1.1 BACKGROUND OF THE STUDY
capital market is a highly specialized and organized financial market
and indeed essential agent of economic growth because of its ability to
facilitate and mobilize saving and investment. To a great extent, the
positive relationship between capital accumulation real economic growths
has long affirmed in economic theories (Anyanwu, 1993).
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. It is in realization of this that consideration is given
to measure for the development of capital market as an institution for
the mobilization of finance from the surplus sectors to the deficit
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 less formal
market arrangements for the operation of capital market. It was not
prominent until the visit of Mr. J. B. Lobynesion in 1959, on the
invitation of the Federal government, to advice on the role the Central
Bank could play in the development of local money and capital market. As
a follow-up to this, the government commissioned and a set up the
Barback Committee to study and make recommendations on the ways and
means of establishing a stock market in Nigeria as a formal capital
market. Acting on the recommendation of the committee, the Lagos Stock
Exchange (as it was called then) was set-up in March 1960, and in
September 1961, it was incorporated under Section 2 cap 37, through the
collaborative effort of Central Bank of Nigeria, the Business Community
and Industrial Development Bank (Alile&Anao, 1990). With the
establishment 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 the Lagos Stock Exchange Act. However,
the Lagos Stock Exchange was only operational in Lagos. By the mid 70’s,
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 review 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 of the Merchant Banks, and the extremely shallow
depth of the capital.
In response to the
problems mentioned above, the government accepted the principle of
decentralization but opted for a National Stock Exchange, which will
have branches in different parts of the country. 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 some other cities. The history of Nigeria Capital
Market could be traced to 1946 when the British colonial administration
floated a N600, 000 local loan stock bearing interest at 3¼% for the
financing of developmental projects under the Ten-Years Plan Local
Ordinance. The loan stock, which had a maturity of 10-15 years, was
oversubscribed by more than N1 million, yet local participation of the
issued was 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 and
consequently economic development.
1.2 STATEMENT OF THE PROBLEM
is abundant evidence that most Nigerian businesses lack long-term
capital. The business sector has depended mainly on short-term financing
such as overdrafts to finance even long-term capital. Based on the
maturity matching concept, such financing is risky. All such firms need
to raise an appropriate mix of short- and long-term capital
(Demirguc-Kunt& Levine 1996).
Most recent literatures on the Nigeria capital market have recognized
the tremendous performance the market has recorded in recent times.
However, the vital role of the capital market in economic growth and
development has not been empirically investigated thereby creating a
research gap in this area. This study is undertaken to examine the
contribution of the capital market in the Nigerian economic growth and
development. Aside the social and institutional factors inhibiting the
process of economic development in Nigeria, the bottleneck created by
the dearth of finance to the economy constitutes a major setback to its
development. As a result, it is necessary to evaluate the Nigerian
1.3 OBJECTIVES OF THE STUDY
broad objective of this study examined the activities and performance
of Nigerian capital market. The specific objectives of the study are as
1.To examines the operations of the Nigerian capital market.
2. To evaluate the performance of the capital market in relation to the economic
growth in Nigeria.
3. To examine the rate at which new stocks are issued on the capital market.
4. To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Nigeria.
1.4 SIGNIFICANCE OF THE STUDY
The study explored
the impact or effectiveness of capital market instruments on Nigerian
economic growth. Though the scope of the study was limited to the
capital market, it is hoped that the exploration of this market will
provide a broad view of the operations of the capital market. It will
contribute to existing literature on the subject matter by investigating
empirically the role, which the capital market plays in the economic
growth 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.
1.5 RESEARCH QUESTIONS AND HYPOTHESES
This research was guided by the following research questions:
i. How is the operation of Nigeria capital market?
ii. What is the performance of the capital market in relation to economic growth in Nigeria?
iii. What is the rate at which new stocks are issued on the Nigerian capital market
iv. How could the capital market through its crucial role stimulate economic growth in Nigeria?
The hypothesis that would be tested in the course of this research is stated below as:
H0: That the capital market operations have no impact on Nigerian economic growth.
1.6 SCOPE AND DELIMITATION OF THE STUDY
The economy is a large
component with lot of diverse and sometimes complex parts; this
research work only looked at a particular part of the economy (the
financial sector). This work did not cover all the facets that make up
the financial sector, but focus only on the capital market and its
activities as it impacts on the Nigerian economic growth. The empirical
investigation of the impact of the capital market on the economic growth
in Nigeria was restricted to the period between 1980 and 2009 due to
the non-availability of some important data.
1.7 ORGANIZATION OF THE STUDY
The study is divided into five (5) chapters and organized as follows:
one form the introduction part, this is where the main theme of the
research is given. It comprises of the statement of the problem,
objectives of the study, research questions and hypotheses, significance
of the study, scope and delimitation of the study and organization of
Chapter two is the literature review of the impact of capital market on the economic growth of Nigeria.
Chapter three forms the research methodology which includes sources of data, method of data analysis and model specification.
Chapter four is the data analysis while chapter five includes the summary, conclusion and recommendations.