THE CAPITAL MARKET AND ITS IMPACTS ON THE NIGERIAN ECONOMY (EMPHASIS ON THE STOCK EXCHANGE)

ABSTRACT

This work is designed to critical evaluate the impact of capital market in Nigerian economy. The researcher investigated into operations, methods, regulations of  the  Exchange. He also investigated into the strategies for mobilization of funds towards facilitating capital formation as well as developing and exploiting policy options to enhance operational efficiency and effectiveness of the capital market. The study reveals, among other things that some listed companies have been flouting their listing requirements and also Report of Forensic Audit of Nigerian   Stock   Exchange   carried   out   between   14-18

September 2009 by KPMG, raised allegations that suggests that the affairs of the Nigerian Stock Exchange ‘NSE’ may have been managed in a manner that is detrimental to the interest of the investing public. In carrying out the survey the researcher made use of questionnaires and documentary sources in obtaining relevant information. The statistical design and analysis used in the study is the percentage ratio and tested with chi-square distribution.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

According to A.R and H.I Alile (1986:5), the Nigerian economy in the 1960s was economically and politically dominated by imperialists, Nigerians have since after independence assumed responsibility of piloting the affairs of the economy towards the attainment of high level of economic growth. This has required greater needs for efficient financial markets, providing medium of exchange which promotes specialization and mobilization of savings from the surplus unit (original lenders, this includes depositors) and  channeling them  into  the  deficit  unit  (the borrowers) of the economy for productive investment which would enhance the productive capacity, overall output and employment.

Towards this end, there is a grater need for growth and development not only politically but also economically, but the resources to attain such desired objective are not readily available. It is in recognition of these obvious problems that Nigerian Stock Exchange (hereafter referred to as ‘NSE’ or ‘the Exchange) has just emerged to complement the effort of the government in mobilizing the long-term investment funds for the nations growing companies and creation of  investment out-lets.

Chuks Okongwu (1986:3) in his book ‘the Nigerian Economy’ defined Stock Exchange as a place where securities such as bonds stocks and shares of varying types are traded openly. It deals on “Existing” rather than “New” securities. Securities are documentary evidence of ownership or entitlement to claim upon the assets of the issuing entity, or quasi- government institution.

Olawale Adedipe (2006:21) also stipulated that the Stock Exchange may also be described as an institution which is responsible for efficient allocation of available capital funds to the diverse users in the economy. The ready marketability feature which the stock exchange bestows on listed securities minimizes any problem which the prospective investor would have had, thus facilitating a free flow of funds into productive uses. Such marketability has great impact for the individual saver, the investor, or fund user as well as the nation as a whole, thus, the relevance of the stock exchange to the capital formation and investment process and ultimately to the promotion of individual and national well being leads to its Obvious recognition as a vital strategy for promoting economic development.

According to information’s from Nigerian Stock Exchange the Nigerian stock exchange has been in operations for over

five decades and precisely it is 50 years of age this year. This length of time is ample enough to critically asses its operations in terms of achievements and failures towards the economic development of the nation (Nigeria). The Nigerian Stock Exchange  was  established  in  1960  as  the  Lagos  Stock Exchange. In December 1977 it became The Nigerian Stock Exchange, with branches established in some of the major commercial cities of the country. At present, there are six branches of The Nigerian Stock Exchange. Each branch has a trading  floor.  The  branch  in  Lagos  was  opened  in  1961; Kaduna, 1978;  Port Harcourt, 1980; Kano, 1989;  Onitsha, February  1990;  and  Ibadan  August  1990;  Abuja,  October

1999 and Yola, April 2002. Lagos is the Head Office of The Exchange.   An   office   has   just   been   opened   in   Abuja. Table1.1

The Exchange started operations in 1961 with 19 securities listed for trading. In 1999 there are 262 securities listed on the Exchange, made up of 11 Government Stocks, 49 Industrial loan (Debenture/Preference) Stocks and 194 Equity / ordinary Shares of Companies.

According  to  THE  PUNCH  newspaper  (10th    Jan.  2011), Nigerian Stock Exchange has a total market capitalization of approximately N8.361 trillion, as at January 10, 2011. Most of the  listed  companies  have  foreign/multinational affiliations and represent a cross-section of the economy, ranging from agriculture, manufacturing to  services.  The  market  has  in place a tested network of Stockbrokerage Firms, Issuing Houses  (commercial banks),  practicing corporate  law  firms and   over   50   quality   firms   of   auditors   and   reporting accountants (most with international links). The Stock Exchange and most of the nation’s stock broking firms and issuing houses are staffed with creative financial engineers that  can  compete  anywhere  in  the  World.  Therefore,  the market has in place a network of intermediating organizations that can effectively and creditably meet the challenges and growing        needs        of        investors        in        Nigerian. Integrity: is the watchword of The Stock Exchange. Market operators subscribe to the code “Our word is our bond”. Thus, public trust in the Nigerian stock market has grown tremendously, with about three million individual investors

and hundreds of institutional investors (including foreigners who own about 47% of the quoted companies) using the facilities of The Exchange. The Stock Exchange’s 50-year history is not devoid of fraud, shocks, scandals or insider dealings.

Trading: The call over trading system was recently replaced with the Automated Trading System (ATS), with bids and offers now matched by stockbrokers on the Trading Floors of The Stock Exchange through a network of computers. This is done every business day from 11.00 a.m. till all bids and offers have been    executed    (about    1.30    p.m.    on    the    average).

Pricing: Prices of new issues are determined by issuing houses/stockbrokers; while on the secondary market prices are  made  by  stockbrokers  only.  The  market/quote  prices, along with the All-Share Index, are published daily in The Stock Exchange Daily Official List, The Nigerian Stock Exchange CAPNET (an intranet facility), The Nigerian Stock exchange website and newspapers and on the stock market page  of  the Reuters Electronic  Contributor  System.  Our  on-line  code  in  the Reuters Network is NSXA-B. Pricing and other direct controls gave way to indirect controls by the regulatory bodies (Securities and Exchange Commission and The Stock Exchange) following the deregulation of the market in 1993.

Deregulation has improved the competitiveness of the market, in addition to making it more investor-friendly.

The All-Share Index: The Exchange maintains an All-Share Index formulated in January 1984 (January 3, 1984 = 100). Only common stocks (ordinary shares) are included in the computation of the index. The index is value-relative and is computed daily.

Clearing, Delivery and Settlement: Clearing, Settlement and Delivery of transactions on The Exchange are done electronically  by  the  Central  Securities  Clearing  System Limited  (CSCS),  a  subsidiary of  The  Stock  Exchange. The CSCS Limited (“the Clearing House”) was incorporated in 1992 as part of the effort to make the Nigerian stock market more efficient and investor-friendly. Apart from clearing, settlement and delivery, the CSCS Limited offers custodian services.

Stock Market Legislations: Transactions in the stock market are  guided  by  the  following  legislations,  among  others:

–    Investments    &    Securities    Decree    No.    45,    1999.

–     Companies     and     Allied     Matters     Decree     1990.

–    Nigerian Investment Promotion Commission Decree, 1995.

–   Foreign Exchange (Miscellaneous Provisions) Decree, 1995.

Regulation: Transactions on The Exchange are regulated by The Nigerian Stock Exchange, as a self-regulatory organization (SRO),  and  the  Securities  &  Exchange Commission  (SEC), which administers the Investments & Securities Decree 1999.

Internationalization of  the  Stock  Market:  Following  the deregulation of the capital market in 1993, the Federal Government in 1995 internationalized the capital market, with the abrogation of laws that constrained foreign participation in the Nigerian capital market. Consequent upon the abrogation of the Exchange Control Act 1962 and the Nigerian Enterprise Promotion Decree 1989, foreigners can now participate in the Nigerian capital market both as operators and investors. Also, there are  no  limits any more to  the  percentage of  foreign holding   in   any   company   registered   in   the   country. Ahead of this development, The Exchange had since June 2,

1987, linked up with the Reuters Electronic Contributor System for online global dissemination of stock market information – trading statistics, All-Share Index, company investment ratios, and company news (financial statements and corporate actions). In November, 1996 The Exchange launched its Internet System (CAPNET) as one of the infrastructural support for meeting the challenges of internationalization and achieving an enhanced service delivery.

The Internet System facilitates communication among local

and international participants in the market, as subscribers to the system include stockbrokers, quoted companies, issuing houses, etc, who now use the facility to receive and send e- mail, globally and locally. But more importantly, they can, through this medium, access key market information – trading statistics (current and historical), corporate trading results, etc.

1.2 STATEMENT OF PROBLEM

Before a problem could be solved, it must first of all be identified. In view of this analogy, this study is designed to identify the constraints confronting the Nigerian Stock Exchange in achieving its hand able objectives towards the growth of the economy, as well as such problem militating against its efficiency and effective operations, which includes the following problems:-

1) Report of Forensic Audit of Nigerian Stock Exchange carried out between 14-18 September (2009:9) raised allegations that suggests that the affairs of the Nigerian Stock Exchange ‘NSE’ may have been managed in a manner that is detrimental to the interest of the investing public

2) Lapses on the part of the regulatory authority in ensuring proper monitoring and surveillance of the exchange constitute a problem militating against the success of the exchange.

3) Unpatriotic act such as large scale corruption in public offices and unbridled recklessness in the expenditure of the public funds.

4) There is a massive export of capital by citizens and aliments through  illegal devices  often  times  with  the  connivance of public servants which handicap the economy growth and indirectly affect the stock exchange.

5) Pursuit of some wrong policies in the past which includes:

a. The pursuit of an industrial policy which relied excessively on imported raw materials and other inputs.

b. The failure to diversify the economy affects the exchange badly.

6) Economic problem which among other things includes an excessively high level of inflation (scarcity-induced and cost- pushed) dwarfed the achievement of the stock exchange.

1.3 OBJECTIVES OF THE STUDY

It is the greatest interest of the researcher to produce a paper which will apart from fulfilling the requirement for award of MBA in the Department of Management, Faculty of Business Administration of the university of Nigeria, Enugu campus, and  report  on  the  capital  market  and  its  impact  on  the Nigerian economy with an emphasis on the Stock Exchange. This  study  will  generally  investigate  on  the  how  far  the Nigerian  Stock  Exchange  has  fairly  strategized  financial

activities for national development. Thus, the researcher will identify and evaluate the following:

a) The role of the exchange in ensuring the protection of the investing public against any malpractice or insider dealings.

b) The tools available to the exchange to ensure that the listed companies do not flout their listing requirements.

c) Strategies for mobilization of funds towards facilitating capital formation as well as developing and exploiting policy options to enhance operational efficiency and effectiveness of the market.

d) The impacts of such polices and programs like indigenization, structural Adjustment Programme(SAP), deregulation, economic stabilization, rationalization of public sector (privatization), Recapitalization etc on the exchange.

e)  To  provide adequate and  up-to-date information on  the operations of the exchange.

1.4 RESEAECH QUESTIONS

a)  What  is  the  role  of  the  Nigerian  Stock  Exchange  in ensuring the protection of the investing public against malpractice of insider dealings?

b)  Are there tools available to the exchange to ensure that the listed companies do not flout their listing requirements?

c)  Does the Stock Exchange employ the use of strategy(ies) in fund mobilization to enhance capital formation as well as

developing  and   exploiting  policy   options  to   enhance operational efficiency and effectiveness of the market?

d)  Is there any significant impact on the Stock Exchange by the various government policies and programmes?

e)  Are there relevant, up-to-date and adequate information on the operations of the Stock Exchange?

1.5 HYPOTHESIS FORMULATION

Based on the above stated research objectives and questions, the  following hypotheses have  been  formulated.    They  are stated in their null:

a) The Nigerian Stock Exchange does not play an important role in ensuring the protection of the investing public against malpractice of insider dealings

b) There are no tools available to the exchange to ensure that the listed companies for do not flout their listing requirements

c) The  Nigerian  Stock  Exchange  does  not  employ  any strategy for fund mobilization to enhance capital formation as well as enable the development and exploitation of policy options to enhance operational efficiency and effectiveness of the market

d) Government  policies  and  programmes  do  not  have  a significant impact on the performance of the Nigerian Stock Exchange

e) The Nigerian Stock Exchange does not have relevant, up- to-date and adequate information on its operations.

1.6 SIGNIFICANCE OF THE STUDY

The relevance of the exchange towards economic revitalization cannot be over-emphasized. The study portrays the contributions of the Nigerian Stock Exchange in encouraging investment and prospects of the exchange over five decades of its existence. The weakness of the Regulatory Authorities and the listed companies are also revealed.

Hence, the study will be of immense relevance not only to the Nigerian stock exchange alone but also to potential investors, stock brokers, and regulatory authorities, government, listed companies and the society at large.

Finally, there is no doubt that this research work will forms a good basis for future researchers who may like to up-date the study.

1.7 SCOPE AND LIMITATION OF THE STUDY

The review of Nigeria Stock Exchange over five decades of operations is intended to access the adequacy or otherwise towards achieving its objectives or economic growth and development.

This study is not extended to the entire financial market but is strictly structured to the Nigerian Stock Exchange. In carrying out   this   research   a   number   of   places   were   visited,

Questionnaires were administered coupled with some oral interviews, such places visited Includes

– Nigerian Stock Exchange, Onitsha

– Central Bank, Enugu

– Commercial banks

– Stock brokers etc.

Limitations

While trying to obtain information relevant to the study some challenges were encountered which in no small measure have posed some hindrances to data collection.

This problems encounter includes:

i) Academic stress,

ii) The uncompromising and time constraints.

iii) Unwillingness of some staff of NSE, Onitsha to disclose some vital information’s.

During the period, the researcher was not exposed to only the research work, it was coupled with academic stress in school to enable him meet other vital academic requirements or demand such as term papers, assignments etc.

Some   of   the  respondents  did   not   co-operate  with  the researcher while gathering information from them, the uncompromising attitude among other things includes: failure to keep data with the researcher, refusal to fill the questionnaire or to grant oral interviews. The time for the

research work is small, minus that, more places would have been visited.

Notwithstanding the challenges, this research work has been successfully executed.

1.8 HISTORICAL BACKGROUND OF THE FIRM UNDER STUDY

According to international monetary fund;(survey of African Economy) vol. 5 (1973:54), The practices that have gradually metamorphosed into the stock exchange as it is known today could be traced to the burgeoning trade in agricultural and other  commodities in  European centers during  the  middle ages. It was the practice in these trade fairs for traders to gather at a place on specified days to strike bargains in commodities. Trade was usually carried out on credit terms and with time instruments such as bill of exchange, it started to be used as evidence of the credit and as instruments for effecting settlement. Later on, these instruments had become traded upon. The other impetus giving rise to the development of   stock   exchange   was   the   development   of   financial institutions such as banks and insurance companies which were set up to meet the ever-increasing demand in industry and commerce. Another vital fact that facilitated the growth of the stock exchange was the industrial activities of 18th century.

Chucks Okongwu (1986:29) also identified that the institution of the Stock Exchange emerged as a spontaneous reaction of enterprising businessmen to the opportunities and challenges offered by the merging free enterprise economy of the middle ages and the era of the industrial revolution. The Nigerian experience is no exception. The Nigerian Stock Exchange first started as the Lagos Stock Exchange in 1961 with only seven members. In  December 1977, its  name was  changed from Lagos  Stock  Exchange following a  persistent expression of dissatisfaction with the nation’s financial system by enlightened citizenry, especially with regards to the low rate of capital formation which was held outside the banking system, etc.

In response to the public concern, the federal government in April 1976 set up a committee headed by Dr Pius Okigbo to study the structure and operations of the nation’s financial system and made recommendations for improvement. The committee recommended inter alia, the decentralization of the exchange so as to bring the benefit of capital market operation nearer to a greater part of the country and then improve the performance of the exchange. Section 5 and 6 set-out certain obligations of the exchange (such as submission of quarterly reports to the minister of finance through the governor of the Central Bank). Both sections seek to place the activities of the exchange under the overall public policy. Finally, section 7 of

the Act reserve to the Central Bank of Nigeria the right to deal in  any  stocks issued by  or  on  behalf  of  the federation of Nigeria, whether such stocks are quoted or not. These sections therefore, in effect exclude the Central Bank from the provisions of section 3 and 4.

The original subscribers to the memorandum and Articles of

Incorporation of the company were

– Alhaji Shehu Bakar

– Chief Theophilus Adebayo Doherty

– Sir Odumegwu Ojukwu, K.T, O.B.E

– Mr. Accentually Williams

– C.T. Browning and Co. (Nigeria) Limited

– The Investment Company of Nigeria Limited

– John Holt Nigeria Limited.

1.9 DEFINITION OF TERMS USED

i) Structural Adjustment Programme (SA)

This is intuitive, inward looking, economic transformer and self dependency economic model, imitated and employed to achieve economical and technology independence in the long run.

ii) Financial Industries

All firms that are engaged in providing financial services (e.g. banks, insurance companies, financial companies etc)

iii) Privatization

This is the relinquishment of part of or all the equity and other interest  hold  by  the  federal  government  or  its  agency  in enterprises whether wholly or partly owned by the federal government.

iv) Regulation Policy

The process by which the price of funds in the market is determined by the interaction of the market forces of demand and supply.

v) Indigenization

This is a process meant to promote local participation in all industrial, commercial and financial activities in the country by allowing the  citizens to acquire ownership, control and management of the economy.

vi)  Underwriting

This is a process whereby the issuing house e.g. commercial banks undertakes to buy a certain percentage of shares being offered for the subscription at the offer price to forestall any possible under subscription.

viii) Regulatory Authorities

These relate to financial regulatory bodies of the apex bank. The  Central Bank of Nigerian and Securities and Exchange Commission

ix) Listed Companies

This relates to companies whose shares are quoted on the stock exchange.

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