The role of capital market on economic growth in Nigeria (1985 - 2014)


The role of capital market on economic growth in Nigeria (1985 - 2014)

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The role of capital market on economic growth in Nigeria (1985 - 2014)

This paper seeks to examine the impact of the Nigerian capital market on its economic growth from the period of 1990-2010. This means that the performance of the stock market is an impetus for economic growth and development. The economic growth was proxied by Gross Domestic Product (GDP) while the capital market variables considered include; Market Capitalization (MCAP), Total New Issues (TNI), Value of Transactions (VLT), and Total Listed Equities and Government Stocks (LEGS). Applying Johansen co-integration and Granger causality tests, results show that the Nigerian capital market and economic growth are co-integrated. This implies that a long run relationship exists between capital market and economic growth in Nigeria. The causality test results suggest a bidirectional causation between the GDP and the value of transactions (VLT) and a unidirectional causality from Market capitalisation to the GDP and not vice versa. The F statistics is significant at 5 percent using a two-tailed test. On the other hand, there is no “reverse causation” from GDP to market capitalization. Furthermore, there is independence “no causation” between the GDP and total new issues (TNI) as well as GDP and LEGS. This is a clear indication of the relative positive impact the capital market plays on the economic growth of the country. The evidence from this study reveals that the activities in the capital market tend to impact positively on the economy. It is recommended therefore that the regulatory authority should initiate policies that would encourage more companies to access the market and also be more proactive in their surveillance role in order to check sharp practices which undermine market integrity and erode investors’ confidence.

 

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

 

1.1   BACKGROUND OF THE STUDY

The growth and development of the capital market in Nigeria can be traced to 1946 with the floating of N600,000 (more than 300,000 pounds sterling) worth of government stocks. However, an organized market for the secondary trading of issued stocks was lacking. In 1959, following the establishment of the Central Bank of Nigeria (CBN) a year earlier, a N4 million (2 million pounds sterling). Federal Government of Nigeria development loan stock was issued in line with its role of fostering economic and financial development. In 1986, Nigeria embraced the International Monetary Fund (IMF) Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s. The programme was proposed as an economic package to rapidly and effectively transform the Nigeria economy within two years (Yesufu, 1996). government to judiciously implement some of its policy measures (Oyefusi and Mogbolu, 2003).

However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%, interest deregulation from August 1987, financial market reform and public sector reform which entails the full or partial privatization and commercialization of about 111 public owned enterprises.

 

The Nigeria stock exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank, 1994; Anyanwu et al, 1997; Oyefusi and Mogbolu, 2003). The introduction of SAP in Nigeria has resulted in significant growth of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile, 1996; Soyode, 1990).

 

Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market, yet its impact at the macro-economic level was negligible. Again the capital market was instrumental to the initial twenty five Banks that were able to meet the minimum capital requirement of N25 billion during the banking ector consolidation in 2005. The stock market has helped government and corporate entities to raise

long term capital for financing new projects, and expanding and modernizing industrial/commercial concerns (Nwankwo, 1991). We use econometric techniques the relationship between capital market performance and economic growth. Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various governments and companies in Nigeria, the objective of this study therefore is to evaluate the level of development of the capital market and how it has impacted on her economic growth.

 

1.2   OBJECTIVES OF THE STUDY

The objectives of the study are:

1.     To evaluate the performance of Nigerian capital market on the economic growth.

2.     To assess the roles of Nigerian capital market on the economic growth.

3.     To determine the extent at which the capital market has impacted on the economic growth in Nigeria.

4.     To identify the major constraints hindering the operations of Nigerian capital market

5.     To make suggestions on how the performance of Nigerian capital market on the economic gowth.

1.3   STATEMENT OF THE PROBLEMS

Nigeria is a country with increasing labour force. She lacks capital as well as foreign investment into the country as a result of political instability and other reasons. Therefore, a proper and efficient way of utilizing her scarce other resources must be found in order to reduce unemployment and increase economic growth. it must be noted that unemployment is not only an economic problem but also a social problem. This means, it does not only under growth, it also gives room for social problems such as robbery, arson, suicide etc.

The key problem facing most small-scale enterprises is lack of finance whether for the establishment of new industries or to carry out expansion plans. The inability to attract financial credit or resources has hindered or stifled the growth of small scale enterprises. The reasons for the lack of fund include the following:

·        High rate of inflation that led to the vast depreciation of the naira exchange rate, thus making it difficult for most small and medium enterprises to obtain the required  input for expansion

·        Low level of savings in the economy, which leads to low capital formation

·        High rate of interest charged on loan, which scares off potential small and medium scale entrepreneurs

The unwillingness of retail banks to grant credit to small and medium scale enterprise because of the low creditworthiness of these enterprises has also hampered their growth over the years.

1.4   RESEARCH QUESTIONS

        i.      Do Nigerian capital market play any role in economic development?

        ii.     Do Nigerian capital market contribute to financial growth?

        ii.     what are the major constraints hindering the activities of capital market in Nigeria.?

1.5    STATEMENT OF HYPOTHESES

In order to achieve the above stated objects, the following hypotheses shall be tested:

HYPOTHESIS ONE

Ho:   Nigerian capital markets do not play significant roles in economic development.

H1:   Nigerian capital markets play significant roles in economic development.

HYPOTHESIS TWO

Ho:   Nigerian Capital Market do not play significant roles in financial growth.

H1:   Nigerian Capital Market play significant roles in financial growth.

1.6   METHODOLOGY OF THE STUDY

The study will base its data collection on both the primary and secondary sources. The secondary source shall include, textbooks, journal, speeches delivered in various seminars, information from Federal Offices of Statistics, CBN Annual Report etc. The primary source is through the use of questionnaire, which will be used to obtain information from the respondents that from the sample of the study. Data obtained through the questionnaires shall be presented through the use of simple frequency distribution table. The data shall be analyzed through the use of chi-square distribution, which is the statistical method use to test for the difference of two independent statistics.

1.7   SIGNIFICANCE OF STUDY

This paper focuses on the issues of capital market and how it has impacted on the Nigerian economy. Olawoye (2011) noted that the capital market is an essential agent of economic growth because of its ability to facilitate and mobilize savings and investment. The ability to mobilize and invest lies in the nation’s strength in effective resource mobilization which enables internal wealth generation and domestic savings as well as inflows of foreign capital. Thus, the consideration of the capital market as the institution for financial management from surplus sectors of the economy to the sectors that are seeking to be financed.

1.8   SCOPES AND LIMITATION

This research is aimed at establishing that Capital Market actually impacts on the general economy of a nation using Nigeria as a case study. We are aware that the economy of a nation to what extent its production, utilization and exportation of goods and services affect the national income and the standard of living of its people. Good and strong economies require strong domestic infrastructure with a good foreign relationship (Smathers 2014). Strong domestic infrastructures are capital intensive projects including industries and corporate entities that require good capital financing to be able to survive. The research question is that to what extent can the Nigerian Capital Market impact on the economy of Nigeria? .The objective of the study are to examine the impact of the capital market on the economy of Nigeria, that is to evaluate the effect of Market Capitalization on the Inflation rate, Gross Domestic Product (GDP), Total number of New Issues, Transaction Value, Total listing and Foreign Direct Investment (FDI.

1.9  ORGANIZATION OF WORK

The study will be divided into five main chapters. Chapter one will cover the general introduction into the study under which introduction, statement of problems, objectives of the study, statement of the study are discussed. Chapter two will focus on literature review, which has to do with a general presentation of views by former researchers as well as scholars on the main variables of the study. Chapter three will contain the structural composition of the study under which the sources of the finance of small scale enterprises are discussed. Chapter four will be devoted to data presentation and analysis and chapter 5 will be used for summary, conclusion and recommendations.

1.10 DEFINITION OF TERMS

Capital Market: capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

GDP: Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country''s borders in a specific time period.

Foreign Direct Investment: foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

Inflation rate: The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. Economists generally believe that very high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.

Total new issues: The market that deals with these new issues is called the primary market, as opposed to the secondary market that deals with existing shares and bonds. New issues are distributed through the primary market, which is a market where companies raise long term equity capital.

Value of Transaction: Transaction Value means the aggregate cash and non-cash consideration in connection with the consummation of a Sale Transaction that is paid, payable, distributed, or otherwise available for distribution, to holders of Company Shares.

Total listing: In corporate finance, a listing refers to the company''s shares being on the list (or board) of stock that are officially traded on a stock exchange. Some stock exchanges allow shares of a foreign company to be listed and may allow dual listing, subject to conditions.

The role of capital market on economic growth in Nigeria (1985 - 2014)

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This paper seeks to examine the impact of the Nigerian capital market on its economic growth from the period of 1990-2010. This means that the performance of the stock market is an impetus for economic growth and development. The economic growth was proxied by Gross Domestic Product (GDP) while the capital market variables considered include; Market Capitalization (MCAP), Total New Issues (TNI), Value of Transactions (VLT), and Total Listed Equities and Government Stocks (LEGS). Applying Johansen co-integration and Granger causality tests, results show that the Nigerian capital market and economic growth are co-integrated. This implies that a long run relationship exists between capital market and economic growth in Nigeria. The causality test results suggest a bidirectional causation between the GDP and the value of transactions (VLT) and a unidirectional causality from Market capitalisation to the GDP and not vice versa. The F statistics is significant at 5 percent using a two-tailed test. On the other hand, there is no “reverse causation” from GDP to market capitalization. Furthermore, there is independence “no causation” between the GDP and total new issues (TNI) as well as GDP and LEGS. This is a clear indication of the relative positive impact the capital market plays on the economic growth of the country. The evidence from this study reveals that the activities in the capital market tend to impact positively on the economy. It is recommended therefore that the regulato.. economics project topics

The role of capital market on economic growth in Nigeria (1985 - 2014)

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  • PAGES : 66 Pages
  • CHAPTERS : 1 - 5
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