Stakeholders have attributed the slow take-off of commodities exchanges in Nigeria to the government’s lack of understanding of the workings of these specialized exchanges which thrive on trading electronic receipts against storage and sale of agricultural products in warehouses.
They explained that an organized commodities exchange with clearing and settlement system, dealing member firms and other registered operators had the potentials to grow the nation’s Gross Domestic Product (GDP) by revamping the ailing economy through employment generation, digital transaction of agricultural and mineral products and foreign exchange earnings.
“Commodities exchanges provide numerous benefits to an economy, especially, a developing economy like Nigeria if the relevant authorities provide appropriate support for their orderly functioning. Price discovery is a major driving force in this organized market. It refers to the mechanism through which prices come to reflect known information about the market. The fact that farmers, merchants, commodity brokers, government and other stakeholders can reasonably gauge the mood of the market from publicly available information around demand and supply, makes planning, organizing, and forecasting, integral part of the market easy.
“Nigerian economy will surely benefit from having functional commodity exchanges in the country, and government must therefore align its economic diversification programme to commodity exchanges’ value chains to facilitate global trade and investments.”, says a commodity trader and Chief Executive Officer, Wyoming Capital and Partners, Mr Tajudeen Olayinka.
Another commodity trader and Chief Executive Officer, Sofunix Investment and Communications, Mr Sola Oni explained that the Federal Government should remove any bureaucratic bottlenecks that may affect the smooth functioning of commodities exchanges to enable them enhance economic growth and development.
According to him, it appears there is a conflict of roles between the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) on the regulation of commodities exchanges in Nigeria aside from what constitutes an ideal commodities exchange.
“The recent announcement of N50 billion lifeline for Nigeria Commodity Exchange (NCX) by the Central Bank of Nigeria (CBN) may have sent a wrong signal to the global community as creating a conflicting the role between The Securities and Exchange Commission (SEC) and the apex bank on the institution that regulates commodities exchanges in Nigeria. The investment and Securities Act of 2007, among others, empower SEC to not only regulate commodities exchanges but ensure that all commodity exchanges compete effectively on an even playing field. There should be clarification of roles on the regulator of commodities exchanges to enable the investing public to determine where to haul blame on the delay in effective takeoff of the exchanges in Nigeria. The Nigerian commodities exchange’s ecosystem is a one trillion Dollar economy that is untapped. The Commission has taken some bold steps towards the implementation of this ecosystem’s structure. For instance, it has issued regulations guiding the involvement of collateral managers, accreditation of warehouses and approval of rules and regulations of structures of commodities exchanges.
“Unfortunately, it seems the role of Commodities Exchanges in Nigeria is still largely misunderstood and often mistaken for commodity traders who buy commodities, store in owned or leased warehouses and decide when to sell. Business of a commodities exchange cuts across Agriculture Solid Mineral and Oil and Gas Sectors. Fungible instruments can be generated from them and listed on a structured commodities Exchange to inject liquidity into the system. The Exchanges provide opportunities for the trading commodity-based contracts and instruments including spots, forwards, futures and capital raising instruments. Commodity Exchanges as regulated platforms do not get involved in commodities till they have been dematerialized to digital contracts that are tradable electronically. This eliminates the possibility of hoarding products and the Nigerian Capital Market is yearning for investment opportunities. “, Oni said.
In his own comments, the Vice-Chairman, Highcap Securities, Mr David Adonri noted that commodities exchanges could promote financial inclusion.
“A Commodities Exchange’s value chain is a mechanism for formalization of trading in commodities. It brings informal participants to a structured system, for financial inclusion and derisking. The Exchange provides a transparent pricing mechanism that enhances the volume of transactions. This attracts more investment into commodities, leading to a multiplier effect on the economy.
“The standardizes contract terms, guarantee performance by all parties thus serve as a safe and profitable investment outlet in the economy. This can engender an increased inflow of export proceeds. As a formal and regulated market, Commodity Exchange offers a great opportunity to unlock the potentials in mining and agribusiness from production to storage, logistics and trading. This enhances the diversification capacity of the economy.”, says Adonri.
A professor of Capital Market and President, Association of Capital Market Academic of Nigeria ( ACMAN), Professor Uche Uwaleke explained that commodities exchanges had multiplier effects on the economy.
“It will help support the non-oil sector, diversify the country’s export base and make the economy less vulnerable to external shocks. Through the provision of price transparency including better access to the market, the income of farmers and their living standards will be enhanced. Agribusiness will become more attractive creating investment and employment opportunities in the commodities value chain with a positive multiplier effect on the nation’s economy.”, said Uwaleke.
At the moment, SEC has registered four commodities exchanges in Nigeria. They are Nigeria Commodity Exchange, (NCX) AFEX , Lagos Commodities and Futures Exchange (LCFE) and the latest entrant, Kano -based Gazawa Commodity Market. But the government has not fully aligned its economic diversification programme to the commodities exchanges’ ecosystem.