THE FLAWED LOGIC BEHIND FTSE RUSSELL’S DECISION

SOLA ONI contends that markets should not be judged solely by how convenient they are for foreign capital

When FTSE Russell announced its proposal to reclassify Nigeria from “Unclassified” to “Frontier Market” status, effective 21 September 2026, many Nigerians welcomed the move as long-overdue recognition of the remarkable progress made in the country’s capital market. 

The performance of the Nigerian Exchange Limited (NGX), supported by broader macroeconomic and regulatory reforms, appeared to provide a compelling case for Nigeria’s return to the Frontier Market Index.

However, some market observers remained cautiously optimistic. They argued that the decisions of global index providers are not always driven solely by market fundamentals. Commercial considerations, institutional biases and the operational preferences of international investors often shape such classifications, sometimes at the expense of local market realities.

It is therefore hardly surprising that FTSE Russell has now halted Nigeria’s return to Frontier Market status because of the introduction of mandatory pre-funding for equity transactions under the Central Securities Clearing System’s new T+1 settlement cycle. The decision is disappointing and misguided.

While FTSE Russell is entitled to maintain rigorous standards, its assessment reflects an outdated interpretation of market development that undervalues reforms designed to strengthen financial stability. Rather than recognising Nigeria’s efforts to build a safer and more efficient capital market, it has chosen to penalise reforms simply because they require operational adjustments by foreign portfolio investors.

Nigeria’s transition from T+2 to T+1 settlement is one of the most significant reforms undertaken by its capital market in recent years. Combined with mandatory pre-funding, it seeks to reduce settlement failures, minimise counterparty risk, improve market discipline and enhance investor confidence.

These are not cosmetic changes. They are fundamental structural reforms aimed at making Nigeria’s capital market more resilient, transparent, efficient and credible. Faster settlement aligns Nigeria with global trends, while pre-funding strengthens the integrity of the trading process by ensuring that transactions are backed by available funds.

Yet FTSE Russell argues that because investors must fund trades before execution, Nigeria no longer satisfies one of its core Delivery versus Payment (DvP) criteria. In effect, a reform intended to improve market integrity has become the basis for denying international recognition.

That reasoning is difficult to justify.

The primary responsibility of every market regulator is to safeguard the stability and credibility of its domestic financial system, not to maximise the convenience of foreign investors. Mandatory pre-funding reduces settlement risk, protects brokers and investors from failed transactions, and promotes confidence in the market.

A brief look at history puts the issue in perspective. In the aftermath of the 2008 global financial crisis, regulators across advanced economies introduced stricter safeguards, stronger risk controls and more robust settlement systems to protect the integrity of their financial markets. Those measures were widely applauded as prudent and necessary reforms. Nigeria deserves the same recognition for taking steps to strengthen the resilience and credibility of its capital market infrastructure.

FTSE Russell’s position appears to assume that foreign investors should be shielded from any meaningful operational adjustment, even where such adjustments arise from reforms that strengthen market resilience. That approach sends the wrong signal to developing economies striving to modernise their financial systems. No emerging market should be forced to choose between implementing sound regulation and securing inclusion in a global market index.

Much has also been made of the currency risk associated with pre-funding. Critics argue that investors must convert foreign currency into naira before executing trades, exposing them to exchange-rate volatility. But currency risk has always been an inherent feature of investing in frontier and emerging markets. It is an investment reality, not a regulatory defect.

Moreover, Nigeria’s foreign exchange market has improved considerably following reforms by the Central Bank of Nigeria. Liquidity has strengthened, price discovery has improved and distortions between official and parallel exchange rates have narrowed significantly. While challenges remain, it is unfair to judge today’s reforms solely through the lens of past foreign exchange difficulties.

The decision also raises broader questions about how global index providers assess developing markets. If reforms are judged primarily by their impact on foreign portfolio managers rather than their contribution to market resilience, developing economies will have little incentive to pursue bold institutional reforms. That cannot be consistent with the objective of promoting stronger and more efficient markets.

This is not to suggest that Nigerian regulators are beyond criticism. Broader consultation with international investors before introducing mandatory pre-funding might have eased concerns and produced a smoother transition. Continued engagement with FTSE Russell and other stakeholders remains essential to address legitimate operational issues without compromising market integrity.

Ultimately, however, Nigeria’s long-term ambition should extend beyond securing a place in any global index. Frontier Market status may improve international visibility and attract additional portfolio inflows, but sustainable capital market development depends far more on strong institutions, sound regulation, macroeconomic stability and investor confidence.

History shows that resilient markets are built through courageous reforms, not by preserving outdated practices for the sake of external approval. Nigeria has chosen to strengthen the architecture of its capital market. That decision deserves recognition, not punishment.

FTSE Russell should therefore reconsider not only its assessment of Nigeria but also the broader message it sends to reforming economies. Markets should not be judged solely by how convenient they are for foreign capital, but by how resilient, transparent and well-regulated they have become. On that score, Nigeria has made substantial progress, and that progress deserves to be acknowledged.

Oni, an Integrated Communications Strategist, Chartered Stockbroker, Commodities Broker and Capital Market Registrar, is the Chief Executive Officer, Sofunix Investment and Communications