Fintech listings on NGX: The underlying issues

Adopting the NASDAQ-style board initiative should encourage listing of fintech companies on the Nigerian stock exchange, but not without addressing the fundamental issues, writes EHIME ALEX

As of July 2021, technology firms made up half of the National Association of Securities Dealers Automated Quotations index, a report has shown. Known to be an index for technology firms, the Nigerian Exchange Limited is considering adopting the style to its domestic market. Repeatedly, the NGX had said it would launch the board this year to enable fintech firms raise capital to finance their operations.

In a chat with Financial Street, an investment and portfolio analyst, Abel Ezekiel, said, though a laudable idea, the initiative will face many bottlenecks.

“The Nigerian capital market is tightly regulated,” he said, adding that investors’ interest also calls for concern. “The fintechs must have track records to be listed on the Nigerian stock exchange. They must have a track record to guarantee investors’ interest.”

Ezekiel added that NGX’s preparation to launch the NASDAQ-style board will, no doubt, face challenges in the market.

 

Promise to deliver

Five major areas the NGX is looking to make significant strides in the capital market this year include building on digital transformation, listings and delistings, technology, partnerships and sustainability.

At its ‘2021 Market Recap and Outlook for 2022’ held recently, the Chief Executive Officer of NGX, Temi Popoola, said the exchange had a lot of work to do in achieving its set targets for the year.

His words, “NGX, this year, is looking to launch a NASDAQ-style board that we could call the technology board.”

According to him, products “sweated better” to attract technology companies will be on the board, adding that it will also provide enough flexibility for them to find the kind of information that shows confidence for them to attract capital with local and foreign investors.

However, Popoola disclosed that the exchange was working out modalities to address major constraints inhibiting the participation of fintech in the market.

 

Huddles ahead

Access to capital, both domestic and international, remains essential to the success of fintech businesses. A research conducted by Ernst & Young Global Limited, a multinational professional services network, shows that despite the considerable increase in investment, access to late stage and growth capital remains a challenge for fintechs in Nigeria.

The report, ‘Nigeria Fintech Census 2020 Profiling and Defining the Fintech Sector’, conducted in collaboration with the FinTechNGR, states that the ability of a fintech company to raise funds is fundamental to its growth. “Our findings suggest that foreign investors are more involved in the fintech space than their local counterparts, with a higher percentage (57 per cent) of fintech funding coming from overseas.”

It also indicates that policy and regulation stand out as a major hurdle for fintech companies in Nigeria, relative to other markets.

According to EY, more than 50 per cent of the fintech companies interviewed responded that there was need to amend regulations in certain areas. “These areas include capital, Know Your Customer and reporting requirements.”

It disclosed that a large proportion of “fintechs strongly believe the financial industry in Nigeria is overregulated, and may stifle innovation and global competitive advantage.”

The report added, “The Nigeria fintech industry is maturing and continues to grow. There remains a high degree of optimism, however the industry is facing some scale-up challenges. Two fundamental foundations for continued success will include the level of effective collaboration with major players and the level of government support.”

Although some progress has been made to create a supportive environment for fintechs to thrive, the EY report shows that a unique opportunity to improve the fintech policy landscape and make it a differentiator in Africa cannot be ignored.

 

Survey snapshot

The EY report shows that about 24 per cent of the fintechs surveyed consider regulatory outlook / landscape and the unfavorable regulatory environment to be among the top challenges they face as a business.

“Compliance with regulation was identified as the most challenging policy area in the current business environment (at 18 per cent), while the subject of insufficient capital and liquidity, a fiduciary requirement for a larger percentage of fintechs stood at 14 per cent.”

 

Beyond deepening the market

At the 2021 Capital Market Conference in December, Nigerian Vice President, Yemi Osinbajo, expressed concern on the inability of fintech companies and startups to access funds from the capital market.

According to him, there is need for the NGX to woo fintech firms in raising capital beyond deepening the capital market.

He said attracting the fintech unicorns to the market as a viable option for capital raising would give more investors the opportunity to benefit from the growth of these companies and create wealth for the economy.

“We must enhance policies and the ability of fintech companies to raise capital faster, so that investors can look forward to seeing more faster-growing companies listed on the exchange,” Osinbajo said.

 

Regulatory obligation

Nigeria’s Securities and Exchange Commission has been saddled with the responsibilities to develop and regulate a capital market that is dynamic, fair, transparent and efficient to contribute to the nation’s economic development. This role further requires that in the fintech industry, SEC deploys innovative products or processes to aid the Nigerian capital market.

On its part, the NGX, regulated by SEC, provides listing and trading services, licensing services, market data solutions, ancillary technology services as well as access to capital.

 

Fintechs as investment-attractive

In the past years, the fintech companies have highly relied on external funding. “Our analysis indicates that 86 per cent of fintechs arrive at the post-revenue funding stage within four years, on average. Although the bulk of capital for the pre-revenue stage is usually privately-funded, we noticed that 21 per cent of the fintechs at this stage receive funding of $50,000 at the minimum,” EY said in that report.

Fintechs’ access to international funding is vast, obtaining investment sources from about 20 countries across Africa, America, Asia and Europe. According to EY, about 57 per cent of the fintechs report the USA as a source of capital investments, higher than 52 per cent that received funds locally.

The report also shows that the growth in customer base is promising, as 68 per cent of fintechs have over 10,000 customers, with 80 per cent comprising retail customers.

“This indicates high adoption of fintech by consumers and provides signals to investors on the market attractiveness of the Nigerian fintech landscape,” the report added.

In evaluating the nature of capital inflows for fintechs in Nigeria, the report indicated that most fintechs, about 73 per cent of those who rely on external funding, leverage commercial sources to raise capital. Primary sources of such funding include venture capital, bank loans, grants and other personal sources such as family and friends.

As about 53 per cent of fintechs are optimistic that their businesses will initiate an Initial Public Offer in the near future, EY added, “It is estimated that one in two fintechs plan for an IPO within the next three to five years.”