Relevance of Capital Market in the Economic Development of Nigeria

  Relevance of Capital Market in the Economic Development of Nigeria

CHAPTER ONE

1.0     INTRODUCTION

1.1     BACKGROUND OF THE STUDY

A market could be defined as a place where or medium through which buyers and sellers are brought into contact to transact a business. Therefore, a market is a mechanism that allows economic activities to take place. Hence, it could be said that it is the bedrock of a country’s development.

The focus of this research shall be on the capital market. As the name implies, the capital market is a market for securities; that is buying and selling of bonds stocks, equity and derivations. It is a market where companies and government raise medium and long term funds, companies and government need funds for the production and distribution of goods, services, infrastructure development and the provision of social amenities in the country for the collective benefits of the owners of the funds (investors)

The relevance of the capital market in a country (Nigeria) aspiring to be one of the leading economies in the world cannot be over emphasized.    

This is equally more important as for the country had earlier set a vision (for itself) stated by way of some cardinal objectives as to establish

                                i      A unified, story and self-reliant nation.

                              ii      A great and dynamic society.

                           iii      A just and egalitarian society.

                           iv      A land of bright and full opportunities for all citizens.

                              v      A free and democratic society (federal republic of Nigeria 1970 federal ministry of information, 1975; federal ministry of national planning.1981).

By implication of this vision, the country aims at achieving a developed economy states within the frame work of democracy. It had adopted approaches in this direction which include development planning (the colonial ten years plan of development and welfare, 1946-56; the colonial supplementary plan 1955-61, the first national development plan 1962-69, the second plan 1970-74; the third plan 1975-80; the touch plan 1981-85; the rolling plan 1990-1999), the structural adjusted programme, 1986-1995; embodying much of the rolling plans ;Guided deregulation since 1995;the annual budgets etc and development strategy (NEED); since 2003, in spite of all these efforts and progress so far made, the country is still facing many development challenges and high level of poverty; the level of technology and maintenance culture, provision of social and economic  infrastructure. diversification of the economy (to reduce the level of dependence of the mono-product syndrome); checking (controlling) rapidly growing population growth exceeds the rate of resource use; improving the level of savings and investment (from external and internal sources) and reducing the gap between the two and resolving administrative controls that hinds development (Onwumere, 2005).

Of relevance to us here is the issue of contending challenges of external dependence, eradicating monocultures and diversification of the country’s industrial base, thereby aiding economic self reliance.

Development requires funding both in the short and long-term, that is, financial intermediation largely provided by the financial market. A financial market is the market which deals with short and long-term funds i.e. with the exchange of financial intermediation involving the motivation of financial resources from surplus-spending units and then channelling of such funds to deficit spending units for production investment while assets and securities are generated in the process (Onyido 1990; Onwumere; 1992, Ijewere, 2000; Dada, 2003).

The Nigeria financial market comprises of the money market whose major function is to provide funds for short term purpose (usually for a period of between a day and one year) and the capital market which is a market for long term funds involving dealing in equity instruments (usually for a minimum of five years to perceptivity for typical long term funds, while those fund having maturity period of more than one year but less than five are called medium term funds). Typically debt instruments traded upon the floor of the money market include treasury bills, treasury certificate, certificate of deposit, commercial papers, municipal notes, promissory notes, bankers acceptance/other short-term bank credit facilities with key institutions compromising mostly commercial/universal banks, financial and discount houses. On the other hand, instruments traded upon in the capital market are many and include equities (shares); preference share; dust instrument (federal government development stock, state and local government stocks, mortgages and debentures, and corporate bonds);derivatives and rights trading instruments. Bonds could have redeemable, irredeemable, fixed, floating, secured and unsecured features. Participating intermediaries in the capital market include issuing houses, stockbrokers/dealers, investment advisers, portfolio managers, registries, trustees, receiving agents, bankers, solicitors, and auditors and reporting accountants.

Therefore there is a strong correlation between developed economy and the capital market. The capital market consists of the primary and secondary market. The primary market is where new (fresh) stock and bonds issues are sold and bought from one investor or speculator to another, on exchange (e.g the Nigeria stock exchange).

The capital market is significant in all countries as it provides the long-term investable funds necessary for sustainable economic growth and development. For the developing countries, investable funds have been found to be the often critical factor and the often missing element (caincross,1984)

A stock exchange is a place where securities (bonds, stock and shares) of varying types are traded only, and where one can purchase or sale any of such securities relatively easily. The stock exchange is also an institution which sees to the diverse uses in the economy. The opportunity which the stock market affords trading in newly issued securities is a major factor facilitating capital mobilization. The ready marketability feature which the stock exchange bestow upon listed securities, minimizes (or possibly eliminate) any ambitions which the investor might have in parting with his hard earn savings, thus encouraging a free flow of funds into productive user via the acquisition of securities.

The detailed procedure for claims and settlement is explained in chapter two where the control security clearing system (CSCS)is discussed .It is important to note that every investor participating in the Nigeria stock exchange has a CSCS account with a stock broker that is domiciled in a bank. Therefore any intended debtor must open a CSCS account before he/she can participate in the second ties market. The requirement for opening the account is the same as opening a checking (current) account with a bank. The minimum balance for opening the account depend on individual stock brokers, some of their peg as high as N50,000.00, while some accept N10,000.00 or lesser amount. The balance on the account is what the investor would use in buying stock/shares.

1.2     STATEMENT OF THE PROBLEM

The Nigerian capital market has been recognised as a power house for the economic development of Nigeria. In this regard, there have been series of reforms to encourage it.

It has been argued that capital market creates income inequality, income shrink, bad debts and financial crisis thereby denying the developing economic of opportunity to grow. It also have been observed that capital market is a risk venture, negate private enterprises, and subvert consumption and income pattern which generate social tension and economic meltdown. It is also believed that capital market lead to the leakages of multiple due to high rate of the marginal propensity to save thereby reducing into stream and vis-à-vis.

One still wonder the degree of attention given to the capital market in resent time nevertheless over the years, the capital market dominated virtually all sectors of Nigeria economy. One still wonder the extent it has contributed to unemployment, Gross domestic product (GDP), aggregate output, capital utilization and other increases towards improving the living standards of the populace. So in this work the researcher intends to examine the relevance made over the years in Nigeria, given the unending efforts and attention offered by various governments that have managed and controlled the country’s financial sector.

1.3     OBJECTIVE OF THE STUDY

There are times when a company might need a large amount of capital-perhaps to expand, money market is a place to raise that kind of money; letting companies offer ownership or promise repayment to investors in exchange for capital. The study has the following objectives.

i.                   To ascertain whether or not capital market has any impact on economic development in Nigeria.

ii.                 To assess the role of capital market in reduction of financial crisis in Nigeria.

iii.              To examine the extent of financial sector development given the role of capital market in Nigeria.

iv.              To review the performance of Nigeria capital market in the face of the global economic meltdown experienced in Nigeria.

1.4     RESEARCH QUESTION

Here the researcher assumed some possible questions that will help to understand the general study of the topic in question. From the following one may ask;

1.     What positive contribution have been realized from the Nigeria capital market?

2.     Has financial crisis really reduced, due to the existence of the capital market in Nigeria?

3.     Can we say that capital market has improved the economic development in Nigeria?

1.5     STATEMENT OF HYPOTHESIS

The Nigeria stock exchange contributed significantly to the growth of the Nigeria economy as a mechanism that allows the exchange of money between companies, government and investors for the mutual benefit of both parties. Therefore, it can be said that, it is the fuel that drives the engines of economic activities and growth.

The hypothesis to be fasted are:

H0: Capital market has contributed meaningfully to gross domestic product (GDP) of Nigeria.

H1:  Capital market has not played significant role in the management of financial crisis in Nigeria.

1.6     SCOPE OF THE STUDY

The study will cover capital market and the participants beginning from 1986-2009. This is the period where a lot of reforms, programmes and policies have been made concerning the capital market. The study is also limited in scope by detailed information from the Nigeria stock exchange Abuja area office and trading floor. It is concentrated mainly on stocks and shares in Nigeria and it is expected that the findings and conclusion can safely be generalised to other sectors or institutions in the country.

1.7     SIGNIFICANCE OF THE STUDY

In view of the frantic effort going on with the intention of further reforms to encourage capital market by the present government in Nigeria. It is not of place to be aware of the impact over the years. Nigeria is known to be more of a consumption economy, lack the necessary savings and investment, have large financial crisis, underutilization of funds and misallocation of resources. The actual data development efforts in reality, promotion of savings and investment brought about by Nigeria capital market is an important step toward development and growth.

This study is therefore significant in the following ways:

                      i      The findings will enable government to have more focus on the area to intensify reform activities.

                   ii      The empirical result will enable a concrete solution to ensure that financial sector development and financial crisis reduction is improved by reforms to stabilize the capital market and repositioned in all sector of the economy.

                 iii      The study equally reveals the short comings of the capital market while recommending adequate penalties.

                 iv      The findings will as well unveil empirical information for further research and therefore the study adds to knowledge in the area of capital market operation.

1.8     LIMITATION OF THE STUDY

The desire of the researcher to cover a very broad scope has been limited by some factors such as finance, time and lack of adequate corporation by staff of the banks etc.

                            i      Financial factor; the researcher encounter the problem of finance, and has a result of the present economic situation in the nation. The finance available was insufficient to enable the researcher to visit banks in search of valuable information needed for the research work.

                         ii      Other problems are the problem encountered in the course of sourcing for data, lack of free access to study materials by banks, NSE staffs and the major one is the collection of vital information that is needed, but are kept as high or top secret by bank, NSE and at such could not be reviewed.

                       iii      Another limiting factor is time frame to carry out this research work. The time to carry out this research work conceded with programme.

                       iv      Lack of effective and efficient transport system make the research work unexciting and frustrating.

                         v      The haphazard and incomplete record-keeping of the business transaction.

                       vi      Respondents are reluctant which resulted to incomplete data or raw information.

1.9     DEFINITION OF TERMS

Securities: a collective name referring to shares, bonds, debentures, and derivatives. They are written or printed financial documents by which the claims of holder in specified property are secured.

Equity: units of ordinary shares, naming the holders and indication ownership in a company.

Preference share: this is regarded as a hybrid security which combines some attributes of debt with equity instruments. The holders are neither creditors nor owners of the company.

Bonds: this is an instrument issued by the federal, state, or local government to source funds in order to execute developmental project and social infrastructure.

Derivatives they are nonfactual rights to buy or sale underlying instrument or commodities at specified price at a state  data.

Portfolio:  A collective of various securities (share stock) of different companies by individual investors or institutions.

Capital market: is a market for security that is buying and selling of bonds, equity and derivatives. It is a market where companies and government raise medium and long-term funds.

Market: could be defined as a place where or a medium through which buyers and sellers are brought together or into contact to transact a business.

Money market: this is an institutional arrangement for sourcing and investing loanable investment funds on short term basis.

 Ordinary share; these are shares which represents the basic ownership equity in a corporation.

Offer for sale: this is a public offer of shares in a company by the shareholders.

REFERENCES

Cain cross ,A.K. (1984); the place of capital in Economic progress;   

In G.M. Meier, leading issues in economic development. New York oxford university press.

Dada, L.O (2003) THE Nigeria capital market;

Development, issues and policies. Ibadan; spectrum banks Ltd.

Ijewere.E. (2000) some perspectives on the development of the capital market in Nigeria; paper presented at a workshop organised by Ijewere and co held in Lagos, Nigeria June.

Onyide. B.C. (1990) the Nigerian financial market growth, performance, appraisal and prospects; Central bank of Nigeria economic and financial review, 28 (2) June.

Onwumere, J.U.J (1992); The Nigeria financial market; An Appraisal; Nigeria financial review, 5(4); B2 42.

Onwumere, J.U.J (2005) Banking industry reforms and development the Nigeria economy; the Nigeria Banker, October; 10-19

                                          

CHAPTER TWO

LITERATURE REVIEW

2.0     HISTORICAL BACKGROUND OF THE STUDY

The financial system, of which the capital market is a major components, plays a vital role in the economic development of any nation. It is, of course, the responsibility of the system to regulate the financial environment of the economy, determine the types and amounts of funds to be issued and raised, cost of funds as well as the various uses to which the funds could be channelled into.

The capital market, however, is a market for long-term funds and securities that extend beyond one year. Found under this market are long-term loans, mortgage bonds, preference stock, ordinary shares (common stock). Federal Government Bonds also referred to as eligible development stock, or Gilt-edged securities as well as industrial loans. To play the traditional role of funds transfer from the savers to users, such institution as the stock exchange, share registrars, issuing houses, stock brokers and underwriters and of course the securities and exchange commission , are all notable participants in positioning the financial system and in particular the capital market, for economic development.

Besides, there is an established evidence of demand for extend finance by enterprises that want to expand beyond limits at self-finance but have historically lacked access to bank credit (Aryeetey and others 1994;Levy 1992; Liedholm 1991; Parker, Riopelle, and Stell 1995; Steel and Webster 1992) Accordingly, Nobi (1979) noted that the importance of the capital market lies in its being a meeting place for investors and borrowers, such that funds needed by the joint stock firms or institutions are made available through such medium.

To achieve this, Seibel and Marx (1987) observed that better integration among different segment of the financial system formal, semi-formal and informal could facilitate economic development by mobilizing household resources more effectively and improving the flow of financial resources to enterprises with high potential.

However, can the volume of business in Nigeria stock exchange be regarded as adequate given the size of the country’s population and the need to mobilize resources for economic development, Uremadu (2003) contends that with the recent development in banking habits and the decline of the business sector, the importance of well-developed stock exchange becomes even more heightened as an engine of economic development.

A good number of scholars have carried out some studies in this area in the recent pasts which mostly centre on the pricing of securities in the stock exchange. These includes the work of Nwazeaku,  Asiegbu and  Okoroafor  (1998),  Anwolam and Eke (1999), Olowe, Balogun and Mobolurin (1999), Nwakanma (2000) and Okoroafor (2004).

In all, the study carried out by Okoroafor (2004) on the assessment of the risk/return of some selected securities in the Nigerian capital market, virtually claimed to have addressed all the noted short comings of the previous studies.

Perhaps, what needs to be pointed out is that this study by Okoroafor (2004) like others before it made no attempt to relate the market capitalisation to the Gross Domestic Product; a study which would have afforded the opportunity of determining the influence of market capitalisation on the Gross Domestic Product, with the added advantage that predictions could be made on the GDP given a level of market capitalisation.

Even a related study done by Feldman and Kumar (1995) only tried to relate the total market capitalisation to percentage of GDP. This study again failed to reflect the impact of the capital market on the GDP.

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