How to Structure Innovative Capital Market Transactions in Nigeria
Structuring effective capital market transactions in Nigeria requires stakeholders to navigate the legal and regulatory framework while developing innovative deal structures tailored to the needs of both issuers and investors. In the capital market landscape of Nigeria, there are various structures being utilized by stakeholders and these structures vary from transaction to transaction. Analyzed below are some of the innovative strategies being utilized by stakeholders
1. HYBRID SECURITIES AND STRUCTURED FINANCING
A hybrid security can be understood to mean a single financial security that merges two or more different financial instruments. Basically, in plain terms hybrid securities mean fixed-income instrument that mostly combines elements of both debt and equity.1
In a bid to clearly understand hybrid securities, it is imperative that we examine the various types of Hybrid Securities that are commonly used in the Nigerian Capital Market.
a. Convertible Bonds: Generally, Convertible Bonds afford companies with versatile financing option. This is done via the combination of elements of both debt and equity. At its core, these bonds function like traditional debt instruments by offering periodic interest payments to investors. However, they also include a conversion feature that allows bondholders to exchange their bonds for company stock under predetermined terms. The conversion ratio specifies the number of shares an investor receives upon conversion, making convertible bonds an appealing choice for those seeking both fixed income and potential equity appreciation.2 In simple terms, a convertible bond is a fixed-income corporate debt security that yields interest payments but can be converted into a predetermined number of common stock or equity shares.
b. Preference Shares with Redemption Features:
Another notable example of Hybrid Securities are Preference shares that are redeemable. This type of share is a unique financial instrument in the fact that they combine elements of both equity and debt, making them a notable form of hybrid security.3Under the Companies and Allied Matters Act, 2020 (CAMA 2020), particularly Section 147 of CAMA 2020, a company is allowed to issue redeemable preference shares at a future date, under specific conditions, or at the discretion of either the company or the shareholder, depending on the terms of issue.
These shares provide investors with preferential rights, such as priority in dividend payments over ordinary shareholders, while also offering a structured exit mechanism through redemption. The redemption process is either contained in the company's Articles of Association or in the issuance terms and may be triggered in one of the following ways:
Ø On an agreed date or following the happening of a specified event;
Ø At the option of the issuing company; or
Ø At the option of the shareholder.
As a result, preference shares with redemption features are considered a form of hybrid security, as they combine elements of both debt—such as a fixed redemption feature—and equity, which provides ownership in the company, effectively serving as a bridge between the two asset classes.4
c. Islamic Finance Instruments (Sukuk)
In Nigeria, Sukuk has gained significant traction as a financing tool for infrastructure development and investment diversification. Its hybrid nature stems from its combination of equity-like ownership features and debt-like fixed returns, making it distinct from conventional bonds. As a form of hybrid security, Sukuk embodies characteristics of both equity and debt instruments. Sukuk holders, in particular, possess ownership rights or undivided interests in the underlying asset or project, which aligns with equity principles. This dual structure is particularly evident in hybrid Sukuk, which pools various types of contracts such as Ijara (lease), Murabaha (cost-plus financing), and Istisna (construction financing), allowing issuers to diversify risk and customize structures to meet investor preferences.5 The hybrid nature of Sukuk also mitigates certain risks associated with traditional securities. For instance, while conventional bonds expose investors to credit risks without any direct claim on assets, Sukuk holders retain ownership rights over the underlying assets. This feature provides a layer of security and aligns with ethical investment principles by ensuring that financial transactions are backed by real economic activities.6 It is very necessary to point out that Sukuk transactions are very much in force in Nigeria and notable ones include a Sub-national Sukuk worth about $62million (N11.4 billion) which was issued by Osun state in 2013 as well as a Sovereign Sukuk valued $277.93 (N100 billion) in 20177
2. SECURITIZATION AND ASSET-BACKED SECURITIES(ABS)
Securitization involves pooling illiquid assets, such as mortgages, auto loans, or credit card receivables, and converting them into tradable securities. This financial strategy has the potential to boost capital market liquidity, benefiting both financial institutions and investors. Furthermore, this strategy provides Nigerian banks and other financial institutions the ability to have free funds that can be utilized for additional lending, this can be achieved through the removal of loans off their balance sheets.8The primary legal framework governing securitization in Nigeria is the Securities and Exchange Commission (SEC) Rules on Securitization (2015), which provides regulatory guidelines for structuring and issuing securitized assets.
Types of Securitized Assets in Nigeria
Securitization in Nigeria involves converting various asset classes into tradable financial instruments, enhancing liquidity and investment opportunities. The common types of securitized assets include:
a. Mortgage-Backed Securities (MBS) – These securities are supported by pools of mortgage loans, enabling financial institutions to unlock capital from existing mortgage portfolios.
b. Asset-Backed Securities (ABS) – These are investment instruments backed by financial assets such as auto loans, consumer loans, and trade receivables
c. Infrastructure Bonds – These bonds are structured to finance large-scale infrastructure projects, such as roads, bridges, and energy facilities. Investors in infrastructure bonds benefit from consistent revenue streams while contributing to national development efforts.9
3. VENTURE CAPITALS
With the ever-expanding tech start-up space in Nigeria, particularly in the areas of Fintech, health amongst other industries, there was a gapping need for accessibility to funds as well a need for guidance and direction and accessibility to network. This and many other benefits are what Venture Capital provides to startups in the Nigerian market.
In its most basic form, Venture Capital focuses on equity ownership.10 This form of investment allows entrepreneurs and venture capitalists (investors)to share in the risk and rewards of the business, without burdening the entrepreneurs with the need for immediate repayment of debt as the investors are also in the business as shareholders and not merely passive observers.
When it comes to regulations, The Securities and Exchange Commission (SEC) plays a significant oversight function into the activities of Venture Capitals in Nigeria. SEC’s role includes monitoring the operations and activities of individual and corporate investors in a bid to ensure compliance with laid down laws and regulations. 11
Under the SEC Rules and Regulations 2013, specific provisions govern the authorization and regulation of venture capital funds. In addition, a regulatory framework was further strengthened with the introduction of Rule249D, which came into effect on 28 February 201312.This rule was designed to oversee private equity firms that manage investment funds with a minimum investor capital commitment of one billion Naira.13 Rule249D imposes key restrictions, including a prohibition on private equity firms from soliciting funds from the general public. Instead, they are permitted to raise capital solely from qualified investors. Furthermore, the rule limits the allocation of fund assets, preventing any private equity firm from investing more than 30% of its total assets into a single investment. To ensure transparency and accountability, fund managers are also required to submit quarterly financial reports to the SEC.14
KEY EMERGING TRENDS IN CAPITAL MARKETS IN NIGERIA
Nigeria’s capital market is undergoing a significant transformation driven by digitization and technological innovation. The increasing adoption of online trading platforms, algorithmic trading, and artificial intelligence (AI) is reshaping investment strategies and market operations. Online trading platforms are broadening investor participation, making capital markets more accessible to a wider demographic. Meanwhile, algorithmic trading is enhancing market liquidity and efficiency by automating trading processes and optimizing trade execution.15
The rise of digital assets, including cryptocurrencies and tokenized securities, is steadily integrating into Nigeria’s financial landscape. Recognizing this shift, the Securities and Exchange Commission (SEC) has established a regulatory framework for digital assets, ensuring their issuance, offering platforms, and custody operate within defined legal parameters.[16]Under these regulations, issuers of digital assets classified as debt or equity must register with the SEC, while foreign VASPs, such as Digital Asset Custodians (DACs), may also receive regulatory recognition.17
As the digital assets market in Nigeria continues to grow, projections estimate a market volume of approximately US$1.58 billion by 2025.18This trajectory underscores a gradual yet deliberate shift toward a more digitized, diverse, and well-regulated capital market, ensuring that technological advancements align with investor protection and financial market stability.19
Another emerging trend is the issuance of green bonds and sustainable financing, this trend represents a significant trend in Nigeria's capital market, mirroring a global movement toward environmentally conscious investment. The Nigerian government has demonstrated commitment by issuing sovereign green bonds aimed at funding projects such as renewable energy initiatives and afforestation programs, supported by the SEC's Green Bond Issuance Rules mandating disclosure of sustainability impacts.17 Corporate entities are also participating through domestic green bond issuances to finance renewable energy projects, with examples including Access Bank PLC N15.00 billion 5-year 15.50%Fixed Rate Senior Unsecured Green Bond due 2024, and the first Green Infrastructure Bonds in Nigeria: North South Power Limited ₦8.50bn15-year 15.60% Series 1 Guaranteed Fixed Rate Senior Green Infrastructure Bond due 2034 and N6.33bn 10-Year 12.00% Fixed Rate Senior Green Bonds due 2031. 20
CONCLUSION
The evolution of Nigeria’s capital market is shaped by the interplay of regulatory frameworks, financial innovation, and technological advancements. As stakeholders navigate the complexities of structuring capital market transactions, the adoption of hybrid securities, asset securitization, and alternative financing models has become instrumental in optimizing capital flows and mitigating risks. The regulatory landscape, anchored by the Investments and Securities Act, the SEC Rules, and other governing statutes, provides the necessary oversight to ensure transparency, investor confidence, and market stability.
The integration of digital assets, tokenization, and AI-driven trading mechanisms signals a transformative shift, expanding market accessibility and fostering financial inclusion. However, challenges such as regulatory ambiguities, liquidity constraints, and risk management concerns require proactive measures to sustain market growth and resilience. Addressing these challenges through policy refinements, enhanced market transparency, will be critical to unlocking the full potential of Nigeria’s capital markets.
[1] Liberadzki, K., Liberadzki, M. (2016). The Definition of Hybrid Securities. In: Hybrid Securities. Palgrave Macmillan, London.https://doi.org/10.1007/978-1-137-58971-2_1
[2] James Chen, (Investopedia, 1 June 2024) ‘Convertible Bond:Definition, Example, and Benefits’ https://www.investopedia.com/terms/c/convertiblebond.aspaccessed 20th February 2025
[3] Thomson Reuters, ‘Redeemable Preference Shares’ (Practical Law, undated) https://uk.practicallaw.thomsonreuters.com/w-004-7688accessed 20th February 2025
[4] ASX, Understanding Hybrid Securities: An Attractive Alternative for Incomehttps://www.asx.com.au/investors/learn-about-our-investment-solutions/hybrids/risks-and-benefitsaccessed 20th February 2025
[5] Securities and Exchange Commission Nigeria, Sukuk (Islamic Bond) at a Glancehttps://sec.gov.ng/investor-education/sukuk-islamic-bond-at-a-glance/accessed 20th February 2025
[6] DOA Law, Understanding the Issuance of Sukuk Bonds in Nigeria https://www.doa-law.com/wp-content/uploads/2024/03/Understanding-the-Issuance-of-Sukuk-Bonds-in-Nigeria.pdf accessed 20th February 2025.
[7] Supra.
[8] DLM Capital Group. 2023 Updated:Everything You Need to Know About Securitization in Nigeria – Africa https://dlm.group/securitization-in-nigeria/ accessed 20thFebruary 2025
[9] PwC Nigeria, Digital Assets – An Emerging Trend in Capital Markets (PwC, 2024) https://www.pwc.com/ng/en/publications/digital-assets-an-emerging-trend-in-capital-markets.html accessed 20th February 2025.
[10] O. M. Atoyebi SAN FCIArb (UK) and Efe Iseghohime, July 17, 2024 Venture Capital in Nigeria: A Comprehensive Overview of the Landscape and Legal Framework https://omaplex.com.ng/venture-capital-in-nigeria-a-comprehensive-overview-of-the-landscape-and-legal-framework/ accessed 21st February 2025
[11] SECURITIES AND EXCHANGE COMMISSIONRULES AND REGULATIONS, 2013
[12] Rules on Private Equity Funds – Rule249D_February 28, 2013
[13] Supra
[14] Supra
[15] PwC Nigeria, Digital Assets – An Emerging Trend in Capital Markets (PwC, 2024) https://www.pwc.com/ng/en/publications/digital-assets-an-emerging-trend-in-capital-markets.html accessed 20th February 2025.
[16] SEC Further Tightens Rules on Digital Assets with New Amendments https://www.templars-law.com/app/uploads/2025/01/SEC-Further-Tightens-Rules-on-Digital-Assets-with-New-Amendments.pdf accessed 20th February 2025.
[17] Supra
[18] Statista, Digital Assets in Nigeria (Statista) https://www.statista.com/outlook/fmo/digital-assets/nigeria accessed 20th February 2025
[19] PwC Nigeria, July 2022 DigitalAssets-an emerging trend in capital markets. https://www.pwc.com/ng/en/assets/pdf/digital-assets.pdf accessed
[20] Patrick Kwabena Stephenson, 26 July2024 Tapping Into The Growing Global ESG Bonds Market – Nigeria PunchingBelow Its Weight https://africanclimatewire.org/2024/07/tapping-into-the-growing-global-esg-bonds-market-nigeria-punching-below-its-weight/ accessed 20th February 2025.
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