ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY THE NIGERIA EXPERIENCE 1986-2006

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ABSTRACT

This study is an assessment of the performance of the capital market in the deregulated Nigerian economy from 1986-2006. The research focus was directed toward a deeper understanding of how capital market performance has impacted on capital formation and economic growth in Nigeria. We concentrated on two capital performance indications namely; market capitalization and growth in the number of listed securities. Secondary data from Central Bank of Nigeria (CBN), Nigeria Stock Exchange  (NSE),  and  Federal  Office  of  Statistics  (FOS),  which  were  obtained through  library  research  of  relevant  publications,  were   used.  The  econometric technique  of multiple  regression  analysis  was used as  the main estimation  tool to measure the degree of relationship between capital formation and Nigeria’s economic growth respectively and capital market performance measures. The study was guided by  two  hypotheses.   Both  linear   and  log  linear  specifications   of  each  of  the relationships were tried. Our hypotheses were tested with the R2  test and f-test. The major findings of the study were: that the log linear specifications suit our data more in terms of goodness of fit, precision of the estimates and tolerable level  of multi collinearity  and that capital  market  performance  has both significant  and positive impact  on  capital  formation  and  economic  growth  in  the  deregulated  Nigerian economy.  The  study  concluded  that  to increase  the  level  of  capital  formation  in Nigeria  and enhance  economic  growth  of the country,  efforts  should  be made  to enhance  the performance  of the capital market but  how fast the market moves to assume  its  rightful  position  as  a  major  channel  of  capital  formation  needed  for Nigeria’  rapid  economic  growth  will  depend  on  how  fast  the  major  obstacles impeding its performance are dispensed with. It recommended some measures to be implemented  to enhance the  performance  of the Nigeria  capital  market.  Like The regulatory  and   supervisory   framework  needs  to  be  continuously  reviewed  and strengthened to embrace the activities of the market, emphasis on transparency and accountability on all aspects of economic management and corporate governance,etc.

CHAPTER ONE INTRODUCTION

1.1    BACKGROUND OF THE STUDY

The capital market is a financial market that provides facilities for mobilizing  and dealings in long-term funds for economic growth and development. Wilkinson (2007) defines capital market as “any place or system where the requirements  of  business enterprises and public authorities or governments for medium and long-term capital funds can be met”. It is the market in which corporate equity  and long term debt securities that is shares and bond (those maturing in more than one year) are issued and traded.

Ajie (2002) is of the view, “that pivotal role of the capital market in any economy could have been dispensed with, if a firm or even an individual for that matter could operate in a financial vacuum”. As a matter of fact, it is because firms for example, operate in close contacts with various financial intermediaries and markets that they are afforded not only the mechanism through which their idle funds can be invested but also one that is capable of satisfying their needs for additional funds.

As  observed  by Okereke-Onyiuke  (2000),  raising  funds  from  the  Capital  Market makes  possible  among  others,  the  construction  of  factories,  offices,  buildings, highways,  bridges  and the acquisition  of machineries.  This  opportunity  which the Capital  Market offers facilitates  capital mobilization  and  allocation  among several competing activities.

In theory, Capital Markets are intended to provide investors and borrowers  with a wide range of trading and investment vehicles and to better mobilize and allocate a country’s  financial  resources  and  support  economic  growth.  This  market  brings together all the providers and users of capital. Buying stock allows investors to gain an equity interest in the company and become part owner. When investors buy bonds, they essentially loan money to the company or government that issued the bond and

become creditors of that issuer. The market also provides them with new and more varied saving vehicles as alternative to bank deposit. For borrowers capital markets provide  access to more funds for expansion  which can help in  economic  growth. Levine and Zervos (1998) are of the opinion that well  functioning  capital market, along with well designed institution and regulatory system, foster economic growth through private initiatives.

There is empirical evidence strongly suggesting that well functioning capital market promote long-run economic growth. In particular, Levine and Zervos (1998) find that indicators  of  capital  market  performance  such  as  market  capitalization,  turnover, growth in the number of listed securities,  and so on  are correlated  with economic growth and its sources – total factor productivity growth and capital formation.

In the recent past, capital market performance has received increased attention among governments and development finance institutions, with emerging market accounting for  a growing  share  of the worldwide  boom  in the capital  markets.  Countries  at different  levels  of  development  are  promoting  the  performance  of  their  capital markets with the expectation that these efforts will pay off in terms of faster economic growth.

In Nigeria,  the role of the capital  market in economic  growth  of the country  has continued to attract increased attention from the government and market practitioners. Al-Faki  (2008),  emphasizes  that  “the  Nigerian  capital  market   has  experienced considerable  growth in the last decade.  In the last year  alone(2007),  the Nigerian Stock Exchange  all-share  index has almost  doubled  to 51,000  points,  and market turnover has also increased”. According to him, the factors responsible for this growth of market are firstly, public enlightenment programmes that the Commission carries out periodically to reach and enlighten the public all over the country. Other factors are the reduction of the cost of  transaction which has enhanced competition  in the Nigerian capital market. The  Commission, in collaboration with other stakeholders, has also continued with the efforts aimed at promoting the reactivation of the bond market in Nigeria.

According to Wilkinson (2007), “deregulation is defined as dismantling or abolition of state intervention in economic matters with the purpose of reducing the influence of the state in the economy, abolishing bureaucratic obstacles and legal regulations”.

The  deregulation  of  the  Nigerian  economy  started  with  the  introduction  of  the Structural  Adjustment  Programme  (SAP)  in  July  1986  and  since  then,  conscious efforts are made regularly to put in place new policies and where necessary, fine tune existing  ones  to  ensure  rapid  and  sustainable  economic  growth  of  the  country; emphasizes reliance on the country’s natural resources (Nigeria, 1986).

As  observed  by  Okereke-Onyiuke  (2000),  properly  articulated  and  implemented, these  government  reforms  are bound to improve  the performance  of the Nigerian capital market as a vehicle for increased capital formation thereby leading to rapid economic growth of the country”. This improvement would help the capital market’s ability to mobilize savings, attract new listing and liquidity through increased trading activities (turnover).

Therefore, this study attempts an assessment of the performance of the Capital Market in the deregulated Nigerian economy and covers the period 1986-2006.

1.2    STATEMENT OF THE PROBLEM

A capital market like Nigeria’s is bedevilled with a lot of problems that make exact measurement of its impact on various aspects of the economy quite challenging. Some economic analysts like Okigbo Report(1986) and Odife Report(1996) have observed that the Nigerian Capital Market has performed below expectations as a purveyor of cheap and stable funds for Nigeria’s economic growth due to its underdevelopment, which has impeded long-term funds flow through it. They argue that the performance of  the  Nigerian  Capital  Market  as  a  source  of  long-term  financing  of  Nigeria’s economic  growth  is  inhibited  by among  other  things;  pervasive  poverty  that  has impacted adversely on the saving culture; poor partnership spirit of Nigerians that has inhibited the development of public limited companies; poor perception of the market by offshore investors; low public awareness of the benefits of investing in the Capital Market;   poor  dissemination;   few  number   of  trading   instruments;   low  market

capitalization; high transaction costs in the market; bad corporate governance among others

The need to eliminate these observed performance inhibitors and therefore  enhance the  performance  of  the  Nigerian  capital  market  has  led  the  federal  government through  the Nigeria  Stock  Exchange  (NSE),  Central  Bank of  Nigeria  (CBN),  the Securities  and  Exchange  Commission  (SEC)  to  embark  on  reforms  aimed  at  a broader, deeper and more efficient Capital Market.

The on-going reforms in the capital market in addition to the privatization programme of the government and the consolidation programme taking place in the banking and insurance sectors through the capital market are expected to deepen the market, assist Nigerians  in imbibing  the culture  of investing in the  capital market and therefore increase the activities of the capital market.

However,  evidence from the Nigerian Capital Market shows that in spite of  these deregulation, the market is still characterized by few number of trading instruments, low  market  capitalization,  low  market  turnover,  unrealistic  stock  pricing,  high transaction cost, lack of market transparency, and so on.   Thus, there is need for a proper  assessment  of  the  performance  of  the  capital  market  in  the  deregulated Nigerian economy.

1.3      OBJECTIVE OF THE STUDY

The general objective of this study is to assess the performance of deregulated capital market in the mobilization of long term funds for Nigeria’s economic growth. Specifically, the study seeks to achieve the following:

1.   Evaluate the impact of deregulated capital market performance measures on

capital formation in Nigeria

2.   Examine the impact of deregulated capital market performance measures on the Nigerian economy.

1.4        RESEARCH QUESTIONS

Our research questions are:

1.        How does the deregulated capital market impact on gross fixed capital formation in Nigeria.

2.        How does the deregulated capital market impact on the economy.

1.5      HYPOTHESES OF THE STUDY

This study was guided by the following hypotheses:

Ho1:    The  capital  market  performance  as measured  by market  capitalization  and growth of listed securities does not have significant positive impact on gross fixed capital formation.

Ho2:    The  capital  market  performance  as measured  by market  capitalization  and growth of listed securities does not have significant positive impact on gross domestic product.

1.6     SIGNIFICANCE OF THE STUDY

This study is significant for a number of reasons:

1.   The  study  will  expose  the  performance  of the capital  market  in  resources mobilization in a deregulated economy such as Nigeria‚Äôs.

2.   The examination  of the performance  of the capital market in a  deregulated Nigerian economy will keep market participants including investors informed in the benefits of the government on business and investment.

3.   The study will also keep policy makers informed as to whether deregulation programmed  of the government  and reform  process  are  in  course,  that  is, achieving the desired goals and if not the problems militating against it.

4.   Furthermore, the study will show if the reforms made so far in the  Nigeria capital market are adequate to bring about the much needed investment flow for economic growth.

5.   In addition, the study will suggest ways to improve the effectiveness  of the reform  programmed  and  how  best  the  Nigeria  capital  market  could  be invigorated to meet the growth needs of the economy.

Finally, the work will serve as reference material for future and further work in related areas.

1.7      SCOPE OF THE STUDY

This study covered the period of 1986 to 2006.  The Nigerian economy and the capital market in particular are believed to have witnesses major reforms aimed at enhancing their performance within this period.  The study concentrated on the Nigeria capital market size. Market capitalizing is the value of a corporation as  determined by the price of its equity performance indicators namely; Market Capitalization and growth in listed securities. The study will also keep policy makers informed as to whether

1.8      OPERATIONAL DEFINITION OF TERMS

1.   Allotment: The part of stock issue apportioned or assigned by an investment firm to a purchase or subscriber usually.

2.   Collateral Security: Any security put up to reinforce an obligation

3.   Delivery: The handing over of possession of shares certificates on a delivery day.

4.   Ex-dividend Date: The day, on or after which the night to receive a current dividend is not transferred automatically

5.   Ex-dividend (Ex Div, Xd) Period: The period during which the quoted price of a security excludes the payment of any declared dividend to the buyer, and the dividend reverts to the seller.

6.   Floatation:  The issue of a security by a new company or on behalf of  the company by an issuing house.

7.   Issue Price: The price for a new security sold to the public determined by an underwriter or syndicate.

8.   Listed Securities: Any bonds or stocks that have been admitted for trading on a stock exchange and whose issues have complied in every way with the listed requirements of the exchange.

9.   Market Capitalization:  The value of a firm as determined  by the  market price of the issued and outstanding common stock. 10.  Stock: The legal capital of a corporate dividend into shares.



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ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY THE NIGERIA EXPERIENCE 1986-2006

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