Securitisation: Bolstering the Nigerian Economy through the Capital Market

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Description

Securitisation: Bolstering the Nigerian Economy through the Capital Market is a well researched actuarial science project topic, it can be used as a guide or framework for your Academic Research.

Abstract

There is an increasing need for the Nigerian capital market currently ranked 52nd in Bloomberg’s list of “world’s strongest financial markets” to expand its range of instruments. I review the securitization instrument market in developed and emerging countries largely made up of asset-backed securities (ABS) including mortgage-backed securities (MBS) and other physical and non-physical financial assets.

This paper highlights the economic benefits of securitization implementation in Nigeria, especially in its ability to transform the banking sector stability, mortgage market, and capital supply. In conclusion, I recommend to the Nigerian monetary and fiscal authorities that the path to growth of the economy through the financial asset securitization is by engineering a regulatory and operational framework that aligns the primary mandate of economic stability with increased investor confidence whose capital market sentiment has been eroded by the global financial crisis of 2008/2009 and the recent 2015 third quarter sell-off.

Introduction

The first set of financial quants that arrived on Wall Street in the early 1970s, where the origin of contemporary financial innovation which includes the modern era securitization which has expanded massively to a market worth trillions of dollars today. The securitization process involves transforming homogenous illiquid assets (e.g., loans) into tradable securities backed by the cash flows of these assets which are then split and sold to different investors to realize the immediate cash value of such assets.1 This innovation of securitisation saw depository institutions expand their business model from the traditional “originate to hold” model to the “originate to distribute” model (Taylor, 2009).
The global securitisation market is largely dominated by the United States often attributed to the clarity on the regulations relating to securitization in the country with $1,210.3 billion asset-backed securitised issued in 2014, while the European region had an average of $244.6 billion y/y issuance on average from 2001 to 2014. Asia’s share of the global securitisation market has grown to 14% in 2014 and in absolute terms to reaching to almost pre-global financial crises levels of $38.8 billion. The Nigerian securitization market is rather nascent, with a curtailed shift to a more market-based financial structure. Established in 1994, the Federal Mortgage Bank of Nigeria (FMBN), the apex mortgage institution saw its activities revamped with more focus on secondary mortgage and capital market functions in the mid-2000s including a proposed mortgage-backed securitisation operations.

Despite this commendable move, commercial bank asset securitisation still stands out as the outstanding route to incentivizing securitisation growth in Nigeria ultimately deepening the country’s financial markets and fill the gap in the supply of investment funding leading to the desired economic development. The “originate to hold” model of banking involves accepting deposits usually short-term and making loans that are comparatively long term. Here, the bank holds the risks associated with originating loans (e.g., credit risk, funding risk, interest rate risk) unlike the “originate to distribute” model where these risks are speciously shifted to intending investors.

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Additional information

Type

Project Topic and Material

Category

Actuarial Science

No of Chapters

5

Reference

Yes

Format

PDF

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