Entrepreneurial knowledge ecosystem and the capital market nexus* 

UCHE UWALEKE

Uche Uwaleke, B.Sc., M.Sc., Ph.D, professor of capital market, Department of Securities and Investment Management, Faculty of Administration, Nasarawa State University Keffi, delivered this excerpt as part of an inaugural lecture titled “Unlocking Wealth And Leveraging Entrepreneurial Knowledge Ecosystem: Understanding Capital Harnessing Essentials’ with the acronym UWALEKE UCHE, at the university on Wednesday, 26 February, 2025 

While entrepreneurial knowledge is generally seen as an embodiment of the skills and competencies necessary for unlocking wealth in any economy, there is no generally accepted definition of entrepreneurial ecosystem. However, one of the most widely accepted definitions of the concept is by Mujahid, Mubarik and Naghavi, (2019:2) as ‘a collection of organized and interdependent factors that lead to the formation of a stimulating environment for entrepreneurial activities in a country’.

Hence, entrepreneurial knowledge ecosystem can be seen as the interconnected network of actors, institutions, and processes that collectively enable the creation of wealth. A thriving entrepreneurial ecosystem is characterised by a skilled workforce, access to medium-to-long term capital, and a stimulating environment that enables innovation.

A good example of an entrepreneurial knowledge ecosystem is the Silicon Valley, located in the southern part of San Francisco Bay Area in Northern California in the United States. It integrates universities like Stanford, tech companies, venture capital firms, research institutions, and entrepreneurial communities to create a globally recognised hub for innovation and entrepreneurship. Silicon Valley is home to FAANG stocks: an acronym for the stocks of companies of US technology giants namely Facebook, Amazon, Apple, Netflix, and Google which trade on the NASDAQ. According to the world Bank, the GDP of the state of California was about $3.9 trillion in 2023 making it the fifth largest economy in the world.

In essence, the entrepreneurial knowledge ecosystem can be the backbone that unlocks wealth and fosters strong economic growth. Entrepreneurial knowledge is critical for understanding how to access, manage, and optimize resources. While educational institutions represent a major stakeholder in this ecosystem, the government is expected to facilitate a conducive environment for developing entrepreneurial knowledge. The connection between entrepreneurial knowledge ecosystem and the capital market lies in how the latter serves as a crucial enabler for entrepreneurs and governments, offering the platforms and providing long-term resources needed for funding innovation and unlocking wealth. 

Let me acknowledge at this juncture that in the last ten years or so, Nigeria has made remarkable progress in capital market development. The menu of available asset classes has been expanded to include Exchange Traded Funds and derivatives, market infrastructure has been modernized and strengthened with platforms such as NASD, FMDQ as well as commodity exchanges firmly in place. I am also aware that the SEC is in the process of finding accommodation for digital assets within its regulatory purview enabled by the Investment and Securities Bill 2024 which was passed by the National Assembly last year.

While these are encouraging developments, the country’s capital market continues to trail behind that of peer countries. The flagship securities exchange, the Nigerian Exchange, is small compared to the major international exchanges, with a total equities market capitalization of N56.5 trillion (about $35 billion,) as at end of September 2024, according to data from the NGX, housing only 151 companies. This pales in comparison to the Johannesburg Stock Exchange with 274 listed companies and equities capitalization of about $1 trillion representing over 280 percent of South Africa’s GDP. It goes without saying that at less than 15 percent of Nigeria’s GDP, the current size of the capital market constrains its role in national economic development. 

Also, the issuer base is not diversified with the NGX dominated by a few companies which leaves the market vulnerable to shocks. This is demonstrated by the fact that only 10 (out of 151 listed companies) account for over 60 percent of equities market capitalization. 

Market cap of top 10 companies on the NGX as at 24th September 2024

Source: NGX

Furthermore, relative to Nigeria’s population of over 200 million people, retail investors’ participation at less than five million is low.  Equally of concern is the low participation of youths in the capital market given that the average age of retail investors is over 40 years which does not reflect the country’s demographics with a significant youth population. Without a doubt, any effective strategy for ramping up retail investor participation should emphasize financial market literacy and leverage the current demographics in the country which emphasize a large youthful population, who represent a huge reservoir of entrepreneurial knowledge.

Capital harnessing essentials for unlocking wealth

As earlier noted, the entrepreneurial knowledge ecosystem requires a stimulating economic environment. Much as the twin reforms of fuel subsidy removal and exchange rates unification embarked upon by the present administration exacerbated inflationary conditions in Nigeria, they have had salutary effects on government revenues, forex market stability and external reserves. On the fiscal side, the remarkable improvements in government revenues and reduction in the debt service ratio from over 80 percent to less than 70 percent represent positive fallouts of the reforms. Going forward, the tax reform Bills hold a lot of promise for the fiscal space and will go a long way to improve the ease of doing business, boost SME growth and improve the macroeconomic environment.

On the monetary front, I note that efforts by the CBN to boost forex liquidity especially through remittances are beginning to yield some positive results. Accretion to external reserves is said to have reached a level (over $40 billion) that can now finance several months of imports. The exchange rate, although still high, has been relatively stable in recent months and Nigeria has now begun to record current account surpluses. As we continue to witness improvements in the macroeconomic environment, the need to access long-term capital to accelerate economic growth cannot be overstressed. 

On this score, I propose the adoption of the IPO (Incentives, Privatization, Optimization) approach to strengthen the capital market in Nigeria and harness long term funds required to develop entrepreneurial knowledge ecosystem and unlock wealth.

Incentives

Incentives may take various forms and have the potential of encouraging more companies to seek quotation on the Exchange. Introduction of a tiered corporate tax system in favour of public companies listed on the Exchange will induce some private companies to go public. Another alternative is to increase company income tax for unlisted companies which would amount to incentivising listing without reducing government revenue. A tax break could also be granted to newly quoted companies for a fixed period of time (say, one year).  The government may also choose to reward already listed firms through patronage and preferential business access.

It goes without saying that tax policies have a strong influence on the development of capital markets. In Jamaica, for example, companies listed on the Junior Stock Exchange are automatically exempted from 100 percent of Corporate Income Tax (CIT) in the first five years from the date of admission to the Junior Market, and 50 percent of CIT in the following five (5) years. Jamaica, a country of about three million people, has nearly 100 listed companies on its main bourse with 48 companies on the Junior Market. Data released by the Jamaica Stock Exchange indicate that the market value of the 48 companies listed on the JSE Junior Market as of January 2025 was a total $148.5 billion.

Since universities are critical institutions in the entrepreneurial knowledge ecosystem, the government can provide incentives for them to access long-term funding.  Against the backdrop of low revenues and other competing needs, funding of public universities will continue to remain a challenge in Nigeria except new funding strategies are explored. It needs to be acknowledged that solutions to the challenge of sustainable funding for universities have to go beyond the traditional mechanisms where private finance finds accommodation. One way that universities can tap capital markets is through the issuance of bonds on a securities exchange which enables them to raise large amounts of capital over a very long period. As a matter of fact, bond issues by universities in the United States are common, particularly among the Ivy League. Some of the biggest US universities, including Harvard, Yale, MIT, Stanford and Princeton, feature in the list of top borrowers. With support from Rating Agencies, they are also becoming popular among universities in Mexico, Canada and Britain. Moody’s, one of the leading global credit-rating agencies, has issued ratings for universities in the US, Canada and the United Kingdom. Not too long ago, the University of Oxford successfully tapped the capital market, offering investors a bond with a record maturity of 100 years – the longest in the history of university bonds and longer than any publicly issued UK Government bond.

While it is easy to dismiss the capital market option as unviable for public universities in Nigeria, the experience of an Australian university illustrates the possibilities. Following the winding up of the Education Investment Fund, the public body that funds teaching and research in Australian public universities, the University of Melbourne issued $250 million in bonds in 2014 to build student housing facilities and generally upgrade infrastructure, a move that saw an exponential increase in the number of its international students from Asia, the UK and the US, according to data by Dealogic.

There is no reason why this cannot work in the Nigerian context. The challenge would be to find a sustainable means of servicing the debt. Because bond markets tend to favour large and reputable universities and penalize smaller ones through high interest costs, the federal government can encourage the big first-generation universities to tap the capital market through the issuance of government-backed bonds. This would entail greater autonomy and responsibility on the part of those universities to ensure that the loans are properly serviced. They will be expected to harness commercial opportunities in their activities and programmes to generate income. It is a no-brainer that public universities have the potential to drive development in Nigeria if they find the right environment. For instance, many of our first-generation universities have been running civil engineering programmes for decades, yet, major construction contracts in the country are undertaken by foreign companies. The result is capital flight, depletion of foreign reserves and constrained job opportunities for Nigerians. 

To change this narrative, the government can provide the required incentive by helping these universities issue, say, a 20-year bond for the purpose of retooling and developing modern day skills required to execute big ticket jobs not only in Nigeria but also in sub-Saharan Africa. It is from such commercial undertakings that any debt taken from the capital market can be repaid over time. This is just one example. The National Universities Commission should rise to the occasion by regularly ranking universities in Nigeria to stimulate the interest of Rating services.

It goes without saying that Nigeria needs skilled manpower to meet broad economic development objectives. To this end, a funding mechanism that ensures that students in tertiary institutions acquire critical skills has significant public benefits. Private capital will be quite useful in this regard. On page 155 of the defunct Economic Recovery and Growth Plan (2017- 2020), it was stated that the administration of President Buhari had planned to “partner state governments and the private sector to introduce post-university skills development institutions (PUSDIs)” across the country. This plan was fantastic. Regrettably, there is little to indicate that it ever left the drawing board.

It is evident that both the federal and state governments must continue to incentivize university education in a predictable way because failure to do so could result in high expenditure in the future on social welfare programmes as well as low scores on the Human Development Index which are inimical to unlocking wealth. The future is clearly in developing creative solutions to the challenge of non-functional education. Tapping the capital market through the issuance of government-guaranteed bonds could be one such solution.

Privatisation

Studies have also indicated that enabling government policies significantly influence issuer demand for capital markets funding. In emerging markets in particular, privatisation or listing of state-owned enterprises has proven to be one of the strongest levers for influencing issuer demand. The federal government (FG) is therefore advised to sell stakes in state-owned enterprises through the Exchanges to raise funds for development. For instance, the FG can make it possible for the public to invest in the oil and gas sector through the creation of a Special Purpose Vehicle which can be listed on the Nigerian Exchange. As with the case of Saudi Arabia’s Aramco, I am confident that the privatisation of NNPCL and its subsidiaries through the capital market will go a long way to improve corporate governance and the performance of the oil company. It will be recalled that in 2019, the government of Saudi Arabia sold about two percent of Saudi Aramco’s 200 billion shares at the Tadawul, the Saudi Stock Exchange, for over $29 billion. At the time, the company was valued at circa $1.7 trillion. Today, Saudi Aramco is one of the most profitable companies in the world. 

Optimization

Like Malaysia, the federal government and sub-nationals should utilize more of infrastructure bonds such as Sukuk and Green bonds when borrowing from the debt capital market to finance renewable energy projects, smart cities, and environmentally sustainable developments. They can actually raise funds for PPP projects through bond issuance. As a matter of fact, Malaysia has one of the highest quality of infrastructure amongst the Asian countries. In a study by Goldman Sachs Global Economics, Malaysia ranked one of the highest in ‘quality score’ at 5.1 compared to South Korea (5.9), Thailand (4.6), Indonesia (3.8) and Philippines (3.2). The country was ranked 21st out of 137 countries for the quality of its infrastructure, aided by the mobilization of long-term local currency financing from the bond market to support private sector participation. 

Malaysia’s high-quality infrastructure has mainly been due to the government’s ability to leverage the capital market in the implementation of its five-year economic plans to execute many infrastructure projects. Relative to GDP, the value of the Malaysian project-finance bond market stands among the world’s biggest. According to the World Bank, infrastructure bonds accounted for 26 percent of overall bond issuance between the years 1993-2019, and in the last decade, the bond market in Malaysia has financed up to an average of $3.4 billion per year in the electricity, gas, and water sectors. 

As a corollary, considering that vast land and property assets are often underdeveloped or inefficiently utilized, optimization of assets also involves the securitization/monetization of public infrastructure by issuing securities backed by their future cash flows, such as toll roads or utility payments. According to Nigeria’s Ministry of Finance Incorporated, over 70 entities have been captured in a national asset register that aims to identify and unlock idle assets’ value in Nigeria. The government should also encourage investments in Real Estate Investment Trusts (REITs) to unlock capital for housing development as well as develop a robust secondary mortgage market to improve access to affordable housing finance.

CONCLUSION

In conclusion, while Nigeria is resource-rich and has significant economic potential, weak infrastructure and skills-gap constitute a major challenge. Unlocking Nigeria’s hidden wealth through the capital market will involve leveraging the market’s potential to mobilize, allocate, and grow the entrepreneurial knowledge ecosystem and in the process foster a supporting environment that encourages public private partnerships. 

In order to achieve this, governments at all levels should deploy the right approach to incentives for capital formation, privatization of public enterprises via the capital market as well as optimization of resources in ways that guarantee value for money. These steps can help channel untapped resources into productive ventures, including through prioritizing pillar courses in tertiary educational institutions to enhance entrepreneurial knowledge, thereby transforming Nigeria’s latent potential into real wealth.

In this connection, the role of universities in the execution of government’s priority areas should be embedded in a revised National Development Plan detailing relevant disciplines and financing requirements within a framework of a differentiated funding model that strengthens labour-market connect and ensures proper linkage with the country’s national perspective plan. Only then will Nigeria be seen to be on the right path to unlocking her massive hidden wealth.

This will form the thrust of my research in the coming years.

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*This is an excerpt from an inaugural lecture titled “Unlocking Wealth And Leveraging Entrepreneurial Knowledge Ecosystem: Understanding Capital Harnessing Essentials’ with the acronym UWALEKE UCHE, delivered by Professor Uche J. Uwaleke at Nasarawa State University, Keffi,  on Wednesday, 26 February, 2025