CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND
TO THE STUDY
The
mobilization of resources for national development has long been the crucial
focus of development economists. This is
because, for sustainable growth and development to take place, funds must be
effectively mobilized and allocated to enable business and the economy
harnesses their human, material and managerial resources for optimal
output. It is against this background
that every country has a financial system which serves as a mechanism for the
mobilization of resources for the attainment of economic growth. Consequently,
the more developed the financial system of an economy is, the more efficient it
is likely to be in the mobilization and allocation of resources for development
purposes.
The
financial system of any society is the framework within which capital formation
takes place. According to Odife (1994),
it is the framework within which the savings of some members of the society are
made available to other members of the society. Put differently, it is the
arrangement or mechanism by which the savings surplus units of the economy
transfer their resources to the borrowing deficit units for the purpose of
enhancing economic growth (Okereke – Onyiuke, 2009). The financial system is made up of two major
markets. These are the money market and
the capital market. According to Elakama
(2009), the two markets are at the heart of the financial system.
The
money market is a type of market where short term funds and securities such as
treasury bills, inter-bank deposits, Banker’s acceptance, certificate of
deposits etc whose tenor are usually shorter than or equal to a year are bought
and sold. In other words, it is a market
where short term capital is sourced. The
capital market on the other hand is a type of market where long term debt
instruments whose tenor exceeds a year are traded. According to Sulaiman (1999), it is a network
of interrelated institutions governed by operational guidelines, which permit
the sale of equity and long term debt.
Furthermore, Al-Faki (2006) describes the capital market as a network of
specialized financial institutions, series of mechanism, processes and
infrastructure that, in various ways, facilitate the bringing together of
suppliers of medium to long term capital for investment in socio-economic
development projects. Instruments traded
in the capital market include equities, debts, government bonds, corporate
bonds, preference shares, debentures, rights etc.
Within
the broad classification of the capital market is the stock market, which
operates as the rallying point for the overall activities in the capital
market. According to Alile and Anao
(1984), the stock market is the pivot around which every activity in the
capital market revolves. Its follows
therefore that without the facilities provided by the stock market, it is
doubtful if the capital market can efficiently perform its expected role of
resource mobilization (Ologunde, Elumilade and Asaolu, 2006). It is in the light of the above that the
stock market is considered a vital element in the mobilization and allocation
of resources in any modern economy.
Until
now, the literature has mainly focus on the role of financial intermediation in
the process of economic growth and capital accumulation. Indeed, many studies have analyzed the
channels through which banks and other financial intermediaries may help to
increase, for example, the savings rate or the average productivity of capital
and, in turn growth. Recently, however,
with the upsurge in world stock markets and with a large proportion of this
boom accounted for by emerging markets, there has been a growing interest among
economists and policy makers on the role played by stock market development in
the process of economic development.
Recent research has therefore begun to focus on the linkage between the
stock market and economic development.
It is no wonder, that the World Bank Economic Review dedicated its May
1996 issue to the role of the stock market in economic growth.
The
stock market also known as the stock exchange or equity market performs some
functions that promote the growth of the economy (Osinubi, 2004). Firstly, as an economic institution, the
stock market promotes efficiency in capital formation and allocation. Secondly, the stock market serves as a
veritable tool in the mobilization and allocation of savings among competing
uses which are critical to growth of the economy. Thirdly it enables governments and industry
to raise long term fund for financing new projects and expanding and modernizing
industrial/commercial concerns, thereby increasing the quantity and quality of
investment. Fourthly, by performing its
function of allocating capital efficiently, the stock market, as it mobilize
savings concurrently allocates a larger proportion of it to the firms with
relatively high prospects as indicated by their rate of returns and level of
risk. The importance of this function is
that capital resources are channeled 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.
Additionally, the stock market performs the functions of intermediating
between the needs of firms and investors; providing a means of sharing
investment risks; providing information about companies, promoting and
providing the means of improving corporate governance etc. Furthermore, well functioning stock market
provides low cost equity capital for firms imposes control on the investment
behaviour of firms through continuous adjustment of shares and serves as a
mechanism for attracting foreign portfolio investment. Given the above functions, it is expected
that the development of the stock market will both enhance and lead to growth
of the economy.
In
recognition of the importance of the stock market in economic development, many
developing countries have launched stock exchanges during the past few decades.
This explains the drive toward the establishment of stock exchanges in African
countries especially during the past two decades, with new stock markets established
in Ghana, Malawi, Swaziland,
Uganda and Zambia. Prior to 1989, there were just eight stock
markets in Africa, of which three were in North Africa
and five in Sub-Sahara Africa. At
present, more than 50% of the fifty four African countries operate stock
exchanges, accounting for over twenty-two stock exchanges in Africa
(Komo, 2008). According to Komo, this
rapid expansion of stock exchanges in Africa
has contributed to economic development in various ways, which amongst others
include facilitating the privatization process, diversifying the financial
services, facilitating long term capital mobilization, provision of alternative
investment opportunities, attracting capital inflow and serving as a signal of
overall macroeconomic performance.
Aware
of the crucial role played by the stock market in any modern economy, the
Nigerian government in 1960 established the Nigerian Stock Exchange (NSE). Like many African countries, Nigeria
has invested in developing her stock market as a means of providing
opportunities for greater fund mobilization and improved efficiency in resource
allocation. This study therefore
examines whether stock market development promote growth in Nigeria.
1.2
STATEMENT
OF RESEARCH PROBLEM
The
role of a developed stock market in the development of any economy cannot be
over emphasized in view of its potentials and likely impact on the economy if
well harnessed. It is a known fact that
nations cannot develop without the needed long term funds for development
projects, and the more developed a stock market is, the higher the potential
for sourcing long term fund for industrialization. Indeed, as pointed out by Osinubi, a well
functioning stock market serves a veritable tool in the mobilization and
allocation of resources needed to meet the rapid expansion of the economy as it
develops.
Over the years, the Nigerian Stock
market has experienced relative stability and recorded impressive growth. This
growth has been most significant especially since the introduction of the
Structural Adjustment Programme (SAP) in the early 1980s, which brought about
the privatization, commercialization and liberalization programmes, all of
which has helped in boosting activities in the stock market. However, as noted by Ogwumike and Omole
(1997), when compared with other emerging and developed markets, it becomes
evident that the Nigerian Stock Market is still relatively small in size and
underdeveloped. For example, a
comparison of the Nigerian Stock Market in terms of number of listed equities
reveals that while Nigeria has only 214 equities listed in 2005, even though
its stock exchange was established in 1960, Singapore has over 500 (established
in 1979), Hong Kong 695 (established in 1986) and Istanbul over 900
(established in 1986). This thus indicates
the relative poor performance of the Nigerian Stock Market vis-à-vis those of
other countries. Moreover, Osazee (2007)
pointed out that less than 21 percent of the 400,000 registered companies in Nigeria
are not currently quoted on the Nigerian Stock Exchange, a situation which he
attributes to the unattractiveness of the market as well as the lack of
incentives for more companies to go public.
Furthermore, while the growth of the stock market has been impressive,
same cannot be said of the growth of the Nigerian economy.
In recognition of the above, the
research questions for this study are:
i.
Has the growth of the Nigerian Stock Market
promote economic growth in Nigeria?
ii.
Has the market acted as a mechanism for
attracting foreign capital inflow?
iii.
How has the market facilitate the mobilization
of long term fund for financing long term development project?
1.3 OBJECTIVES
OF THE STUDY
The stock market is a common feature
of a modern economy and it is reputed to perform some functions that promote
the growth and development of the economy.
Given the above, this study is therefore carried out primarily to
empirically ascertain the impact of the Nigerian Stock Market on economic
growth. Specifically, the objectives
are:
i.
to identify the channels through which the stock
market impacts on economic growth;
ii.
to examine the establishment of the Nigerian
Stock Market, as well as its performance and growth;
iii.
to identify the performance/growth drivers of
the Nigerian stock market;
iv.
to identify the challenges facing the Nigerian
Stock market and examine various ways of boosting its performance and growth.
1.4 HYPOTHESES
OF THE STUDY
A research hypothesis is a scientific
statement expressing the relationship between two or more variables which is
meant to be tested. In the light of the
primary objective of this study, the following hypotheses have been formulated
1. Ho: The
development of the Nigerian Stock Exchange is not positively associated with
economic growth in Nigeria.
2. H1: The
development of the Nigerian Stock Exchange is positively associated with
economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The significance of an efficient and
well functioning stock market in spurring economic growth has been well
emphasized in the literature. Therefore,
a constructive and objective study of the stock market which aims at
highlighting its role in the process of capital formation and national
development will be of great importance both to individual investors, firms and
policy makers.
As a market place where securities
(Stocks, bonds, shares) are bought and sold openly with relative ease, the
stock exchange is very important to investors.
Hence, prospective share holders and investors would find the work
relevant as the research study focuses on the Nigerian Stock Exchange where
activities of the capital market are usually carried out. Furthermore, since the stock market is a
reliable means through which firms can source for low equity capital, as well
as the fact that the prices of the stocks of firms quoted on the stock exchange
serves as an indication of the overall performance of the firm, this research
study will also be of great significance to firms. Additionally, this research will be relevant
to the government as it will enable it have a better knowledge of the policies
necessary to enhance or improve the contribution of the stock market to the
economy.
This research work will also serve as
a reference for subsequent write-ups and stimulate further in-depth and
insightful study in this area of study.
1.6 SCOPE
OF THE STUDY
In view of its primary objective, this
study focuses mainly on the activities of the Nigerian Stock Market without
detailed reference to other markets in the capital market. The study covers activities of the Nigerian
stock market for a period of 28 years, from 1981 to 2008. The choice of this period is anchored on the
fact that it covers both the relatively small and high activities performance
of the market.
1.7 LIMITATIONS
OF THE STUDY
This research was limited by certain
constraints which include difficulty in sourcing data from certain relevant
organization, non availability of data on certain variables, restrictions on
accessing certain materials on the internet and insufficient financial
resources for the study.
Lastly, this study was also
constrained by inadequate time on the part of the researcher, since attention
had to be given to other course work.