Strengthening the bedrock: Why increased capital requirements are essential for resilient economy

SEC

The global financial landscape is undergoing a profound transformation. From the rapid integration of Artificial Intelligence(AI) in trading to the increasing complexity of cross-border financial flows, the risks facing our markets have evolved.

As the apex regulator of the capital market, the primary mandate of the Securities and Exchange Commission(SEC), Nigeria, is to ensure stability, protect investors, and facilitate capital formation. To achieve these goals in an era of heightened volatility, the Commission has recently revised the Minimum Capital Requirements (MCR) for all Capital Market Operators (CMOs).

This decision is not merely a technical adjustment; it is a strategic imperative designed to build a formidable, resilient market capable of anchoring a strong and sustainable economy.

Enhancing risk absorption and financial soundness

At its core, capital serves as a ‘safety buffer.’ In times of economic distress or sudden market corrections, well-capitalised firms can absorb losses without collapsing or defaulting on their obligations to clients.

The previous capital thresholds, many of which had remained unchanged for a decade, were no longer commensurate with the current volume of transactions and the sophisticated risk profiles of modern market activities. By raising requirements—for instance, increasing the capital for Issuing Houses (Underwriting) from N200 million to N7 billion—we are ensuring that firms have the ‘deep pockets’ necessary to survive systemic shocks.

Safeguarding investor protection and public trust

Public confidence is the ‘oxygen’ of any capital market. When a market operator fails due to insolvency, it doesn’t just affect one firm; it erodes the trust of thousands of retail and institutional investors.

Higher capital requirements act as a natural filter, ensuring that only serious, well-resourced entities operate in the market. This protects investors in two ways: • Operational Resilience: Firms with more capital can invest in robust technology and cybersecurity, reducing the risk of fraud and system failures. • Accountability: Shareholders with significant capital at stake are more incentivized to demand rigorous internal controls and ethical governance, aligning the interests of the operator with those of the investing public.

Scaling for global competitiveness

A fragmented market with too many ‘fringe players’ lacks the depth to attract large-scale international investments. The increase in MCR is expected to trigger a wave of voluntary mergers and acquisitions.

Consolidation will create larger, more formidable entities with the capacity to: • Underwrite massive infrastructure projects and sovereign bonds. • Deploy cutting-edge fintech solutions to reach the unbanked. • Compete effectively with global investment banks in the regional and international space.

Aligning with macroeconomic aspirations

A strong economy requires a capital market that can efficiently mobilize long-term savings for productive investments. Whether it is financing the ‘Green Transition’ or supporting the growth of Small and Medium Enterprises (SMEs), the market needs intermediaries who are financially sound.

The new requirements ensure that CMOs are not just “surviving” but are active catalysts for economic growth. By ensuring that our intermediaries are strong, we ensure that the transmission mechanism of capital from savers to borrowers remains uninterrupted, even during global downturns.

The Path Forward: A Call for Compliance

The Commission has set a deadline of June 30, 2027, for all affected entities to meet these new standards. We understand that this transition requires significant effort, but the long-term benefits—a stable, liquid, and world-class market—far outweigh the short-term pains of recapitalisation. We remain committed to providing a supportive regulatory environment throughout this transition. Together, we are building a market that is not only larger but also safer, more efficient, and ready to power our nation’s economic future.

–Olusola, a financial analysts and investment adviser, writes from Lagos.

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