CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Rebuilding Nigeria's inadequate infrastructure so that it can support economic development has made a functioning bond market a priority. Economic growth can be sustained only if investment in infrastructure and in industrial output continues, and a shortage of adequate long-term finance has been identified as a major obstacle to that investment, notably in downstream and midstream petroleum distribution, telecommunications and transportation (Jonas, 2025). Substantial long-term finance is also needed to revive the power sector and the refineries and to provide socio-economic services in education and health care. In addition, the Federal Government's efforts to diversify the economy and make it more market-driven mean that funds will be needed to expand existing facilities to meet the higher demand expected from a more efficient economy over the long term.

The bond market is a fundamental financial market, because risk-pricing and investment valuation models depend on its data. A functioning domestic bond market is necessary for capital investment, and monetary authorities also use bonds to define the yield curve and to keep short-term rates stable. An active sovereign bond market helps to prevent the economy from overheating, since it absorbs large temporary overflows from the money market. Because the bond market is so important to the health of the economy, monetary authorities must pay close attention to its structure and operation (IMF and World Bank, 2014).

International best practice calls for a public debt management agency. No such agency existed in Nigeria until 2000, when the Debt Management Office (DMO) was set up. Debt relief gave a critical impetus to its work and ensured that it had enough resources to deliver the country's debt relief goals. As a result, a strong and capable debt management agency was created faster, and with wider public support, than would otherwise have been the case (Debt Management Office, various years).

The Nigerian bond market is regulated principally under the Investments and Securities Act (ISA) and the rules and regulations of the Securities and Exchange Commission (SEC). Federal Government bonds are reported to have existed since the 1970s, but the market was inactive. Government paper was very short-term and limited in scale, and treasury bills had maturities of 91 days and below, which made the Federal Government's borrowing costs inconsistent and irregular. To restructure the financing of the Federal Government's deficit from short-term to longer-term instruments, to improve and lengthen the yield curve in the domestic money markets, and to encourage long-term savings, the DMO introduced the sale of Federal Government of Nigeria (FGN) bonds in October 2003 with the launch of four bonds with maturities from three to ten years. The bonds were sold to investors through all licensed banks and discount houses. Most investors, however, adopted a hold-to-maturity approach, so little or no secondary trading took place (Debt Management Office, various years).

The DMO then restructured Nigeria's domestic debt portfolio extensively. In 2005 it began a textbook programme of bond market development. It started with the first issues of 2-year and 3-year bonds, for which there was appetite, and gradually and predictably extended the range to 5, 7, 10 and later 20-year bonds. Regular monthly issuance of bonds of increasing tenor creates a sovereign yield curve that serves as a benchmark for pricing other securities, including corporate bonds. This is a powerful strategy for supporting growth. It generates long-term funding for government-financed development projects such as infrastructure and, more importantly, it opens up a source of domestic funding that helps Nigeria's private sector to create wealth and jobs (Abdullahi, Jonas, Olanrewaju and Basalma, 2024).

In December 2004 the outstanding Nigerian domestic debt stock was N1,370.32 billion, compared with N1,329.72 billion in December 2003. This was an increase of N40.63 billion, or 3.1 percent, over the previous year, and it was the lowest annual growth in the domestic debt stock in eight years (Debt Management Office, various years).

The increase of N40.63 billion was made up of new issues of treasury bills worth N46.52 billion, partly offset by repayments of treasury bonds and FGN development stocks worth N5.67 billion and N0.22 billion respectively.

As in 2003, treasury bills remained the dominant instrument at the end of 2004, accounting for N871.57 billion, or 64 percent, of the total domestic debt stock. The balance consisted of treasury bonds (N424.94 billion, or 31 percent), Federal Republic of Nigeria Government Development Stock (N1.25 billion, or 0.1 percent) and the first FGN bonds (N72.56 billion, or 5.3 percent).

In 2004 the DMO planned to build on the success of the first FGN bond issue of 2003. It made arrangements to begin issuing bonds regularly, in small tranches that the market could absorb.

The DMO also began smoothing and restructuring treasury bills in 2004. The restructuring extended the maturities of existing treasury bills by issuing tenors of 6, 12, 24 and 36 months to refinance part of the existing 91-day bills.

The 2005 bond issuance programme, which floated N140 billion between July and December 2005, had the objectives of converting the existing stock of treasury bills into longer-tenured bonds and of sustaining the momentum of reviving, deepening and developing the Nigerian capital market.

The 2005 debt deal not only lifted a heavy financial burden from the government, which let it spend more on public services and the social sectors, but also allowed the DMO to refocus on the core business of public debt management. In the standard formulation of that business, the aim is to raise the required funding at the lowest cost consistent with a prudent degree of risk, and to meet any other debt management goals the government has set, such as developing and maintaining an efficient and liquid market for government securities (IMF and World Bank, 2014).

The next landmark in the development of the bond market came in August 2006 with the establishment of a primary dealership/market-maker network. The Primary Dealers/Market Makers (PDMMs) are the only institutions authorized to deal directly with the DMO in bond auctions. The system was set up to help a liquid and vibrant secondary market for government securities emerge, in line with global best practice (Debt Management Office, various years). Before it was established, the DMO invited financial institutions to submit expressions of interest (EOIs) for PDMM status, and thirty-two (32) EOIs were received.

The PDMM system has a two-fold purpose:

• To ensure full take-up of government bonds at primary auctions.
• To provide liquidity in the secondary bond market.

Apart from underwriting every bond issue, PDMMs are required to quote two-way prices on the bonds to their customers and to other PDMMs on demand in all market conditions. As a result, trading in FGN bonds issued by the DMO has been viable and active in the secondary market since August 2006.

The strategy for developing the Nigerian bond market for 2008 to 2012 was organized on a medium-term basis, with an annual securities issuance work plan. In preparing the work plan, the Federal Government consulted widely with market participants through regular monthly meetings with the PDMMs, usually held before each FGN bond auction (Debt Management Office, various years).

Bond issuance in 2008 to 2012 was intended to keep developing the bond market and to create a benchmark for the issuance of other instruments, mainly through long-tenured securities. It also aimed to give the FGN low-cost funding, subject to risk being kept within acceptable limits, and to develop the market for long-term debt instruments, thereby creating a benchmark yield curve for other financial instruments in Nigeria.

The work plan for the 2008 to 2012 issuance programme included the advertisement of offer circulars, the conduct of auctions, post-allotment activities, and the development of indicators of domestic debt sustainability.

The 2008 to 2012 bond issuance programme was to include the following features:

• As the market's appetite became more sophisticated, a variety of instruments such as floating-rate and index-linked securities might be introduced.
• As market sophistication and capacity grew, and in order to allocate government resources optimally, a multiple-price auction system might be introduced.
• FGN bond auctions, then held monthly, might be held more often as demand continued to rise, particularly given the limits on re-openings.
• Bids would be submitted on the day and within a specified time period, with settlement on T+2.
• The restructuring of short-term debt into long-term debt would continue until a short-term to long-term ratio of 25:75 was reached.

The range of tenors on government debt instruments increased sharply and impressively in the six years after the launch of the Access Bank government bond index, and the government went on to issue bonds with a 20-year tenor. This reflects growing confidence in the market's capacity to absorb government bonds and in the sophistication of the instrument as a key channel for state funding. The search by investors for a stable asset class was a strong catalyst for the expansion of the market, and investors were also drawn to government bonds for technical reasons such as their tax-exempt status.

The corporate bond market was also developing in this period. This may be attributed to companies' need for inexpensive long-term debt capital, together with investors' reluctance to hold equities after the global recession reduced share values. Companies including Guaranty Trust Bank Plc, UACN Property Development Company Plc, United Bank for Africa Plc and Flour Mills of Nigeria Plc successfully issued bonds in the Nigerian capital market, and a number of other corporate bond applications were before the SEC.

The ISA of that period did not provide specifically for the regulation of corporate bonds, so its general provisions on securities offerings by public companies applied to them. Beyond the general rules on securities offerings, the SEC Rules set specific requirements for corporate bonds. The SEC Rules on corporate bonds were among the initiatives introduced to encourage the development of the Nigerian corporate bond market.

To encourage the development of corporate bonds, state government bonds and bonds issued by supranational institutions such as the International Development Bank, the Government approved in March 2010 a waiver of taxes on these categories of bonds. The taxes covered were personal income tax, value added tax, companies income tax and capital gains tax, and the waiver was expected to run for ten years from the date of the grant. The administrative and legislative steps needed to give the waivers legal effect were still to be completed at that time. Nigerian banks were also allowed to treat state government bonds as liquid assets, provided the bonds met the requirements set out in the CBN circular.

The corporate income tax exemption that eventually took legal effect through the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011 expired in December 2021. The SEC has since drawn the attention of market participants to this, and has noted that interest on treasury bills, promissory notes, and government, corporate and supranational bonds may now attract tax obligations, although the tax exemption for FGN bonds continues to be recognized under existing legislation (Securities and Exchange Commission, 2025).

In periods of financial uncertainty and apprehension, the assurance that the bond market offers becomes an attraction. At least in the bond market, investors have their capital and pre-agreed interest guaranteed against the ups and downs of the wider financial market.

A bond is an investment made by lending money to the issuer in exchange for future income in the form of interest payments. At the end of the life of the bond, the investor gets the original investment back, plus the interest. The interest payments and the principal (the amount invested) are guaranteed by the company or government that issued the bond.

State governments and even banks have also begun to patronize the market, competing with the Federal Government, which has been the dominant player since the market began. Among the states are Niger, Imo and Kwara, which made their successful first entry in 2009 with offers of N6 billion, N18.5 billion and N17 billion respectively (Debt Management Office, various years).

Developments since 2012 and the prospects of the market

The market has grown and become more varied since then. The latest data from the DMO put Nigeria's total public debt at N166.79 trillion at 30 June 2026, of which domestic debt was N91.59 trillion, or 54.91 percent. Federal Government domestic debt stood at N87.00 trillion. Within it, FGN bonds were the largest component at N64.84 trillion, or 74.53 percent, made up of N41.47 trillion of FGN naira bonds, N22.11 trillion of securitised Ways and Means advances and N1.27 trillion of FGN domestic US dollar bonds. Nigerian treasury bills accounted for N19.48 trillion, or 22.39 percent. The remainder consisted of FGN Sukuk (N1.19 trillion), promissory notes (N1.22 trillion), FGN savings bonds (N122.45 billion), green bonds (N47.36 billion) and other instruments (N100 billion) (Nairametrics, 2026a, reporting DMO data). The long-term instrument has therefore overtaken the treasury bill that dominated the stock in 2004, and the range of products has widened to include sukuk, green bonds, savings bonds and dollar-denominated domestic bonds. Demand remains strong: FGN bond auctions between January and September 2026 attracted subscriptions of N13.72 trillion against allotments of N7.15 trillion (Nairametrics, 2026b).

The regulatory framework has also changed. The Investments and Securities Act 2025 repealed the ISA of 2007 and expanded the powers of the SEC, with new rules for market infrastructure and for the issuance of securities (PwC Nigeria, 2025; Federal Republic of Nigeria, 2025). The SEC has since set out the post-2021 tax position of bonds, as described above (Securities and Exchange Commission, 2025).

The growth of the market has also drawn the attention of researchers, but the evidence is mixed. A study of 1986 to 2018 found that government bonds had a positive but statistically insignificant relationship with economic growth in Nigeria, while corporate bonds and the value of bonds traded had significant positive effects (Oke, Dada and Aremo, 2021). A study of the money market found that treasury bills and federal government bonds had a positive and significant impact on growth (Ogbuji, 2021). Research on the drivers of the bond market found that fiscal deficits, inflation, interest rates and the scale of banking did not support its development in the short run, whereas domestic debt and stock market development did (Abdullahi et al., 2024), and recent work continues to identify thin corporate bond issuance and a limited investor base among the problems that must be solved if the market is to reach its potential (Jonas, 2025). Taken together, these facts and findings motivate a study of how the market has evolved, what has made it succeed, and what its prospects are.

1.2 Objectives of the Study

This study evaluates the development of the Government Bond Market in Nigeria. To achieve this general objective, it pursues the following specific objectives:

i. To trace the evolution of the Government Bond Market in Nigeria.

ii. To evaluate the key success factors that have made the Nigerian Government Bond Market successful.

iii. To assess the prospects of the market in the light of recent developments in debt management, regulation and market structure.

1.3 Scope of the Study

The study analyses the performance of the Nigerian bond market with respect to FGN primary bond issuance, FGN secondary market trades, domestic debt growth trends, and the transformation of the domestic debt stock by instrument. It covers the period from the first FGN bond issue in October 2003 to the latest DMO debt data available at the time of writing, which are those for 30 June 2026.

1.4 Limitations of the Study

Access to data from secondary sources was difficult. The study therefore relied to a large extent on statistics compiled by the Nigerian Debt Management Office, the Central Bank of Nigeria, members of the African Securities Exchanges Association, the Nigerian Exchange (NGX, formerly the Nigerian Stock Exchange) fact books, the IMF and similar sources. Because the study is a working paper, the quantitative data reviewed are annual.

1.5 Significance of the Study

In most African countries the domestic bond market is generally under-developed, in both breadth and depth, compared with the banking system and the equity market. Since the Asian financial crisis, many studies have made the case for developing the domestic bond market as an alternative source of debt financing in cash-strapped Africa, where the range of debt financing is limited (Abdullahi et al., 2024; Jonas, 2025).

The rationale for developing a domestic bond market is as follows. First, it is an alternative source of debt finance, which reduces over-reliance on bank lending and limits the exposure of the economy to the risk of a failure in the banking system. Second, such markets lower financing costs through disintermediation. Third, an active and efficient bond market broadens the capital market by offering investors the chance to invest in a wider range of assets. Fourth, a well-functioning bond market can lead to efficient pricing of credit risk, since the expectations of all bond market participants are built into bond prices. Lastly, a developed bond market helps the economy to meet its financing needs during periods of rapid economic growth (Abdullahi et al., 2024; IMF and World Bank, 2014).

The domestic bond market benefits the Nigerian economy by encouraging more rational management of the government's fiscal and monetary operations. By funding its debt in the capital market and issuing longer-tenured securities, the government advances its economic reform programme and helps to develop the national capital market.

Investors also benefit from the domestic bond market in the following ways:

i. The investment is regarded as free of default risk in the domestic currency.

ii. Interest income on FGN bonds remains tax-exempt under existing legislation (Securities and Exchange Commission, 2025).

iii. Returns are relatively high.

iv. Bonds can be used as collateral security.

v. They are fully transferable and marketable on the floor of the Nigerian exchange.

vi. They qualify as liquid assets for banks when they are two years from maturity.

Domestic bond market financing is needed for many projects, including the rehabilitation of the infrastructure for electricity generation, transmission and distribution, the energy sector, road and rail transport, telecommunications, potable water supply, and other socio-economic infrastructure (Jonas, 2025; Abdullahi et al., 2024).

References

Abdullahi, S. G., Jonas, A., Olanrewaju, R. O. and Basalma, E. O. (2024). Boosting Nigeria's bond market: Evidence from macroeconomic perspective. Jurnal Ekonomi Pembangunan, 22(2). https://doi.org/10.29259/jep.v22i2.23107

Debt Management Office (various years). Annual report and statement of accounts. Abuja: Debt Management Office. https://dmo.gov.ng

Federal Republic of Nigeria (2025). Investments and Securities Act, 2025. Abuja: Federal Government Printer.

IMF and World Bank (2014). Revised guidelines for public debt management. Washington, DC: International Monetary Fund and World Bank.

Jonas, A. (2025). Analyzing the determinants of bond market development in Nigeria. Asian Zakat and Journal of Accounting and Finance (AZJAF), 6(1). https://doi.org/10.51377/azjaf.vol6no1.197

Nairametrics (2026a). Nigeria's public debt rises to N166.79 trillion in Q2 2026 (report on Debt Management Office data), 26 September 2026. https://nairametrics.com/2026/09/26/nigerias-public-debt-rises-to-n166-79-trillion-in-q2-2026/

Nairametrics (2026b). FGN bond allotments rise 106% to N7.15 trillion in nine months, 1 October 2026. https://nairametrics.com/2026/10/01/fgn-bond-allotments-rise-106-to-n7-15-trillion-in-nine-months/

Ogbuji, I. A. (2021). The growth impact of money market in Nigeria: An imperative of financial innovation. UNILAG Journal of Business, 7(1).

Oke, M. O., Dada, O. and Aremo, N. O. (2021). Impact of bond market development on the growth of the Nigerian economy. Folia Oeconomica Stetinensia. https://doi.org/10.2478/foli-2021-0005

PwC Nigeria (2025). Summary of key changes to the Investment and Securities Act 2025, 12 November 2025.

Securities and Exchange Commission, Nigeria (2025). Circular on the expiration of the Companies Income Tax (Exemption of Bonds and Short-Term Government Securities) Order, 2011, 1 July 2025. https://www.sec.gov.ng