Distributing foreign collective investment schemes in Africa's largest economy

Author: | Published: 18 Mar 2015
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Michael Oyebola and Damilola Okonkwo of FBN Capital Asset Management examine the emergence, growth, regulatory regime and future potential for collective investment schemes

Effective and pragmatic regulation has been the cornerstone for the growth of Nigeria's asset management industry. Nigeria has recently been attracting attention for its thriving economy and large population. It is now Africa's largest economy, with a GDP of $510 billion, and its financial sector has played a major role in the country's growth and is positioned to continue to do so. The Nigerian Securities and Exchange Commission recently released new rules outlining requirements for the introduction of foreign collective investment schemes to Nigerian investors.

Nigeria has been at the forefront of the African growth story; nowhere is transformative growth and immense opportunity more apparent than within the continent's most populous nation and largest economy. Once overshadowed by abject poverty and corruption, Nigeria has established a record of resilient and steady economic growth and improved political stability. The country has a fast-growing middle class, which accounts for over 23% of the 170 million population. Unsurprisingly, economists predict that Nigeria will be Africa's leading frontier market for growth and opportunity.

The many reforms that have engendered the nation's remarkable growth have largely included those in the financial sector, particularly the positive policy shifts in the domestic money market as first steps towards a more robust and enduring facelift for the sector. More specifically, the asset management industry has made considerable progress as it establishes itself as the country's investments and savings magnet for the emerging middle class and institutions. Reforms in 2004 split the industry into two: traditional asset management (for example, collective investment schemes and discretionary mandates); and, pension fund administration and management. It is not possible to determine exactly when Nigeria's asset management industry was established; however, the first ever collective investment scheme was launched in 1995 and pension reforms (with the advent of the Pensions Reform Act 2004) were established in 2005.

Pension funds

The tightly regulated pension funds, which have accumulated $24.2 billion over the last nine years, dominate the asset management industry. The market is governed by the Pension Reform Act 2014 (this replaced the Pension Reform Act 2004) and is regulated by the National Pension Commission. There are approximately 5.5 million retirement savings accounts (RSAs), 21 pension fund administrators (PFAs), seven closed pension fund administrators (closed PFAs) and four pension fund custodians. Local pension fund managers invest directly in Nigeria's capital markets.

Collective investment schemes

Traditional fund managers (non-pension fund managers) manage the nation's collective investment schemes. With a growing middle class, deposits accumulated in bank savings accounts over the last five years up to December 31 2013 have grown 101% from $6.8 billion to $13.8 billion, whilst hard currency deposits have grown 136% from $8.5 billion to $20.0 billion over the same period. As at the end of October 2014, total assets under management in collective investment schemes was over $1.1 billion in 52 collective investment schemes and two exchange traded funds, having grown 139% from $452 million in 2011. Whilst the industry has grown faster than savings deposits in the nation's banks, traditional fund managers have been working assiduously to grow assets under management at a much faster rate. For example, money market collective investment schemes have grown by 748% from $42 million in 2011 to $360 million as at the end of October 2014. While some managers are growing much faster than others, the market is very fragmented, and the top five asset managers control over 80% of the market.

"Nigeria has been at the forefront of the African growth story"

As with the wider capital market, the collective investment schemes market is regulated by the Securities and Exchange Commission of Nigeria, having been empowered under the Investment and Securities Act 2007 (ISA 2007). The Act establishes the Commission and enlarges its powers and functions over the capital market. Any fund manager operating in Nigeria has to register with the Commission and all collective investment schemes must be approved by the Commission. Section 153 (1) of ISA 2007 defines a collective investment scheme as:

A scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which –

(a) two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest;

(b) the investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a collective investment scheme authorised by any other Act.

Funds accumulated in the asset management industry have been growing much faster than the pool of investible assets, especially in the equity space. Whilst open pension funds are not (for now) allowed to invest outside of Nigeria for asset and liability reasons, collective investment schemes do not face such restrictions. And while there are now a growing number of Securities and Exchange Commission-registered local fund managers offering local products, there is also room for these managers to offer Nigerians exposure to international markets. In addition, foreign operators can offer such products to Nigerians or they can partner with established local managers to do the same.

Foreign collective investment schemes

The new Securities and Exchange Commission rules for foreign fund managers wanting to operate in Nigeria define a foreign collective investment scheme as 'a collective investment scheme authorised in another jurisdiction'. As such, any foreign collective investment scheme soliciting for investments from investors in Nigeria is subject to the approval of the Commission.

To be eligible:

  • A foreign collective investment scheme applying for approval of the Commission should be registered or authorised under the relevant foreign jurisdiction;
  • The operators of the foreign collective investment scheme should be registered and regulated by the relevant foreign regulator;
  • The relevant foreign regulator should be a member of International Organization of Securities Commissions (IOSCO), have adopted global standards for securities regulation and must have substantially met the IOSCO collective investment schemes principles;
  • If the fund is listed, it should be listed and traded on an exchange which has standards of disclosure at least equivalent to those of the Nigerian exchanges;
  • The fund should comply with the same requirements and investment restrictions imposed on similar funds constituted and primarily regulated in Nigeria;
  • The legal and regulatory framework governing the fund and the enforcement of investors' rights should provide a level of investor protection at least equivalent to that offered in Nigeria; and,
  • A foreign collective investment scheme which will not be listed in Nigeria should invest no less than 20% of the fund's total assets in Nigeria.

"Effective and pragmatic regulation has been the cornerstone for the growth of Nigeria’s asset management industry"

A further condition stipulates that the foreign operator is required to appoint a representative in Nigeria for the life of the fund approved in Nigeria. The representative should be an affiliate of the foreign operator duly incorporated in Nigeria and registered with the Commission or a fund manager duly registered in Nigeria with whom it should enter into a representative agreement. Where a foreign operator appoints a local representative, the representative is required to perform a number of duties including:

  • Market the fund to local investors through available distribution channels, and ensure that marketing and distribution efforts are in compliance with the Investment and Securities Act 2007 and its rules and regulations;
  • Administer and maintain a register of unit holders and update their information and particulars;
  • Where applicable to the structure of the fund, ensure that the fund's unit price and net asset value per unit is readily available both to the Commission and the general public;
  • Be responsible for all forms of reporting including performance and financials;
  • Be responsible for managing the communication with unit holders to ensure issuance of all notices to unit holders on a timely basis.

The rules further list the documents to be submitted by a local issuing house on behalf of the foreign operator as well as the disclosure requirements. There are also reporting obligations for the foreign operator, such as ensuring that returns and reports made to the home regulator are also filed with the Commission through its Nigerian representative.

Asset management: set for transformation


Michael Oyebola
Managing Director
T: +234 1 279 8300
E: michael.oyebola@fbncapital.com

Damilola Okonkwo
Head of Strategy and Corporate Development
T: +234 1 279 8300
E: damilola.okonkwo@fbncapital.com

FBN Capital Asset Management
16 Keffi Street
Ikoyi, Lagos, Nigeria

Effective and pragmatic regulation has been the cornerstone for the growth of Nigeria's asset management industry and should not be perceived as a deterrent by foreign operators. The Commission has recognised the need to restore investor confidence, especially after the country's 2007 market turmoil where many investors were severely impacted due to their limited knowledge and understanding of the capital markets. Opportunities do exist for foreign operators to offer Nigerians innovative products and services not available in the local market. As the Nigerian economy continues to grow, the asset management industry is poised to become a powerhouse within the financial sector, attracting retail and institutional investors from across the country.

Local fund managers continue to work with the Commission and introduce partnerships with foreign fund managers to boost growth in the industry. Further, new technology, demographic shifts and changing social habits will transform the asset management industry. Nigeria remains popular with all investors who share the story of strong GDP and consumption growth, and good demographics. In the long term, Nigeria looks to house Africa's largest asset management industry: any strategic moves into Nigeria by foreign fund managers will certainly pay off.