Majiyagbe: Nigerian Custodial Services in Conformity With Global Best Practice

Vice President of the Association of Asset Custodians of Nigeria (AACN), Mr. Babatunde Majiyagbe speaks on a wide range of issues affecting Nigeria’s banking and capital markets, including custody services and the way forward. Eromosele Abiodun presents the excerpts.

Volatility Uncertainty complexity Ambiguity or VUCA environment still persists despite the gradual recovery from the devastating COVID-19 pandemic. What’s your take on the Nigerian outlook?

For the global capital markets, the pandemic unarguably left in its trail multipronged turmoil that unleashed widespread anxiety and economic hardship for investors, consumers, businesses, and communities. Helping customers and businesses to pull through the crisis and emerge stronger became a major task for industries, their leaders, regulators, and governments.

Nonetheless, navigating through the crisis wasn’t an easy task for any individual, business or country; it was a global affliction. At the onset, countries took different measures to contain the pandemic and mitigate collateral damage on their respective countries.

However, as the coronavirus spread across the world, it dawned on everyone that concerted global action was required to contain it.

Consequently, remedial measures, including health protocols, lockdowns, vaccine rollouts, etc, were globally administered.

Initially the pandemic seemed largely contained however, the emergence of the Omicron variant and its highly contagious nature has become a cause of worry. The global economy is still on the path of recovery albeit slow and notably, the world’s two largest economies, the US and China are recovering. This is significant for the rest of the world.

For Nigeria, though there could be unstated apprehension in business circles but practically everyone has adjusted to the new normal and activities are picking up steadily. The inflation rate has been on a steady decline for seven consecutive months, the GDP is growing, and international organizations are projecting modest growth of the economy. Indeed, the International Monetary Fund (IMF) has predicted Nigeria’s economy to grow by 2.7 per cent growth in 2022.

It was based on signs of economic recovery that our trade group, the Association of Asset Custodians of Nigeria (AACN), the umbrella body for Nigerian custodian banks, took the bull by the horn by proceeding to organize its annual Nigerian Investors Day Conference in June 2021. It was a sign of growing confidence in the recovery of the Nigerian economy.

We want to believe that with the growing application of digital solutions, the need to safeguard assets in physical form will be in steady decline. Is that assertion correct?

It is correct. In general, the digitalization of securities services had begun way before the advent of the pandemic. However, C19 accelerated the pace. For example, annual General Meetings: a key governance and corporate action event in the calendars of companies and issuers are now being held virtually or in a hybrid version given C19 capacity constraints. The Central Securities Clearing System equally deployed Application Programming Interface (APIs) for detachment of shares, account opening etc. The work-from-home situation, another new normal from the pandemic, has made imperative the digitalization of everyday processes in line with this trend, investors are increasingly keen on seeing a much more efficient market driven by technology to improve Straight Through Processes (STP). It is a leaning we expect to continue for some time. It is now left to key market participants including Financial Market Infrastructures to drive digital imperatives and processes that make this more seamless and sustainable. Inevitably, digitalization has become the major catalyst for the continuous change in the way the entire Capital Market interacts.

The 9th AACN Annual Nigerian Investors Conference had the theme, ‘Nigerian Capital Market: The Road to New Normal’. If you are asked to tweak this theme to reflect the current situation, what would it be? And why?

I would say something like ‘The New Normal: Restoring Nigeria’s Capital Market to Pre-Pandemic Heights’. This is off the cuff and just a pointer based on my personal viewpoint and the need to respond to your question. It does not in any way reflect what our group would be settling for.

I have no doubt that memories of a vibrant capital market still linger in the minds of Investors and operators in the market and there would be a natural craving for its return.

Until the foreseeable future, themes around digitization and collaboration, heightened by the pandemic, will continue to resonate.

Still on this year’s AACN investors’ conference, can you share any feedback?

Although the two-day event was virtual, it nonetheless attracted wide participation from Foreign and Local participants. We are quite impressed with the outcome. Dr Yuguda Lamido; the Director General of Securities and Exchange Commission gave a keynote speech, there were fireside chats with investors on what they would like to see in the market vis-à-vis what makes Nigeria remain an investment destination of choice. Like in previous editions, the forum showcased the key fundamentals of the Nigerian economy to the world, showing in very clear terms that the economy remains an investment destination of choice in Africa regardless of the turbulence caused by COVID-19.

We remain committed to the development of our market both in terms of breadth and depth and therefore engage in market advocacy and development as well as awareness creation initiatives to unlock economic opportunities in the country.

The capital market regulators have been taking several measures to enhance participation of retail investors in the market, as well attract new investors, especially young investors, which are crucial for market development. How would assess the success of these interventions so far?

Market development is a continuum that takes into account happenings in the macroeconomic environment. Across the globe, investors’ choice of assets to own in view of changing market dynamics is putting operators under immense pressure. Such factors as non-financial investing, political developments, cost and efficiency have brought the original concept of sustainable investing to the crossroads. It was in response to this that PwC undertook a survey that led to the creation of the Investor Alignment Index, which measures the gap between investor expectation and asset managers’ performance.

The survey made far reaching recommendations, including the need to widen the securities market by attracting new players, especially the retail and youth segments. This is an inevitable route for the Nigerian market, given the rising clout of retail investors in shaping market direction.

Armed with the power of new technologies, which has democratized trading processes, the participation of retail investors on the Nigerian Exchange Limited (NGX), is on the increase, with one account saying they contributed 29 percent to equity trading in 2020. This is expected to grow even more.

So, it was in recognition of the rising importance of the retail segment that the Nigerian Exchange Limited, the Securities and Exchange Commission (SEC) and other stakeholder groups have been organizing financial literacy campaigns targeted at the retail base with the intention of more numbers from the current figure of about three million. The gains of these investor education interventions have been contributory in the market recovery and uptick we are currently seeing.

The ideal situation is the one where it is easy for retail investors to find ways to channel their savings into productive investment and returns. In other climes, retail investors provide long-term funding for the economy, which minimizes over-dependence on bank loans. While there has been some level of progress, market participants must continue to work with regulators on factors that often impact adversely on market development, including such issues as transparency, price manipulation, among others.

When are we likely going to see a reversal of the current situation in which the bulk of assets managed by Nigerian custodians are owned by foreign portfolio investors?

Tough! Attaining such a status is not a tea party. It will result from considerable market development and not wishful thinking. There is a natural tendency for people to seek investment options when an economy is vibrant. This means that the people have something to spare as savings. At present, we are still way back from that ideal. We must also take note that asset custodianship is global in nature. So, it is not unusual to have foreign dominance of the Nigerian custody or capital markets. As you go across the West African sub-region, you would also notice that Nigerians are major investors in the other countries in the sub-region.

The insurance sector is rarely using custodians for their investments but rather building their own investment operations teams, which they basically do internally at a very high cost whereas a custodian would do it for them more efficiently and at a far cheaper cost. Has there been any change in this scenario?

Custodianship is a globally acclaimed post trade function for asset safety and safekeeping. The bulk of custodian banks in the world are some of the biggest in their countries of origin and in the regions where they operate. They also have impeccable reputation for sound management and trust. What else can anyone ask for?

All key regulators such as the Central Bank of Nigeria, Nigerian Pension Commission, Securities and Exchange Commission, National Insurance Commission, etc, have seen the significant benefit custodians provide to asset safety and independent assurance from a control perspective. Regulators have also begun using custodians to aid and protect investors.

The choice of hiring an independent custodian could be up to the investor. Efficiency and cost effectiveness are imperatives that any business would embrace. Our duty as custodians is to be an agent of the investors, protecting their assets and advocating for an efficient and effective market.

Such things as stable power, good transport system, sustainable foreign exchange liquidity and availability, clear and predictable tax regime need to be in place to support growth of the real sector and in turn create opportunities for capital market depth. Are there signs Nigeria is on the road to address such needs?

Whilst there is predictable progress in terms of investments in some of the enablers that drive for economic growth, Nigeria still has a lot to do. Citizens whether private or corporate businesses, as well as the government need to work together in harnessing economic growth driven by innovation, infrastructure, and investments. This collaboration would create products and services people need, provide employment opportunities, promote efficiency, address environmental challenges and create regional economic integration in the sub-region.

Have Nigerian custodians faced peculiar challenges in terms of providing a level playing field that meets the requirements of global investors. We have in mind such things as clear and transparent regulations, protecting investors’ interests, fostering a stable foreign exchange regime, and move to shorter settlement cycles.

In terms of the core functions of custodianship, I will not say we are lagging. I think regulation of the industry has largely conformed to our level of development. Nobody will entrust you with his assets if he does not have confidence in you. But for a country with some gaps in infrastructure and technology, there will always be room for improvement. The solution to effective regulation within the space includes a deep and wider stakeholder consideration to review the impact of any rule, tax modification/inclusion, policy, etc, before the policy is enacted. This ultimately drives the ease of doing business as well as the perception given to Nigeria is the go-to investment destination in Africa

Would you consider cybercrime as a major threat to custody services in Nigeria?

Deviance or criminality is from creation a part of human nature. While I do not condone criminality, I only want to say that perfect compliance with standard conduct or expectation is tough and might be almost impossible in some instances. However, being proactive, deploying appropriate risk mitigation structures and staying ahead of the criminal masterminds is very germane in combating these vices.

What has happened is that the invention of the internet has created an alternative universe with almost the same population as the physical world. So, criminality in that space is only a logical offshoot. Like in the physical form, we have a natural duty to devise means of countering crime in whatever form it manifests, including the cyber space. I do know that at organizational levels, various measures are being taken to protect businesses from the intrusion of hackers and other criminal elements. Our industry is not an exception.

What ultimately happens is that every organization deploys what it considers as its ideal level of security using firewalls, concepts of demilitarized zones and other tools, one that is not easily breached by cyberattacks, and one that continues to elicit client confidence and trust. In the banking industry, earning a customer’s trust is the numero uno.