquidity imperative
At the heart of this divergence lies the fundamental relationship between liquidity and market vitality. The JSE operates within an ecosystem of deep institutional participation, where pension funds, asset managers, and insurance companies provide consistent demand for equity securities. This creates what economists term “thick markets” where large transactions can occur without significant price disruption, reducing the cost of capital for listed entities. Nigeria’s equity market, by contrast, suffers from structural thinness that creates a vicious cycle of disinvestment. When major shareholders attempt to exit positions, the lack of ready buyers often forces them to accept steep discounts, discouraging other companies from pursuing public listings. This liquidity constraint becomes particularly acute during periods of macroeconomic uncertainty, when even sophisticated investors retreat to the sidelines.
The governance differential between the two markets further compounds this liquidity challenge. South African listed companies operate under rigorous disclosure regimes that have earned international recognition, creating what financial theorists call a “governance premium” in valuations. This reputation for transparency attracts global institutional investors who might otherwise avoid frontier markets, thereby expanding the addressable investor base.
The regulatory architecture
Nigeria has made commendable progress in modernising its regulatory framework, with the adoption of the NGX Rulebook representing a significant step toward international best practices. However, implementation remains inconsistent, and many market participants report experiencing what regulatory economists term “enforcement uncertainty” – the unpredictable application of rules that creates additional risk premiums in investment decisions.
“Strategic spin-offs of high-value subsidiaries could simultaneously unlock shareholder value, deepen sectoral representation on the NGX, and create pure-play investment opportunities that appeal to specialised institutional investors.”
This regulatory inconsistency manifests most clearly in corporate communication practices. While South African companies have embraced proactive investor relations as a competitive necessity, Nigerian firms often treat stakeholder communication as a compliance exercise rather than a value creation opportunity. This reactive approach undermines the development of the institutional relationships that underpin sustainable market growth.
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The foreign exchange factor
The role of currency volatility in Nigeria’s listing challenges cannot be overstated. Companies operating in naira-denominated businesses face the constant threat of foreign exchange-induced earnings volatility, making financial projections and valuations exercises fraught with uncertainty. This creates what economists call “real option value” for remaining private, as companies retain maximum flexibility to adapt to currency shocks without the constraints of public market reporting.
South Africa’s more stable currency environment, while not immune to emerging market pressures, provides a foundation of predictability that enables long-term capital allocation decisions. This stability premium becomes self-reinforcing as international investors develop confidence in rand-denominated investments, creating deeper secondary markets that further reduce volatility.
The institutional investment gap
Perhaps the most critical structural difference lies in institutional investor participation. Nigerian pension funds and insurance companies maintain relatively conservative equity allocations, reflecting both regulatory constraints and institutional risk aversion. This creates a fundamental demand deficiency that limits market growth potential regardless of supply-side reforms. This institutional gap is perhaps the most pressing challenge facing Nigerian capital markets. Without significant domestic institutional participation, the market remains overly dependent on retail investors and foreign portfolio flows, both of which tend to be more volatile and price-sensitive than long-term institutional capital.
Strategic implications
The unbundling trend observed in South Africa presents particularly compelling opportunities for Nigerian conglomerates. Many of the country’s largest business groups encompass diverse operations spanning telecommunications, financial services, energy, and consumer goods. Strategic spin-offs of high-value subsidiaries could simultaneously unlock shareholder value, deepen sectoral representation on the NGX, and create pure-play investment opportunities that appeal to specialised institutional investors. This approach would address multiple market development objectives simultaneously: increasing the number of listed entities, improving sector diversification, and creating more focused management structures that typically command valuation premiums in efficient markets.
The path forward
Nigeria’s capital market stands at an inflection point. The recent rally demonstrates that investor appetite exists when macroeconomic conditions stabilise and corporate earnings improve. However, converting this cyclical momentum into sustainable structural growth requires coordinated policy intervention across multiple dimensions. The most promising approach involves creating incentive structures that make public listing economically attractive for quality companies. This might include targeted tax relief for newly listed entities, streamlined regulatory approval processes, and enhanced post-listing support services that reduce the ongoing costs of public company status.
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Equally important is the development of market-making mechanisms that provide liquidity buffers during periods of market stress. Active market makers, supported by appropriate regulatory frameworks, can significantly reduce the volatility that currently deters potential issuers from considering public markets. South Africa’s experience demonstrates that emerging markets can successfully build virtuous cycles where liquidity attracts listings, listings deepen liquidity, and both contribute to sustained market development. Nigeria possesses the economic scale and corporate sophistication necessary to achieve similar outcomes, but realising this potential requires acknowledgement that market development is as much about institutional architecture as it is about individual company performance.
The stakes extend beyond capital market statistics. In a country where small and medium enterprises require patient capital to scale and where infrastructure development demands long-term financing, a vibrant equity market represents essential economic infrastructure. The choice is clear: implement the structural reforms necessary to reverse the delisting trend, or accept the gradual marginalisation of Nigeria’s public capital markets in the broader economic ecosystem.
Dr. Oluyemi Adeosun, Chief Economist, BusinessDay Media
