THE ROLES OPERATIONS AND STRUFCTURE OF NIGERIAN CAPITAL MARKET AND ITS IMPACT ON THE GROWTH OF NIGERIAN ECONOMY

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ASTRACT

This study examines the roles, operations and structure of the Nigerian capital market. It  also went ahead to examine the relationship between capital market development and economic growth. Time series data obtained from Central Bank of Nigeria (CBN) and Nigeria stock Exchange (NSE) were analyzed using simple regression model. The data set covers annual time series data from 1990-2005. Results showed that capital market development indicators like market size, liquidity and efficiency exert positive influence on Economic growth.

CHAPTER ONE

INTRODUCTION

1.1        BACKGROUND OF THE STUDY

A major engine of economic growth and development of any nation is its capital market.

The capital market is a market where equities, shares and bonds are issued and traded either via exchange or over- the-counter market. It impact positively on the economy of any nation by providing financial resources through its intermediation process, for the financing of long-term projects. The  capital  market  is  made  up  of  various  institutions (financial) established for the purpose of mobilization and efficient utilization of long-term development of any financial system. This is a market where investors provide long-term funds and are given long-term financial assets (securities) in exchange by the borrowers otherwise known as the issuers. Capital market is very important in any nation that needs to grow economically and otherwise because; it facilitates the provision  of  fund  for  new  business  and  already  existing

business, income for lenders and finally promotes investment in corporate securities.

In   principle,   a   well-develop  capital   market   should increase savings and efficiently allocate to productive investments,  which  leads  to  an  increase  in  the  rate  of economic growth.  The market contributes to the mobilization of domestic saving by enhancing the set of financial instruments available to savers to diversity their portfolios.

A well-developed capital market share – ownership provides individuals with a relatively liquid means of sharing risk when investing in promising projects. Capital markets help investors to cope with liquidity risk by allowing those who are hit by a liquidity shock to sell their shares to other investors who do not suffer from a liquidity shocks. The result is that capital is not prematurely removed from firms to meet short-term liquidity needs. Moreover, capital markets play a key role in allocating capital to the corporate sector, which will have a real effect on the economy on aggregate.

The market is usually organized into primary where new securities are bought and sold and secondary market where outstanding securities are bought and sold.  However ,  the capital markets not really a market in the traditional African sense. It is rather a network of institutions that arranged for long-term financial instruments, like debentures stocks, mortgages, and shares (Okafor, 1983).

It is a known fact that capital provides the impetus for the effective and efficient combination of factors of production to ensure sustainable economic growth. The capital market which is the major segment of any financial market provides a setting through which medium and long-term funds are provided   by   saving   surplus   unit   and   channeled   into production by deficit units.

Capital market from  the  monetary growth  perspective provides a means for the exercise of monetary policy through the issues and repurchase of government securities in liquidity market. In addition, a well-developed and active market alters the pattern of demand for money, and booming market creates liquidity, and hence spurs economic growth.

The market has strategic roles it plays it in the financial system of a nation. Levine (1991) listed these roles as: mobilization of saving for investment, corporate governance, creating investment opportunities for small investors, raising capital for business, redistribution of wealth, barometer of the economy, and government capital raising avenue for development projects.

There is a strong argument amongst economists as it concerns the relationship between capital market and economic growth, some are for while, others are against. Economic growth is an increase in the economy’s ability to produce real output of  goods and services (Baye and Jamsen,

2006). Putting it in a different form, economic growth is the result of abstention from current consumption. There are however two forms of commodities, which are consumption and capital goods, where capital goods are used for the production of other commodities. In practice, household buy consumption goods while firms buy capital goods. Be it as it may , all incomes are not spend and this result to net savings (saving   minus   borrowing)   is   positive.   For   this   reason,

household abstaining from  current consumption for  future consumption make resources available for investments in capital goods, which add to the nation’s capital stocks and provides for expanded production, and so an economy grows (Samuelson, 1980).

The researcher is not ignorant of the fact that , so many empirical studies on capital (stock) market development and economic growth has been carried out by Economist researchers like Demirguckunt and Levine, 1996a, b; singh,

1997;    Rousseau and  Wachtel,  1998;  Atje  and  Jovanovic,

1993; Levine and Zervos, 1996; Agarwal, 2000; and a host of other seasoned researchers. However, most of their works are on cross-country basis. It is on this ground, that the researchers thought it worthwhile filling the gap of the relationship between capital (stock) market development and economic growth in a single country, using Nigerian economy as a case study.

1.2 STATEMENT OF RESEARCH PROBLEM

Even though, the Nigerian Capital Market has in no small measure   contributed   significantly   to   the   growth   and

development of industrial capacities in Nigeria, certain lingering problem such as: Small size of the market; high cost of raising fund; inadequacy in information dissemination amongst the market participants; and the unsatisfactory liquidity state of the market; still constraints it’s optimal operations.

It is a known fact that, government policies can affect the performance of any nation’s capital market and consequently determine what happens to the nation’s economic growth. The frequent intervention in the capital market activities by the Central Bank of Nigeria (the apex monetary regulatory body) has raised so much concern to many individuals and organizations that, the stakeholders of the market are left with no option other than to known how the capital market development significantly effect economic growth. Some examples of  the recent policies of the Central Bank of Nigeria that  have caused significant changes in the market are: the untimely reversal of the margin trading policy which halted the fueling of the bull market as well as consequent increased pressure on the banks a few month from the halt of the banks

in 2008, the increase in Monetary Policy Rate (MPR) from 9.50 percent  to  10.5  percent  in  2008,  the  increase  in  Cash Reserved Ratio (CRR) from 2 percent to 4 percent in 2008 and the policy of harmonizing the banks year end.

1.3 OBJECTIVES OF THE STUDY

The study is expected to empirically study and examine the relationship that exists between capital market development and economic growth, using data from Nigeria. The main objectives of this study can be summarized as follows:

(a)      To explain and analyze the roles, operations and structure of   the Nigerian Capital Market.\

(b)      To find out the impact of capital market size on economic growth.

(c)      To show the impact of capital market liquidity on economic growth.

(d)      To establish how efficiency (transaction cost) of the market can impact on economic growth.

(e)      To make recommendations on how emerging nations can benefit from capital (stock) market development.

1.4  RESEARCH QUESTIONS

This study will be channeled in such a way that it will provide answer(s) to the following questions:

(i)     What is the impact of capital market size on economic growth?

(ii)    Does the liquidity of the Nigerian capital market enhnce economic growth?

(iii)   What  is  the  impact  of  capital  market  efficiency  on economic growth?

1.5      RESEARCH HYPOTHESES

To help us achieve the above objectives, the following Hypothetical statements were made by the researcher: Hypothesis 1

H1: There is a positive relationship between capital (stock)

market size and economic growth.

Hypothesis II

H2: Capital market efficiency is positively linked to economic growth.

Hypothesis III

H3: There is a significant, positive relationship between capital market liquidity and economic growth.

1.6 SCOPE OF THE STUDY

This study is to deal on the impact that capital market development will have on economic growth. This study will directly focus on Nigeria and will use Nigerian capital market data and the determinant of economic growth on annual basis. The period that the study will cover is 1990 – 2005.

1.7  SIGNIFICANCE OF THE STUDY

There are numerous study on the relationship between capital (stock) market and economic growth but many of these studies  were  using  cross-country  pooled  data  for  their analysis. And none of them directed their to Nigerian capital market, it is this un-filled gap that this research study intends filling. This study will benefit individuals who want to diversity

their  portfolio risk,  seasoned administrators, and  even  the academics. The study will greatly benefit the following stakeholders:

(a)    Capital Market Regulators: This study will in no doubt be   useful  to  regulatory  bodies  like  Securities  and Exchange Commission,  Nigerian  stock  exchange  and even the   Central  Bank  of  Nigeria.  This  is  because proper      understanding  of  the  impact  of  the  capital market     performance on economic growth will motivate them (the regulatory  bodies)  to  face  their  respective tasks.

(b)   Investors: The study will help educate investors on their role to economic growth and the risk diversification opportunities that is within their reach.

(c)   Government: The  result  of  this  study is  expected  to assist policy makers know how capital market is linked to the economic growth and thus help them formulate the right policies that will have great positive effect on Nigerian’s economy.

1.8      LIMITATION OF THE STUDY

The only factor that the researcher can say what is limitation is the time factor. The time frame for the completion of the search posed great deal of constraint to this study.

1.9 DEFINITION OF TERMS

Emerging Market:- This  is  a  market in  a  non- developed economy.

Capital Market:  Capital market is proxy to stock market, a market was securities previously issued are sold or bought.



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