Background to the Study
Stock Exchange is an engine of economic growth and development globally;
Nigeria inclusive is made up of markets and institutions which facilitate the
issuance and secondary trading of long-term financial instrument. The history
of Nigerian Stock Exchange could be traced to 1946 when the British colonial administration
floated a N600, 000 local loan stock bearing interest at 3.% 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. An as result
of poor local participation federal government established several economic
programmes with hope to foster economic and financial development, such Structural
Adjustment Programme (SAP) 1986, Vision 2010, Vision 2020, Millennium
Development Goal (MDGs), National Economic Empowerment Development Strategy (NEEDS),
State Economic Empowerment Development Strategy (SEEDS), and other development
Recently, Nigerian Stock Exchange has experienced unprecedented
growth which was attributed to the banking sector reform of 2004-2005.
(Nwankwo, 1991) says that Nigerian Stock Exchange has helped government and
corporate entities to raise long term capital for financing new projects, and
expanding and modernizing industrial and commercial concerns. Pedro and Erwan
(2004) assert that financial market development raises output by increasing the
capital used in production and by ensuring that capital is put into best uses. Beckaert et
al (2005) analyze that Nigerian Stock Exchange development would lead to
financial liberalization, which will lead to a 1% increase in annual real
Studying the link between
domestic stock market development and internationalization, Laessens et al., (2006)
using a panel data technique concluded that domestic stock market development
as well as stock market internationalization are positively influenced by the log
of GDP per capita, the stock market liberalization, the capital account
liberalization and the country growth opportunities and negatively influenced
by the government deficit/GDP ratio. Ekundayo (2002) argues that a nation requires a lot of
local and foreign investments to attain sustainable economic growth and
development. The Nigerian Stock Exchange provides a means through which this
is made possible. It is on the premises that this research paper wishes to examine
the impact of the Nigerian Stock Exchange on Economic Growth and Development
from 1990 to 2011.
The Nigerian Stock Exchange is a network
of financial institutions and infrastructure that interact to mobilize and
allocate long-term funds in the economy. The market affords business firms and governments
the opportunity to sell stocks and bonds, to raise long-term finds from the
savings of other economic agents. The Nigerian Stock Exchange is a highly
specialized and organized financial market and indeed an essential agent of
economic growth because of its ability to facilitate and mobilize saving and
investment. The sourcing of long-term finance through the Nigerian Stock
Exchange is essential for self-sustained economic growth, which is consistent
with external adjustment and rapid economic growth (Iyola, 2004).
The Nigerian Stock Exchange effectively
started operations in Nigeria on 5th June, 1961 under the provision of the
Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock
Exchange in December 1977 as a result of the review of the Nigerian financial
system (CBN, 2007). The Securities and Exchange Commission (SEC) was
established in 1979 through the SEC Act 1979, to regulate the capital market,
but it commenced actual operation in 1980. It took over regulatory functions
from Capital Issues Commission, which was established in 1973. Since then,
various forms of financial instruments have been issued in the Nigerian Stock
Exchange by new and existing business to finance product development, new
projects or general business expansion.
The capital market, no doubt, is pivotal
to the level of growth and development of the economy. Chinwuba and Amos (2011)
note that Nigerian Stock Exchange is one of the major institutions that acts in
propelling a prostrate economy for growth and development. Nyong (1997), sees
it as a complex institution imbued with inherent Mechanism through which
long-term funds of the surplus sectors of the economy are mobilized, harnessed
and made available to deficit sectors of the economy.
Osaze and Anao (1999), assert that Nigerian
Stock Exchange is the cornerstone of any financial system since it provides the
funds needed for financing, not only business and other economic institutions,
but also the programs of government as a whole. Ilaboya and Ibrahim (2004),
stress that Nigerian Stock Exchange functions as an economic barometer for
galvanizing economic activities.
The journey to the present democratic
experience in Nigeria commenced on May 29, 1999, when the military government
returned power to civilian administration. The agitation for the exit of the
military was embarked upon because of the popular belief among the stakeholders
in the economy that, democracy, among other things, promotes economic growth.
Supporters of democracy also argue that the motivation of citizens to work and
invest, the effective allocation of resources in the market place, and
profit-maximizing private activity can all be maintained in a climate of
liberty, free-flowing information and secured control of property (North, 1990). In
the light of the above background, the question that would readily come to mind
is whether or not Nigerian Stock Exchange has significantly impacted on the
growth of the Nigerian economy, given the enabling environment provided by the
supportive democratic structure. Indeed, this is one question that past related
empirical work have failed to answer. This study is therefore undertaken to
satisfy this “curiosity” and hence fill the existing gap.
Saving, capital formation and economic
growth have been central to the economic development debate for several
decades. The links between these issues, on the one hand and direction of
causality on the other, still remain subject to further analysis across countries.
Accepting that the relationship is unidirectional (i.e. moving from savings to
investment and hence to economic growth) may be misleading. (Ben, 1999),
stressed that Nigerian Stock Exchange provides arrangement through which
households, firms, and government that intend to invest more than they can bid
for the funds of other spending unit who have surplus funds, and this is
necessary for economic growth. Capital markets are the complex of institutions
and mechanisms through which long –term funds with maturity of 5years and above
are pooled and made available to business, governments, individual, and
instruments already outstanding are transferred. As in the case of the money
market, the capital markets are local, regional, and national in scope, (Bekaert,
Mobilization of resources for national development has long been the
central focus of development economists. As a result of this, the centrality of
savings and the investment in economic growth has been given considerable
attention in the literature Rostow (1960), Malinvaud (1997), Soyode (1990),
Aigbokan (1995), Samuel (1996), Demirguc-Kunt and Roos (1996), for sustainable
growth and development, funds must be effectively mobilized and allocated to
enable business and the economy harnessed their human, material, and management
resources for optimal output.
existing literature clearly shows that developed economies had explored the two
channels through which resources mobilization affects economic growth, and
development – money and Nigerian Stock Exchange (Demirguc-Kunt and Roos, 1996;
Samuel, 1996). This is however, not the case in developing economies where
emphasis was placed on money market with little consideration for Nigerian
Stock Exchange(Nyong, 1997),
Since the introduction of structural adjustment programme (SAP) in
Nigeria the stock market has grown very significantly. Alile (1996), Soyode
(1990). This is as a result of deregulation of the financial sector and
privatization exercise which exposed investors and companies to the
significance of the stock market. Equity financing became one of the cheapest
and flexible sources of finance from the Nigerian Stock Exchange and remain a
critical element in the sustainable development of the economy (Okereke, 2000).
The line between the stock market
performance and economic growth has often generated strong controversy among
analysts based on their study of developed and emerging markets Samuel (1996);
Demirguc-Kunt and Roos (1996); Akinifesi (1987); Levine and Sara (1996); Obadan
(1998); Onosode (1998); Emenuga (1998); Osinubi (1998); According to Nyong
(1997) the financial structure of a firm, that is, the mix of debt and equity
financing, changes as economies develop, the tilt is however, more towards
equity financing through the stock market.
economies develop, more funds are needed to meet the rapid expansion. The stock
market serves as a veritable tool in the mobilization and allocation of savings
among competing users, which are critical to the growth and efficiency of the
economy (Alile, 1984).
The determination of the overall growth
of an economy depends on how efficiently the stock market performs its
allocative functions of capital. As the stock market mobilizes savings,
concurrently it allocates a larger proportion of it to the firms with
relatively high prospects as indicated by its rate of returns and level of
risk. The importance of this function is that capital resources are channelled
by the mechanism of the forces of demand and supply to those firms with
relatively high and increasing productivity, thus enhancing economic expansion
and growth (Alile, 1997).
The role of the financial system in
promoting economic growth (and development) cannot be over emphasized. The
financial system comprises of the central bank, commercial banks, mutual funds,
brokerage firms, discount houses, and stock exchange, to mention just few.
These institutions trade in financial instruments such as domestic currency,
foreign currency, stocks, bonds, derivatives and so on, and in the process
mobilize funds from surplus unit (savers) to deficit unit (investors). This
helps business corporations to increase investment and expand production, and
ultimately accelerate economic growth.
The controversies surrounding the role
of financial system in the economy started with Schumpeter (1912) who argued
that in a well functioning financial system, banks help to facilitate economic
growth by enhancing technological innovation through identification and funding
of entrepreneurs with the best chance of successfully implementing innovative
products as well as production process. Supporting this view, Bagehot (1873)
and Hicks (1969) asserted that the development of the financial sector helped
to trigger industrialization in England by increasing the access of the people
to funds, which in turn they used to finance and execute capital projects.
Recently, Levine (1991) argued that developed stock market reduces both
liquidity shock and productivity shock of businesses. Similarly, Levine and
Zervos (1998), and Khan and Senhadji (2000) stressed that the establishment of
stock market has played a significant role in the development of banking
institutions, particularly in emerging market economies. Thus, the authors
believe that the development of the financial sector (and stock market)
contribute meaningfully to economic growth. Contrary to the views of Bagehot,
Schumpeter and Hicks, some scholars argue that financial system does not really
matter in the growth of the economy. For instance, Nobel laureates like Gerald
Meier and Dudley Seers (1984) and Stern (1989) did not accord any role to
finance (or financial system) in their discussion of development. Moreover,
Stiglitz (1993) argued that stock market liquidity does not provide incentives
for acquiring information concerning firms or improving corporate governance.
Besides, Shliefer and Summers (1988) asserted that stock market development may
hinder economic growth by promoting counter-productive corporate takeovers.
Furthermore, Singh (1997) argued that stock market may not be important in attaining
higher economic growth.
Statement of the Problem
There is argument amongst
researchers and economists as to the relevance of the financial system in
economic growth and development. The literature is awash with the views of many
influential economists like Robinson (1952), Meier and Seers (1984), Lucas
(1988), and Stern (1989) who believed that finance plays an in consequential
(if any) role in economic growth and development of nations.
A contrary view is however
held by another group of researchers and economists to the effect that
financial system of a country plays an important role in economic growth. Those
that have demonstrated this line of thinking in their research work included
Schumpeter (1932), Bagehot (1962), Cameron (1967), Goldsmith (1969), Mckinnon
(1973), Shaw (1973) and Ojo (1984).
Building on this line of
thinking, Gelb (1989), Ghani (1992), King and Levine (1993a, 1993b) and De
Grogorio and Guidotti (1995) demonstrated how measures of banking development
are strongly correlated with economic growth in a cross section of countries. Besides
evaluating the general importance of the financial system in economic development,
other researchers had stressed empirically the specific role of Nigerian Stock
Exchange (stock and bond markets) in economic growth.
Despite the popular belief that
democracy promotes economic activities which in turn engenders economic growth,
the growth of the Nigerian Stock Exchange in Nigeria is still very small in
relation to the size of the economy. CBN (2007) has it that a comparative
analysis of equity market capitalization of the Nigerian Stock Exchange with
some countries in North and South America, Asia, Europe and Africa shows that
the Nigerian market is relatively very small. Worse still are the attendant
ugly consequences of the Nigerian Stock Exchange meltdown, characterized by the
crash of the market capitalization from a high record of N13.5 trillion in
early 2008 to less than N4.5 trillion in the corresponding period of 2009. This
development necessitated an investigation by the House of Representatives,
through its committee on Nigerian capital market, of the circumstances
surrounding the 2009 crash of the Nigerian capital market, and this investigation
is otherwise known as the Nigerian Stock Exchange probes.
However, given these scenario, one begin
to wonder if the Nigerian Stock Exchange has really fared well in terms of its
impact on the growth of the Nigerian economy since the return to civilian
administration in Nigeria. Suffice it to re-state here that no past focused on
this very important period (beginning from 1999), which this study intend to
cover. What is seen in other related works is a combination, in varying
degrees, of periods of military and civilian rule. Given these conflicting
views, it is left to empirical investigation to determine whether or not stock
market (financial system) development accelerates economic growth, particularly
Therefore, there has been a concern by
individuals and even corporate bodies alike as to whether the Nigerian Stock
Exchange is actually achieving this laudable goal of capital
market-led-development. To this end, the following research problems were
What is the impact of Nigerian
Stock Exchange on economic development in Nigeria?
What is the direction of
causality between Nigerian Stock Exchange performance and economic development
What is the transmission
mechanism between Nigerian Stock Exchange performance and economic development
Objectives of the Study
broad objective of this study is to assess the impact of Nigerian Stock
Exchange on economic growth in Nigeria. To achieve this, the specific
objectives of this study are to:
relationship between Nigerian Stock Exchange and economic growth in Nigeria.
Examine whether the
activities in the Nigerian Stock Exchange impact positively on the economy.
Determine if the
performance of the stock market is an impetus for economic growth and
1.4 Research Questions
Is there any
relationship between Nigerian Stock Exchange and economic growth in Nigeria?
Do the activities in
the Nigerian Stock Exchange impact positively on the economy?
Do the performance of
the stock market is an impetus for economic growth and development?
1.5 Research Hypotheses
is no significant relationship between Nigerian Stock Exchange and economic
growth in Nigeria.
2. Activities in the Nigerian
Stock Exchange have no significant impact on economic growth in Nigeria.
performance of the stock market has no significant impetus for economic growth
Significance of the Study
study will be useful to scholars of financial discipline, the government of
this nation, participants or operators in the Nigerian Stock Exchange and other
stakeholders as it will provide policy recommendations on the basis of its
findings. The stock market has helped government
and corporate entities to raise long term capital for financing new projects,
and expanding and modernizing industrial /
The outcome of this study is significant in that it is intended to
contribute to the growing body of literature on quality of project financing
management in both public and private sectors in general, and at the same time
contribute to the conceptual treatment of market capital applications to
development processes in project finance specifically. Second, there is a
potential for other public agencies to benefit from this study. Additionally,
this study will focus on the departments/groups which are sub-units of
organizations, illuminating how departments/groups can benefit from components of
Scope of the Study
The researcher intends to review the
structure and relevant aspects of operations and developments in the Nigerian
capital market, with main focus on the determination of the impact of Nigerian
Stock Exchange on economic development in Nigeria. Therefore, the study is not
to compare the Nigerian capital with those of other countries, because
theoretically and practically, Nigerian Stock Exchange are basically the same
but may differ in their levels of developments.
The study will be restricted to a period
of twenty four years from 2000 to 2012. The choice of the timeframe is
predicated by the fact that the Nigerian Stock Exchange witnessed a lot of
changes with the introduction of the 1986 SAP and its obvious implication. The
major limitation in this study is that it will rely only on secondary data
generated from the publications of Nigerian Stock Exchange (NSE), Securities
and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and National
Bureau of Statistics (NBS) as well as other materials relevant to the study as
access to these materials is difficult.
Definition of Terms
operational definition of terms used in the study is as follows:
Capital Market: It
is defined as a collection of financial institutions set up for the granting of
medium and long - term loans. It is a market for government securities, for
corporate bonds, for the mobilization and utilization of long term funds for
development; the long term end of the financial system.
is defined as the reorganization of enterprises wholly or partly owned by the
federal government in which such commercial enterprises shall operate as profit
making commercial ventures without any intervention from the federal
Liquidity of a Stock
Market: This relates to the degree of access, which investors have
in buying, and selling of stocks in such a market. The more liquid a stock
market is, the more investors will be interested in trading in the market.