Thursday, November11, 2020 / 05:30 AM / By ProshareResearch / Header Image Credit: EcoGraphics

Executive Summary

Marketshave a way of exciting users or traders; they delight, pressure and at timesdeflate. Markets for equities, debts and other financial assets centre aroundmood swings, vision and carefully crafted strategy. Those who depend on moodswings and tea leaves to trade live tragic lives. Those who see images in theclouds become frustrated, while those who apply careful methodology potentiallymake decent returns on their investments. Even when things go awry, number-crunchersand context analyzers still get off the hook better than others. The wider themarkets and the more diversified the asset classes people invest in, the betterthe opportunity for superior rewards relative to risks. 

Asequity and debt trading move across borders, Nigerian investors, in largernumbers, are taking a closer look at the merits and demerits of a unifiedAfrican trading platform. Given the commencement of the African ContinentalFree Trade Agreement (AfCFTA) in January 2021, the need for a unifieddigital trading platform has become compelling. African fintech companies haveattempted to unlock the doors to payment solutions nationally, but they arestill picking the locks of unified continental markets. 

Africain Relief

TheAfrican continent has 1.3bn people and a gross domestic product (GDP) size(excluding Nigeria) of roughly US$2trn (slightly lower than the marketcapitalization of Apple Inc. on the New York Stock Exchange (NYSE)). Althoughthe continent's GDP size may not be staggering, it is large enough to drawglobal investor interest during a COVID-19-induced liquidity glut. 

Togrow its GDP, Africa needs to make capital mobilization a more accessibleenterprise. Investors require a continent-wide database of business opportunitiesin the different sub-regions with inflation-adjusted market yields regularlypublished. Financial markets need to stage themselves in the shop window forinvestors to eyeball investment opportunities and decide what fits and whatdoes not. Continental investors should assess equity or debtinvestment from Johannesburg to Harari, Casablanca to Dar es Salam, and Cairoto Accra. The continental movement of capital needs to be seamless, fast andsecure. With the continent's considerable natural resources and largeworkforce, African economies can grow at blinding rates of between 8% and 10%per annum until 2030 (see chart below). 

Africa'smarket yields are the world's best, despite concerns over fiscal balance andrising domestic inflation rates. At the same time countries, like Nigeria(3.71%), Egypt (3.14%), and Botswana (0.71%) have seen slow growth ratesyear-to-date (YTD), other markets like Ghana (46.75%), Mauritius (18.11%) andCasablanca (17.84%) have been flying (see chart below). 

Likemost global economies, African economies have seen inflation rates surge aspost-COVID-19 economic challenges lead to supply chain disruptions, energyshortages and other cost-push pressures. For Nigeria, inflation has tapered tolower values over the last seven months than the first three months of 2021 andhas fallen from the previous fifteen months from January 2020.   Theinflation rate in Nigeria was 16.63% in September compared to 18.17% in March2021. 

Risinginflation rates suggest higher nominal interest rates and higher required ratesof investment return; with interest rates rising, bond prices begin to fall asinvestors expect higher bond yields. In Nigeria, coupon rates on bonds havebeen higher than other large African economies. Inflation has risendifferentially on the continent but has been especially troublesome in Nigeria(see Illustration below). 

Financialinvestments across Africa would become increasingly attractive but the subjectof high uncertainty and volatility. In an environment of high global liquidity,cash will seek out the most viable risk/return relationships across thecontinent, and Africa's low investment base provides new opportunities;however, investors will be wary of the continents low COVID-19 vaccinecoverage, high-risk political situations (for example, military coups) andrising social unrest and insurgency. Political risk factors could put a damperon investment attractiveness. 

TheRise of Fintech; the Missing Middle

Whilepolitical factors may smear Africa's investment opportunities, the rise of itsFintech sector has left the world breathless and in awe. The financial servicesector in countries like Nigeria, South Africa, Egypt and Kenya have navigatedaround the weak continent narrative to stand as an example of private-sectorcreativity, imagination and resilience. 

However,most of the gains have been concentrated in the money market involving paymentand settlement systems, leaving the capital market in the lurch. The recentCentral Bank of Nigeria (CBN) approval-in-principle (AIP) to telecommunicationscompanies MTN Nigeria and Airtel Africa to carry out payment service banking inthe country underlines the digital disruption in the money market.

TheAfrican Exchange Linkages Programme (AELP), the product of collaborationbetween the African Securities Exchanges Association (ASEA) and the AfricanExport-Import Bank, leans into an era of prospective cross-border capitalmarket trading. Gen Z and Y's rise in Nigeria has pivoted investment towardsoffshore markets, searching for superior returns in Africa and beyond. Digitalplatforms such as Bamboo and Chaka have led the charge towards equitytrading in foreign markets by a young Nigerian population anxious to drop theshackles of physical location. 

The NewInvestment Sandboxes

Tradingacross country boundaries has become the option for younger African demographyunwilling to allow history rather than imagination to dictate their future. Ayounger generation of African investors expect trading platforms to show speed,agility and responsiveness, as three of the most critical service deliverycharacteristics highlighted in Proshare's 7^th Annual OnlineTrading Ranking Report. 

Ifcapital flows are to improve amongst African countries, economists haveemphasized the need for capital to move freely within the continent in searchof superior market returns. Although desirable, this will not happen quickly asrestraints on capital movement amongst countries and domestic fiscal andmonetary policies aimed at economic expansion and inflation rate declines hurtforeign exchange markets. The foreign exchange management of capital marketpayment and settlement platforms 

Atruckload of problems such as capital movement restrictions, foreign exchangetranslation difficulties and domestic regulation differences would hindercapital flows and the ability of investors to trade in multiple continentalmarkets. Lina Tonui, Project manager of AELP, noted the challenges whilediscussing the need for African Exchanges to get closer as she spoke at aProshare Nigeria Limited organized Webinar with the theme,  

Accordingto Tonui "Research has shown thatregional integration has the potential to help capital markets overcome theseconstraints. Developing domestic capital markets can be done through a regionalapproach, 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 ofinternational financial resources into an economy".

Tonuifurther explained that "To address theliquidity challenges facing African capital markets, the AELP aims to supportcross-border investment flows amongst participating Securities Exchanges. TheProject's primary objectives are: 

• Facilitate Cross-border securities trading between Stockbrokers on participatingExchanges using a unified order-routing system (AELP Link technology platform)

• Support new products and securities and drive innovation in investmentservices

• Enable free flow of trading information. Make research and informationaccessible to asset managers, stockbrokers, institutional investors andindividual investors and highlight investment opportunities across Africanmarkets by creating a Research Hub. 

• Enabling cross-border capital raising and Initial Public Offers (IPOs)

• Develop capacity between the Exchanges and boost collaboration betweencapital market Regulators, Central Banks and Central Depositories. 

• Legal Committee creates guideline agreements and highlights sharedfeatures and/or differences in KYC and AML regulations in each market.Researching on blockages and ways to lobby reform on capital mobility in themarkets

• AELP will support AfCFTA creating a regulatory platform to supportcross-border trade in services and free flow of investment for Africa's development. 

Whilethe AELP might provide a cross-border trading framework, the trading platformsthat would ensure payments and settlements may have to be forged by the AFREXIMin collaboration with the African Development Bank (AfDB) or the Pan AfricanPayment Settlement System (PAPSS). The trading activity would likely occurthrough 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 thefollowing digital observations (see illustrationbelow):

• Online trading works because of the Digital Payment Infrastructure that enables it
• Today, online trading is available via two main channels -Mobile & Web channels
• .On Mobile channels, applications allow users to create an investment portfolio and make investments with ease while providing access to real-time tracking of stocks performance.
• The same applies to web channels that provide users with a broader screen experience.
• Payment is possible on these channels because of payment innovations in the last decade, and eTranzactas a Super Fintechis proud to have enabled this era of innovations.
• With new and more user-friendly payment channels, online trading can be further adopted in financially excluded areas via channels like USSD, Agent networks, and even social media.

Ogunjifurther noted that online trading "wouldinvolve Blockchain technology and DLT, AI and Robo Advisors and Big Data. Theserepresent the future of the business and describe the defining moments of thecontinent's capital market over the next few years" (see Illustration below). 

Eventhough the continent's commodities market has lagged behind both the equitiesand debt markets, cross-border commodity transactions on a network of linkedplatforms across the continent remain a near-term possibility. According toOluwafunto Olasemo, Vice President Financial Markets, AFEX CommoditiesExchange, "Activities on the exchange in2021 significantly outpaced that of 2020. The growth was attributable to theincreased awareness of stakeholders in the potential of the domesticcommodities market, to boost the productivity of both staples and exportcommodities to the typical household and general economy. Compared to 2020, thenumber of deals, contracts, and value traded surged by 213%, 400%, and 413%(Yo-Y), respectively. The year also saw the rollout and adoption of alternativefinancial products linked to commodities. Players in the capital market fullysubscribed to the fixed income instruments listed on the exchange. We believeour role as a market infrastructure enables us to promote growth in the primarysector which translates to inclusive and sustainable economic development".

Therise in commodity activities in 2021 raises hope that African capital marketswould be more price efficient and liquid with unified trading floors. Theability of investors to rebalance their investment portfolios across assetclasses and countries on the continent could lead to significant growth in thecontinent's gross domestic product (GDP). With more countries coming to termswith 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 aCompetitive  Tableau

Beingthe largest economy and the most populous nation in Africa, Nigeria is poisedto gain significantly from the trade and investment opportunities presented bythe African Continental Free Trade Area (AfCFTA). With over $500billion in GDPand a population of over 200 million, Nigeria has the largest market andcapacity for expansion into other African markets. Whereas the decision toestablish the AfCFTA was taken in 2012 by the Heads of State and Government ofthe African Union (AU) at the 18th Ordinary Session and the Agreement becameeffective in May 2019 when 22 ratifications were received, the official startof trade under the AfCFTA came into effect at the beginning of this year, onJanuary 1, 2021. Nonetheless, the full implementation of trading may take alittle longer as countries still have to negotiate different aspects of theAgreement and develop implementation plans to domesticate the Agreement. 

TheAfCFTA has been the world's largest free trade area since establishing theWorld Trade Organisation (WTO). Its primary objective is to create a singlemarket for goods and services facilitated by the movement of persons andresources to deepen the economic integration of the African continent withinthe Pan-African vision of an integrated, prosperous, and peaceful Africaenshrined in Agenda 2063. When the world recovers from the pandemic, the AfCFTAoffers post-COVID-19 collaborative opportunities to support Africa's economicrecovery and growth plans. For a country like Nigeria, playing a significantrole in existing regional economic communities (RECs), AfCFTA provides aplatform to consolidate and expand its leadership role in Africa. The benefitsof AfCFTA for Nigeria may be more significant, leveraging existing developmentin sectors where the country has a comparative advantage. 

TheNigerian Trading Pie

• Expansion of Market Opportunities

TheAfCFTA's main objective is to create a single market for goods and services onthe continent to increase trading among member nations. The strategy for theAfCFTA is to implement protocols to eliminate tariffs and non-tariff barriersto trade. Nigeria accounts for about 75% of the ECOWAS free trade area exportvolumes due to its size and significant crude oil exports. The continentaltrade agreement presents expanded opportunities for Nigeria in a larger market.The ECOWAS treaty provides access to free trade among 15 West African countries. AfCFTAtreaty offers access to 54 African countries with a combined GDP of US$2.6trnand a population of 1.3billion people.

• Economic Growth and Diversity

TheUnited Nations Economic Commission for Africa estimated that eliminatingtariffs and non-tariff barriers with the AfCFTA will boost intra-African tradeby 52.3%. However, African countries mainly trade in primary products formarkets outside the continent, leaving the continental input-output matrix fullof wide gaps that signify a lack of complementarity of production or processingactivities. AfCFTA offers Nigeria the opportunity to take advantage of thevalue-added products shortages in Africa by diversifying its export base frommainly extractive products to industrial goods and expansion in services.

• Open Doors to Trade

TheAfCFTA is committed to expanding intra-African trade through the coordinationof trade liberalisation and implementation of trade facilitation instrumentsacross Africa. Specifically, the Agreement mandates member countries tosimplify and harmonize international trade procedures, logistics to expediteimportation and transit processes. Nigeria's membership of the WTO TradeFacilitation Agreement (WTO TFA) and its ratification of the AfCFTA agreementwill foster the resolution of persistent trade facilitation challenges in Nigeria in readinessfor trading under AfCFTA. 

• Settling Disputes

Oneof the specific objectives of the AfCFTA is to establish a mechanism for thesettlement of disputes concerning trade rights and obligations among membercountries. This offers Nigeria the opportunity to play its game right withoutcruel and discriminatory treatment from other African countries. However, theconcern for many private sector players is the lack of a concrete disputeresolution framework for non-state actors, which may dampen the hope ofattracting private investors under the AfCFTA.

• The SME Engine

Accordingto PwC's MSME Survey 2020, MSMEs in Nigeria accounts for about 96% of totalbusinesses, account for about 75% of the workforce, and contribute about 50% tothe country's Gross Domestic Product (GDP). One of the most significantopportunities offered by the AfCFTA to SMEs is market access. The Agreementprovides Nigerian SMEs access to essential factors for their growth on a globalscale, such as open borders, better-structured value chains, and improved contracts. 

• Of Industries and Jobs

Successfulimplementation of the AfCFTA protocols is estimated to double Africa'smanufacturing capacity from $500 billion in 2015 to $1 trillion in 2025,thereby creating 14 million stable jobs. In that regard, the AfCFTA willsupport the industrial policy of Nigeria through the negotiated and agreedexclusions on the tariff lines to protect infant industries. Similarly, AfCFTAprovides a platform for Nigerian manufacturers and financial service providersto connect to more regional and continental value chains.

• Cranking up Africa's Capital

Withthe existing expansion of Nigeria's financial institutions into the Africanmarket, AfCFTA offers Nigeria the opportunity to penetrate deeper into theAfrican market by investing in new fintech platforms, providing trade financefacilities, mobilising savings, and investing in industrial development. Thequest to use more technology in securities trading and link exchanges in Africais a mission to connect African securities exchanges, promote the issuance ofinnovative financial products, and boost cross-border investment flow inAfrica. Opening the Nigerian capital market to intra-African capital marketactivities, with its current growth trajectory, will enhance its vision ofbecoming a leading financial hub for capital formation in Africa.

Much Ado About Payments (PAPSS)

The PanAfrican Payment Settlement System (PAPSS)

"The introduction of PAPSS provides central banks withgreater transparency and control as we now have a single window into allcross-border transactions emanating from our various jurisdictions and acrossthe continent."-Godwin Emefiele, Governorof 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 thatdespite there being 42 currencies on the continent, Africa would one day have acommon currency that eases the bottlenecks of intracontinental business. Hesaid the cost of converting currencies on the continent amounts to $5 billion ayear, which can be considered revenue foregone. 

TheAfCFTA secretariat intends to eliminate or at best significantly reduce thecosts to convert currencies in Africa.  Fortunately, the AfricanExport-Import Bank (Afreximbank), a Pan-African multilateral financialinstitution, in third-quarter 2021 announced the operational roll-out of aninnovative online financing infrastructure for intra-African trade. While thesystem is not a common currency itself, as projected by the AfCFTA scribe, itis 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 settlementframework to bolster the implementation of the AfCFTA trading in localcurrencies within the African markets. 

Thesystem was developed in collaboration with Africa's Central Banks as anintegrated platform for commercial banks, payment service providers, andfintech 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 WestAfrica Monetary Institute (WAMI) and the Afreximbank within the West AfricanMonetary Zone (WAMZ), where some live transactions were done with instantsettlement. Upon successive conduct of the pilot phase, the PAPSS came intobeing on September 28, 2021. 

TheGoverning Team of PAPSS is currently on the advanced discussion stage withother regional institutions and nations to expand the system's connectivityacross the continent. To ensure the financial security of the system,Afreximbank provides payment guarantees on the settlement system and overdraftfacilities to all participants and settlement agents. The Afreximbank had alsoapproved US$500 million as a pilot clearing and settlement fund to acceleratethe conclusion of the payment system in WAMZ and expansion to other regions. 

Operation of the PAPSS

ThePAPSS supports three main processes: instant/near instant payment, pre-funding,and net settlement. 

• Instant/Near Instant Payment

ThePAPSS will enhance instant or near-instant payment between a sender of funds inan African country and the fund's receiver in another African country. Thepayment would commence through the sender's financial institutions in the localcurrency to the PAPSS platform and to the receiver's financial institutions inthe receiver's local currency (See Illustration below).

• Pre-funding

Directparticipants-mainly banks and other financial intermediaries who havesettlement accounts with relevant central banks- will issue direct creditinstruction to initiate settlement on the central banks' real-time grosssettlement (RTGS) systems and the PAPSS. Then, the RTGS credits the pre-fundedaccount of the direct participant and alerts the PAPSS platform. The PAPSS, inturn, credits the clearing account of the direct participants. Indirectparticipants-those with no settlement account with the country's central bank,have to leverage sponsorship agreement to fund or defund their clearingaccounts through the direct participants (SeeIllustration below).

• Net settlement

ThePAPSS will enforce account settlement among participating central banks within24 hours, specifically at 11:00 am UTC daily. The PAPSS will determine the netsettlement position of each participating central bank at the end of thetrading session and initiate credit or debit payment mandate to the RTGS ofcentral banks (See Illustration below).

Benefits of the PAPSS

ThePan-African Payment and Settlement System is set to resolve one of the criticalconcerns in implementing AfCFTA and intra-African trade. The payment system willallow payments for intra-African trade in local currencies and save Africamultibillion dollars in payment and settlement charges, thereby boostingintra-Africa trade. The benefits of PAPSS varies across the stakeholders, suchas the African countries/market, financial intermediaries, and customers. ThePAPSS will ease the pressure on foreign exchange and enhance financialinclusion opportunities for African markets. Financial intermediaries willleverage the system to improve their instant and secure cross-border paymentchannels to African traders. More importantly, PAPSS will help Africa'sFintechs scale up their operations and innovative ideas by providingopportunities to new markets with settlement platforms. Other participants suchas corporations, SMEs, and private traders will have access to various paymentfacilities and improved working capital (SeeIllustration below).

The7^th Online Trading Ranking Report folds into 11 sections.Section 1 takes on issues centred on the evolution of the Africancontinental asset trading environment. The section reviews major Africancapital markets and speaks to the need for a unified approach involving a webof integrated continental trading floors that enable investors to trade debt,equity, commodities and other assets across countries. The section notesefforts 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 marketevolution.

Section2 of the report takes a birds-eye view of the marketand gives insights into how Nigeria's capital market trading floors behavedpost-COVID-19's eye of the storm.  The section gave a rundown ofactivities across financial markets for the year and provided a rich data menufor investors' asset review. 

InSection 3, the report reviews previous Online Trading Ranking reports toprovide context to the recent survey and analysis. The report boldly extendedits coverage to include fintech operations. The companies in this part ofcapital market trading operations received ranks in line with their perceivedperformance by clients. 

Section4 of the report gives a list of market operatorsarranged in the market segment they operate. The section provides readers withan abridged directory of registered industry players and their market category.

Atthe heart of the report is Section 5, where the survey outcome isdisplayed and interpreted.  The section ranks trading platforms accordingto the response of users of the different platforms and the rank given forservice delivery quality, speed, agility and innovativeness, among othercriteria. The survey enables users of online services to assess the relativeuser experience and interface-friendliness (UX/UI) of the operators andprovides operators with insights into where their services meet or exceedclients' expectations or fall short. 

Thesurvey provides operators with speedy competitor service comparison, whichcould prompt a service repositioning strategy that improves the customer'sexperiential journey.  

Section6 of the report reviewed Regulatory Technology andexamined how upgrading tech's regulatory oversight has improved the tradingenvironment and supported greater transparency and efficiency. 

Section7 dealt with the surveys' methodology and explained howthe poll was conducted and the results collated to provide insights into client/userexperience. 

Section8 refers to the report's conclusion and highlights theimportance of market convergence across regulations/regulators and best tradingpractices across Africa. The section explained how the intersection ofoversight and trading platforms across the African continent could improvetrading activities' fairness, efficiency, and agility. It reviewed theopportunities open to investors within a continental market of competing assetsand country risks. The section shined a torch on how the probable couldmanifest in the possible. 

Section9 of the report covers references related reports andvideos while Section 10 treates acknowledgements. The last section ofthe report Section 11, provides the relevant disclaimers.

Dofeel free to share your opinions/observations and feedback with us vide [email protected]. Thank you.

For: ProshareEditorial Board

TeslimShitta-Bey                                                          SaheedKiaribe                

ManagingEditor                                                                 Director, Research

DownloadableVersions of 2021 Report (PDF)

1.     Full Report: Online TradingRanking Report 2021 - The Case for a Unified Exchange - Nov11, 2021

Previous Online Trading Reports

1.     Online Trading Ranking Report 2020 - Trading in aPeriod of a Virus; Building Good Habits- 6^th Edition

2.    Online Trading Ranking Report 2019 - Refining TheUser Experience; Trends In Digital Trading - 5^thEdition

3.    Nigerian Online Trading Portals Ranking Report 2018 - 4^thEdition

4.    Nigerian Capital Market and FX Online Trading PortalsRanking Report H2 2017 - 3^rdEdition

5.    The Nigerian Capital Market Online Trading PortalsRanking Report - 2^ndEdition

6.    The Nigerian Online Trading Report - 1^stEdition

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