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Abstract
The study examines the role of capital market on economic development 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 25 years. The technique of data analysis that was adopted for this study is inferential statistics. The multiple Regressions were used to find out whether relationship exists between capital market and economic development variables identified in the study. The multiple Regressions were used to find out whether relationship exists between Nigerian capital market variables and Nigerian economic growth variables identified in the study. From the finding the dependent variables GDPRS = contribution of the Real Sector (manufacturing) to the GDP while MCAP represent capital market, capitalization (i.e Monetary Value of stocks traded on the capital market out daily basis. the study, we recommended that government should restore confidence in the capital market by showing true commitme nt 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.
Table of Contents
Title Page i
Cover Page ii
Declaration iii
Certification iv
Dedication v
Acknowledgement vi
Table of Contents vii
List of Tables ix
Abstract x
CHAPTER ONE 1
INTRODUCTION 1
1.1 Background of the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 6
1.4 Research Questions 6
1.5Research Hypothesis 6
1.5 Significance of the Study 7
1.6 Scope of the Study 7
1.7 Organization of the Study 8
1.8 Definition/Limitation of Terms 8
CHAPTER TWO 11
REVIEW OF RELATED LITERATURE 11
2.1 Conceptual Framework 11
2.1.1 The Capital Market 11
2.1.2 Dimensions of Capital Market 14
2.1.3 The Nigerian Capital Market 15
2.1.4 Analysis of the Nigerian capital market performance 16
2.1.5 Structure of the Nigerian Capital Market 17
2.1.6 The Role of capital market 18
2.1.7 Challenges of the Nigerian capital market 20
2.1.8 Concept of Economic Development 21
2.1.9 Dimensions of Economic Development 22
2.1.10 The Role of the Capital Market in Economic Development 23
2.1.11 The Nigerian capital market and economic growth 24
2.2 Theoretical Framework 26
2.1 Solow-Swan Growth Theory 26
2.2 Theory of capital and investment 27
2.3 Paul Romer Growth Theory 28
2.3 Empirical Review 28
CHAPTER THREE 35
RESEARCH METHODOLOGY 35
3.0 Introduction 35
3.1 Research Design 35
3.2 Data Collection Method 36
3.3 Data Analysis Techniques 36
3.4 Model Specification 36
CHAPTER FOUR 38
DATA PRESENTATION AND ANALYSIS 38
4.1 Data Collection and Presentation 38
4.2 RESULTS AND DISCUSSION 40
CHAPTER FIVE 43
SUMMARY, CONCLUSION AND RECOMMENDATIONS 43
5.1 Summary 43
5.2 Conclusion 43
5.3 Recommendations 44
References 47
Appendix 49
List of Tables
Table 4.1. OLS 38
Table 4.2. Log OLS 38
Table 4.3 Unit Root Test GDP RS 39
Table 4.4. Unit Root MCAP 40
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
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 development 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 development 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 development in Nigeria.
1.3 Objectives of the Study
The broad objective of this study is to examine the impact of capital market on economic development 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 development.
The scope of the study was limited to the capital market. It is hoped that exploration of the market will provide a broad view of the operations of the capital market. It will contribute to existing role, which the capital market plays in the economic development and development of the country. 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.
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 development. The empirical investigation of the impact of the capital market was restricted to the period between 1990-2015 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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