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Abstract
The study has examined the relationship between capital market and economic growth in Nigeria. The study adopted a panel data and an ex-post-facto research design. The secondary source of data was used for this study, and the data were sourced from Central Bank of Nigeria’s annual reports and statistical bulletin. The study covers the period of 28 years. The linear regressions were used to find out whether relationship exists between Nigerian capital market variables and Nigerian economic growth variables identified in the study. The simple linear model considered here, the coefficient, 0.956 measures the marginal contribution of MCAP to the respondent variable (RGDP). The S.E of regression 1428.285 measures the statistical reliability of the coefficients estimates.The T. Statistics of 16.745 represents the ratio of an estimated coefficient of its standard error i.e used to test the hypothesis that a coefficient i.e equal to Zero examine the probability of the T. Statistics, here we have 0.000, this implies that the relationship between our studied variables is highly significant both the ordinary least square and its log. The output above, R2 value of 0.956 and 0.913 i.e 86% variation in RGDP is explained by the independent variables (MCAP). This means that a unit increase in MCAP independent variable will result to 86% increase in the dependent variables RGDP, it further prove that our regression fits perfectly. The study revealed that capital market has significantly impacted on economic growth in Nigeria. The study, we recommended that government should restore confidence in the capital market by showing true commitment and sincerity of purpose in the capital market probe and the findings recommendation of the investigation panel should be fully implemented to restore sanity and confidence in the market.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The capital market drives any economy’s economic growth and development because it is necessary for long term growth capital formation (Osaze, 2000) but evidences from past studies have revealed a growing concern and controversies on the role of the capital markets on economic growth and development. While some (Levine & Zervos, 1996) supported a positive link, some others (Donwa & Odia, 2010) do not find any empirical evidence to support such conclusion. Nyong (1997) found a negative link but Sudharshan and Rakesh (2011) saw, instead, economic growth playing a role in stock market development.
Economic growth means an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth is a process by which a nation wealth increases over time.
The most widely used measures of economic growth is the rate of growth in a country’s total output of goods and services gauged by the gross domestic product (GDP) Economic growth can also be refers to as the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in the real GDP. Economic growth is primarily driven by improvement in productivity, which involves producing more goods and services with the same inputs of labour, capital, energy and materials.
Hence, economic growth is a policy intervention aiming to improve the well-being of people, economic growth is a phenomenon of market productivity and increases in GDP; economist Amartya Sen describes economic growth as but “one aspect of the process of economic growth”. Economists primarily focus on the growth aspect and the economy at large, whereas researchers of community economic growth concern themselves with socioeconomic growth as well.
A startling fact about economic growth is the large variation in the growth experience of different countries in recent history. Some parts of the world, like the United States or Western Europe, experienced sustained economic growth over a period of more than 100 years, so by historical standards these countries are now enormously wealthy. This is not only true in absolute terms (i.e., GDP), but also if we measure wealth as income per capita (i.e., GDP per person).
The capital market is a profoundly specific and coordinated financial market and indeed essential agent of economic growth and development (Okoye and Nwisienyi, 2013) due to its capacity its ability to facilitate and mobilize saving and investment (Donwa and Odia, 2010).
Shallu (2014) describes the capital market as a market where borrowing and lending of long term funds takes place involving both debt and equity like shares, debentures, bonds etc.
Emeh and Chigbu (2014) posit that capital market adds to financial growth through the through the specific services it performs either directly or indirectly, notable among these functions are: mobilization of savings, creation of liquidity, risk diversification, improved dissemination, acquisition of information, and enhanced incentive for corporate control.
According to Anyanwu and Oaikenan (1995) is one of the four macro-economic goals of any society. Recall that others are price stability, full employment and health balance of payment equilibrium. It is imperative to examine the behaviour of population overtime.
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
Growth is usually calculated in real terms – i.e., inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. The economic growth rates of nations are commonly compared using the ratio of the GDP to population or per-capita income.
The “rate of economic growth” refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. This growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend.
An increase in economic growth caused by more efficient use of inputs (increased productivity of labor, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth.
The capital market is a subset of the financial system that is involved in the provision of long term funds for productive use. The capital market drives any economy’s economic progress because it is necessary for long term growth capital formation (Osaze, 2000) but evidences from past studies have revealed a growing concern and controversies on the role of the capital markets on economic growth and development. While some (Atje & Jovanovic, 1993). An organized market for the secondary trading of issued stocks was lacking in 1959, following the establishment of the Central Bank of Nigeria (CBN) A year earlier, a N4 million Federal Government of Nigeria development loan stock was issued in line with its stock of fostering economic and financial development in 1986, Nigeria embraced the in International Monetary Fund (IMF) Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and early 1990. The programmes proposed as all economic packages to rapidly and effectively transform the Nigeria economy within two years for government to judiciously implement some of its policies and measures.
The Nigeria stock exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank, 1994. The introduction of structural adjustment programme (SAP) in Nigeria has resulted in significant growth of financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market.
The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth because its ability to facilitate and mobilize savings and investment. To great extent, the positive relationship between capital accumulation real economic growths has long affirmed in economic theories.
Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resources mobilization. The realization of this consideration is given to measure for the development of capital market as an institution for the mobilization of finance from surplus sectors to the deficit sectors, which explained the fact that the capital market consist of those who have long-term funds on the one hand that are willing to lend such funds and those requiring funds, on the other for investment purpose apart from fund mobilization and allocate capital market are important institution in the efficient sectoral distribution of the available scarce financial resources.
Osaze, (2000) saw the capital market as the driver of any economy to growth and development because it is essential for the long-term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment.
The Nigeria capital market provides the necessary lubricant that keeps turning the wheel of the economy it does not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. In mid 70s, the need for an efficient financial system for the whole nation was emphasized and a review by the government of the operations of the Lagos stock exchange market was advocated. The reviews was carried out to take care of the low capital formation, the huge amount of currency in circulation which was held outside the banking system, the unsatisfactory demarcation between the operation of Commercial Banks and the emerging class merchant banks, and the extremely shallow depth of the capital market.
In response to the problem mentioned above, the decentralization but opted for a national stock exchange, which will have branches in different parts of the economy. On December 2nd 1977, the memorandum and article of association creating the Lagos stock exchange was transformed into the Nigerian stock exchange, with branches in Lagos, Kaduna, Port-Harcourt, Yola and now in federal capital territory (FCT) Abuja and some other cities. The history of the Nigeria capital market could be traced to 1946 when British colonial administration floated a N600, 000 local stock bearing interests at 3¼% for the financing of development projects under the Ten (10) years plan local ordinance. The stock, which had on maturity of 10-15 years was oversubscribe by more than N1 million yet local participation of the issued terribly poor.
Certainly, potential fund abound in Nigeria, but the overriding consideration in this project is to examine the impact of the capital market in harnessing and mobilizing these resources (fund) to generate economic growth in the country.
1.2 Statement of the Problem
There is abundant evidence that most Nigeria business lack long- term capital. The business sector has depended mainly on short-term financing such as overdraft to finance even long-term capital. Based on the maturity matching concept, such financing risk, all such firms need to raise an appropriate mix of short and long term capital. Most recent literatures on the Nigeria capital market has recognized the tremendous performance; the market has in recent times. However, the vital role of locative functions critical in determining the overall growth of the economy. The functioning of the capital market effects liquidity, acquisition information about firms, risk diversification, savings mobilization and corporate control. Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. The advantages of capital market financing include no short repayment period as funds are held for medium and long-term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans.
The development of capital market in Nigeria, as in other developing countries has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some formal market arrangements for the operation of capital market. In 1959 on invitation of the federal government to advice on the role the Central Bank could play in the development of local money and market. As a follow-up to this, the government commissioned set-up the Barbak committee to study and make recommendation the ways and means of establishing a stock market in Nigeria. Acting on the recommendation of the committee, the Lagos stock exchange (as it was called than) was set-up in March 1960, and in September 1961, it was in cooperated under section 2 cap 37, through the collaborative effort of Central Bank of Nigeria, the business community and industrial development of the Central Bank of Nigeria in 1959 and the coming into existence of the Lagos stock exchange ,in 1961 and subsequently the Nigeria stock exchange by an Act in 1979, a sound foundation was laid for the operation of the Nigerian capital market for trading in securities of long-term nature needed for the financing of the industrial sector and the economy at large. After the incorporation of the Lagos stock exchange, it was granted further protection under the law and its activities was placed under some sort of control by the government, hence the passing of ‘Lagos stock Act. However, the Lagos stock exchange was operational in Lagos.
Furthermore, a fundamental weakness of most studies provide evidence from developing economics is past regression and where often run without a thorough examination of characteristics of time series economic data. It is therefore not surprising that some of them are, in fact “spurious regressions” exhibiting an excellent fit between unrelated variables, especially when levels of the variable themselves are used in the regression. In general, when the regression includes non-stationary variables, the estimation of coefficients and inference from them becomes impossible. Besides, recent empirical studies have shown that major macro economic variables such as gross domestic product often used as proxy for economic growth may be a non-stationary process rather than a trend- stationary process as was generally assumed. Hence, the study seeks to examine the role of the capital market on economic growth in Nigeria.
1.3 Objectives of the Study
The broad objective of this study is to examine the impact of capital market on economic growth in Nigeria. The specific objectives of the study are as follows:
1. To evaluate the performance measured in the terms of market capitalization of the capital market in relation to the economic growth in Nigeria.
1.4 Research Questions
1. What is the performance of the capital market in relation to the economic growth in Nigeria?
1.5Research Hypothesis
The hypotheses that will be tested in the course of this is stated below as:
H0: Market capitalization has no significant impact on Nigeria’s gross domestic product.
1.5 Significance of the Study
The study explored the impact or effectiveness of capital market instruments on Nigerian economic growth.
The study is important because the findings will help economist and policy makers on the role of the capital market in enhancing economic growth in Nigeria. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.
The findings of this study, will equally serve as a reference material for subsequent studies ‘that will be related to the variables investigated; more so regarding the techniques and methods utilized. Furthermore, the findings of this study will provide evidence for validity the outcomes of previous studies. In sum, both practicing managers, academics, students and organizational will immensely benefit from the outcomes of this investigation; even those outside the academic field inclusive.
1.6 Scope of the Study
The economy is a large component with lot of diverse and complex parts; this research work will only look at a particular part of the economy (the financial sector).
This work did not cover all the aspects that make up the financial sector, but focused only on the capital market and its activities at it impact on the Nigerian economic growth. The empirical investigation of the impact of the capital market was restricted to the period between 1990-2018 due to the non-availability of some important data.
1.7 Organization of the Study
The study is divided into five chapters and organized as follows chapter one from, the introduction part, this is where the theme of the research work is given, including background of subject matter justifying the need for the study. This chapter comprises of the statement of the problem, Objectives of the study, statement of the hypothesis, scope and limitation of the organization of the study and definition of terms. Chapter two shall present related literature concerning the impact of capital market on the economic growth and development of Nigeria, the chapter shall also present the empirical and theoretical framework for the study. The research methodology which include ‘sources of data, method of data analysis and model of specification shall be outlined in chapter three while chapter four focuses on the presentation and analysis.
Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations.
1.8 Definition/Limitation of Terms
International Monetary Fund (IMF): Is an international organization that was created on July 22, 1944 at the Bretto1 Woods Conference and came into existence on December 2 1945 when 29 countries signed the articles of agreement. It originally had 45 members and its goal was to stabilize exchange rates and assist the reconstruction of the worlds international payment system Post-World War II.
Capital Market: It is defined as a market where medium and long term finance can be raised. Capital market offers a variety of financial instruments that enable economic agents to pool, price and exchange risk
Monetary policies: Are major economic stabilization weapon which involves measures designed to regulate and control the volume, cost availability and direction of money and credit in an economy to achieve some specified macro-economic policy objectives.
Development: It refers to the sustained concerted actions of policy-makers and communities that promote the standard of living and economic health of a specific area.
Macro-economics: Is a branch of economic dealing with the performance structure, behaviour and decision-making of the whole economy.
Deregulation: This is when government reduces its role and allows industry greater freedom in how it operates.
Liberalization: It is refers to a relaxation of previous government restrictions, usually in areas of social or economic policy.
Market Capitalization: It refers to the total dollar market value of a company’s outstanding shares of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.
All Share Index: It tracks the general market movement of all listed equities on the Exchange, including those listed on the Alternative Securities Market, regardless of capitalization.
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