This research work is aimed at showing the role of capital market on development of Nigeria Economy. It also examined
the various economic theories that have postulated the key role of
capital accumulation in the process the economic development of any
nation. The data used were secondary data sourced from CBN and FBS
statistical bulletin and the method of analysis used is the econometric
technique with special focus on multiple regression analysis.
Although, capital can be mobilized from
different sources, both theoretical and empirical analysis have shown
that long term sources of finances are more veritable for productive
capital investments. Consequently, the capital market plays a key role
in this mediation process.
Emphases have been placed on indicators
of stock market size, liquidity and growth over a period of thirty
years; together with their combined effects on the rate of economic
growth and development within Nigeria context. Empirical data were
collected and analysed. The result of the analysis showed a positive
relationship between the independent variables measured and their impact
on economic development in Nigeria as measured by the gross domestic
product (GDP). However, linking the paucity m capital market instruments
as well as expansion of capital market finances to increase in real
productive investment and development, it was discovered that very
little is achieved in this respect.
TABLE OF CONTENT
Table of Content
1.2 Statement of Research Problem
1.3 The Aim and Objectives of the Study
1.4 Research Question
1.5 The Statement of Research Hypothesis
1.6 Research Methodology
1.7' Significant of the Study
1.8 Scope and Limitations of the Study
1.9 Definition of Related Terms
1.10 The Plan of the Study
2.2 Definitions and concept of Capital Market
2.3 The Need for Capital Market
2.4 The Growth of Capital Market in Nigeria
The Structure of Capital Market in Nigeria
3.2 The Operations of the Nigerian Stock Exchange
3.3 The Structure of the Nigerian Capital Market
3.4 Listing Requirements of the Stock Exchange
3.5 Parties to an Issues and their Responsibilities
3.6 The Nine Stages of Public Quotation
3.7 Sanctions for Contravening Post-Listing Rules
3.8 The Capital Market in Nigeria
4.1 Research Methodology, Data Analysis and Interpretation of Results
4.2 Methods of Estimation of Analysis
4.3 Model Specification
4.4 Specification of Data
4.5 Empirical Results and Interpretation
Summary, recommendations and Conclusion
5.1 Summary of Findings
It is a known fact that the investment
that promotes economic growth and development requires long term
funding, far longer than the duration for which most savers are willing
to commit their funds.
Capital market is 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. In this market, leaders
(investors) provide long term funds in exchange for long term financial
assets offered by borrowers.
This market embraces both the new issues
(primary) market and secondary market. Such securities might be raised
in an organized market such as the Stock Exchange. In this sense, it
involves consortium under writing, syndicated loans and project
financing. Thus, it is a mechanism whereby economic unit desirous to
invest their surplus funds, interact directly or through financial
intermediaries with those who wish to procure funds for their
In the Nigerian
context, participant includes Nigerian Stock exchange, Discount Houses,
Development banks, Investment banks, Building societies, Stock Broking
firms, Insurance and Pension Organizations, Quoted companies, the
government, individuals and the Nigerian Stock Exchange Commission
The capital market is therefore very
important to any economy because, it encourages savings and real
investment in any healthy economic environment. Through the market,
aggregate savings are channeled into real investment that increases the
capital stock and therefore economic growth of the country.
More so, the capital market synchronize
the divergent preferences for portfolio managers and financial
institutions and those of savers by mobilizing long - term funds for
portfolio managers and financial institutions while providing avenues
for savers to invest when the need arises through the secondary market,
without affecting the operation of the firm, their savings had earlier
financed. In other words, through the secondary market, the capital
market converts long-term or perpetual investment enlarged and economic
By far the greatest achievement of the
Central Bank of Nigeria since it was established on July 1st, 1959 has
been the gradual development of the Nigerian financial system. The -
system consists primarily of the money market for short term lending and
borrowing. The Nigerian Stock Exchange (formally called the Lagos Stock
exchange) is the pivot or the fulcrum around which the entire capital
market rotates. It is the market for the sale and purchase of the
securities, stocks and shares: a market In which those individuals,
institutions and governments who have funds surplus to their immediate
requirements can employ them profitably. Its major significance is that
it is the machinery for the mobilization of the countries resources for
economic growth and development. Since its establishment in 1961, a
major local investment outlet has been provided for Nigerian investors.
As a marketplace where securities
(stocks, bonds, shares) are bought and sold openly with relative ease,
the stock exchange is very important to the investors. The existence of a
stock exchange in a capital market helps to broaden the share ownership
base of firms and evenly distribute the nation's wealth by making it
possible for people in different locations to own shares in a firm in
another location by purchasing the shares, bond/ stock through the
simple mechanism of tire stock market.
For the government therefore, the stock
exchange provides the mechanism for exchanging the mobilization of
capital for creating goods and services for the satisfaction and
wellbeing of the citizens. The stock exchange is not only crucial but
also central to the entire mobilization process. This is because it
offers an opportunity for continuous trading in securities.
1.2 STATEMENT OF RESEARCH PROBLEM
The capital or stock markets are feature
of the economics of Western Democracies. They do not exist in communist
or socialist countries for they have no business doing there. In the
western capitalist countries, they constitute the most important
institution for massive capital formation geared towards economic
development. The complexity of capitalist ideology resulted in the
control and measures to put the economy in equilibrium state. Factors
such as capital market capitalization rate, government stock rate, rate
of interest charged on financial instruments amongst others exert some
impact on the developmental and growth of the economy.
Bakare (2000:58) defines capitalization
rate as the discount rate used to determine the present value of future
earnings. It is one of the major determinants of the market size of any
stock exchange. The size of the market capitalization and its growth
rate pose a major influence on the growth and development of the
economy. The determination of this rate is based on the forces of demand
and supply of securities.
On the other hand, interest rates along
with monetary aggregates form targets of monetary policy in Nigeria.
Within the period chosen for this study, interest rates in Nigeria were
directly managed by the monetary authorities- the Central Bank of
Nigeria. This control of rate of interest was based on the 156
International Research Journal of Finance and Economics - Issue 4 (2006)
expert advice from financial gurus who perceived that the economy, as
at that period, lack a well developed financial market. Under this
regime control, the federal government of Nigeria did set the deposit
and lending rates of the financial intermediaries at their prevailing
levels. In addition, the government did set the rates for lending to
specified sector of the economy with a view to encouraging (or
discouraging) lending to these sectors.
If the rate of interest paid by banks to
depositors is increased, investors will patronize the banks the more
and fewer investors will invest on the capital market. This will lead to
a decrease in capital investment in the economy. Hence, economic growth
and development will be lowered, because the allocation of capital
resources plays a crucial role in the determination of the rate of the
nation's output. If capital resources are not provided to those in the
industries, or if capital is not made available to sectors which are
capable of increasing production and productivity, the rate of the
country expansion (growth) will be retarded.
Thus, the disparity in the determination
of interest rate, capitalization rate by different forces must have
influenced the development and growth of the economy. These influences
constitute the major problem that this study intends to investigate. The
variation in The interest rate might cause investors also to either go
to the bank or buy government development stock (bond), thereby helping
in the development of the economy. The relationship between interest
rate and government stock rate will also be generated in the course of
this work. The capital market is often accessed to strengthen a
company's capital base, diversify it shareholder's base, improve the
debt/equity ratio and in some cases raise money to retire existing
However, in spite of the myriad of ways
through which corporate entities and government may raise debt,
preference or equity capital, all of which have their merits and
limitations, it becomes rather paradoxical that small scale investors
are not often counseled enough or exposed to the inherent derivable
benefits and associated risks in electing to go for either equity
financing or debt financing in the capital market. Anyanwu (1993:204)
identified ignorance as one of the problems of Nigerian Securities and
Exchange Commission (NSEC) and the capital market is still very low.
Not many of the small scale business or
family-owned business, state and local governments are aware or properly
counseled by the issuing houses about the procedural formalities of
actualizing their full involvement in the capital market activities. The
problem of inability to expose the small-scale businesses, state and
local governments to tap the huge savings in the capital market to raise
funds to start, expand, consolidate and modernize business has been the
chief indictment of the issuing houses that play the intermediary role
between issuers and investors.
The Nigerian Stock Exchange still has a
long way to go when compared with those in some developed countries. For
example, up till date it has 7 branches (Lagos, Kano, Kaduna, Ibadan,
Port Harcourt, Onitsha and Abuja) with about 183 companies listed on it.
As at July, 1996, about 20 companies were listed on the second-tier
securities market. This looks shallow when compared with Indian Stock
Exchange with about 4,344 companies or The London Stock Exchange, with
about 5,085 listed companies, It may seem unfair to compare Nigerian
Stock Exchange at 42 with those of Indian and London that has existed
for decades. All The same, it suggests the need for accelerated
development of the market.
The general objective of this study is
to present an overview of the nation's capital market in terms, of
raising finance to assist companies and government on long term basis.
1.3 THE AIM AND OBJECTIVES OF THE STUDY
The specific objectives of this study are:
i. To critically examine the relationship between stock market capitalization rate and interest rate
ii. To identify the type of
relationship between stock market capitalization rate and government
development stock rate and,
iii. To examine the relationship between government development stock rate and interest rate.
1.4 RESEARCH QUESTIONS
i. What is Stock Market Capitalization?
ii. What are the effects of Capital Market on Macroeconomics Policies?
iii. What are the problems facing capital Market in Nigeria?
iv, Is there any significant relationship between stock market capitalization and interest rate?
1.5 THE STATEMENT OF RESEARCH HYPOTHESES
(1) Ho: That there is no significant relationship between stock market capitalization and interest rate.
HA: That there is significant relationship between stock market capitalization and interest rate.
(2) Ho: That there is no significant relationship between stock market capitalization and government development stock.
HA: That there is significant relationship between stock market capitalization and government development stock.
(3) Ho: That there is no significant relationship between government development stock and interest rate.
HA: That there is significant relationship between government development stock and interest rate.
1.6 RESEARCH METHODOLOGY
This study employs the Econometric
analysis to test for the relationship between dependent and independent
variables. The study therefore employed ordinary least squares
techniques to examine the effect of interest rate, stock market
capitalization, government development stock rate on gross domestic
product. Obtained from 1980 to 2009, through the publication of Nigeria
stock exchange, Central Bank of Nigeria and other relevant of
publications. Sourced through secondary method of data generation.
1.7 SIGNIFICANT OF THE STUDY
The study will explore the role of
capital market on development of Nigeria economy, though the scope of
study will be limited to the financial sector. It is hoped that the
exploration of his sector will give a broad view of stock market
instruments on economic stabilization it will serve as an inspiration to
other potential students and institutions or individuals as it will
contribute to practical life, knowledge advancement and stabilization of
1.8 SCOPE AND LIMITATIONS OF THE STUDY
The economy is a large component with
lot f of diverse and sometimes complex parts; this research work will
only look at a particular part of the economy (the financial sector).
This work cannot cover all the facets that make up the financial sector,
but will look at the capital market and its instruments as 'being used
by the government for the stabilization of the economy on its road to
industrialization and economic development. In other words, its focus is
not on the entire financial, which is a combination of both money and
capital markets, but will only delve exclusively on the capital market.
The limitations are lack of data, information and time.
1.9 DEFINITION OF RELATED TERMS
The instruments of Nigeria money market are defined as follows:
Treasury Bills: These are money market; short-term securities issued by federal government of Nigeria and are sold at a discount.
Treasury Certificates: These
are medium term government securities which nature after a period of
one to two years and are intended to bridge the gap between the Treasury
bill and long-term securities.
Call Money Fund Scheme: This is the money lent by the banks on the understanding that it is repayable at the bank's demand or at short notice.
Commercial Papers: These
are short-term promissory notes issued by the central bank of Nigeria
and their maturities vary from 50 to 270 day in varying denominations.
Certificates Of Deposits: These are inter-bank instruments meant to provide outlet for the commercial banks surplus funds.
Bankers Unit Fund: It is meant to mop up excess liquidity in banking system and also to sweeten the market for Federal Government stock
Stabilization Securities: These are issued by Central Bank of Nigeria ideally to mop up idle cash balance of participating banks.
Eligible Development Stocks: This
was approved on April 197'5. Specified their holdings of federal
Government of stocks of not more than three years to mature will count
as part statutory liquid asset for the calculation of their statutory
Discount Houses: Is a financial institution devoted to trading in money securities in the secondary market.
Commercial Banks: Commercial
bank are financial institutions which hold themselves out to the public
comprising of individuals, firms, organization and government by
accepting deposits and giving out advances as 'well as performing other
services to their customers.
Central Bank Of Nigeria: Is
a non-profit, government controlled institution which acts as a .
banker to· the government, maintaining the accounts of government
departments receiving proceeds of taxation and making payment on behalf
of the government maintaining national debt, issuing new bonds,
prepaying and covering maturing ones.
Merchant Banks: Are
basically for wholesale banking, medium and long-term financing
activities, which are outside the traditional domain of commercial
1.10 THE PLAN OF THE STUDY
This study is divided into five
chapters, chapter one is the introductory parts from 1.1 to 1.9 while
chapter two contains the literature review.
Chapter three is the Theoretical frame work on the structure of capital market in Nigeria.
Chapter four is the Research
Methodology, data Analysis and interpretation of Results while chapter
five conclude with Summary, Recommendation and Conclusion.