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IMPACT OF THE CAPITAL MARKET ON THE ECONOMIC GROWTH OF NIGERIA A CASE STUDY OF THE NIGERIA STOCK EXCHANGE






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IMPACT OF THE CAPITAL MARKET ON THE ECONOMIC GROWTH OF NIGERIA
A CASE STUDY OF THE NIGERIA STOCK EXCHANGE



ABSTRACT
This study is based on the contributions of the capital market to the economic growth of Nigeria. The study primarily examined the impact of the capital market on some vital indicators of economic growth via, gross fixed capital formation (GFCF), index of industrial production (IIP), and gross domestic product (GDP). Secondary data was collected from the central bank of Nigeria, federal office of statistics, the Nigeria stock exchange, and various issues for a period of 21 years (1980-2001). Using the statistical toll of linear regression analysis and test to the hypotheses. The result of the study shows that the capital market has a positive and significant impact on the country’s economic growth. It also revealed the limited contribution of the market to the growth rate of the industrial sector, as a result of the absence of some growth stimulating sub-sectors (i.e. electricity and mining sub-sector). On the strength of this evidence, and the desirability to strengthen existing structures and facilities, this work recommends that government should introduce some tax incentives to motivate and encourage investors, and resist the temptation of running the market. Again, both government and the management of the Nigeria stock exchange should show more commitment by stepping up public enlightenment campaign, to increase the awareness of the market. Finally, listing on the exchange should be made mandatory for companies that have attained a given level of capitalization. It is our believe that if these recommendations are implemented, the efficacy of the Nigeria stock exchange will be enhanced.



TABLE OF CONTENTS
Title Page                                                                                 i
Certification                                                                             ii
Approval Page                                                                          iii
Dedication                                                                               iv
Acknowledgement                                                                    v
Abstract                                                                                   vi
Table of Contents                                                                     vii
CHAPTER ONE
1.1   Introduction                                                                     1
1.2   Statement of problem                                                      3
1.3   Objective of the study                                                      5
1.4   Research questions                                                          5
1.5   Hypothesis                                                                       6
1.6   Significance of the study                                                  6
1.7   Scope and limitation of the study                                    7
1.8   Definition of terms                                                           8
CHAPTER TWO
2.0   Literature review                                                              11
2.1   Introduction                                                                     11
2.2   Nigeria capital market (NCM)                                           11
2.3   Functions of the Nigeria capital market                           18
2.4   Origins of the stock exchange                                          22
2.5   The Nigeria stock exchange (NSE)                                    26
2.6   The stock exchange and the capital market                     28
2.7   The capital market and early development policies          29
2.8   The capital market and the indigenization policy            30
2.9   The capital market and privatization commercialization policy
                                                                                                31
2.10 Membership and governance of the Nigerian stock exchange
                                                                                                32
2.11 The listing requirements on the Nigeria stock exchange  37
2.12 Benefits for companies listed on the Nigeria stock exchange
                                                                                                38
2.13 Problems of the Nigeria capital market                            39
2.14 Impact of the capital market on the Nigerian economy    42
2.15 Understanding the Nigerian capital market as investor   43
2.15.1 Guide to stock market table                                          44
2.15.2 Stock market indicators                                                        50
CHAPTER THREE
3.0   Research methodology                                                     53
3.1   Introduction                                                                     53
3.2   Data collection method                                                    53
3.4   Data analysis technique                                                  54
CHAPTER FOUR
4.0   Presentation and analysis of data                                    55
4.1   Introduction                                                                     55
4.2   Presentation of data                                                         55
4.3   Hypothesis testing                                                           56
4.3.1 Hypothesis One                                                              56
4.3.2 Hypothesis Two                                                              60
4.3.3. Hypothesis Three                                                           61
4.3.4 Discussions                                                                    65
CHAPTER FIVE
5.0   Summary, conclusion and recommendation                   72
5.1   Summary                                                                         72
5.2   Conclusion                                                                      73
5.3   Recommendations                                                           74
Appendices                                                                              77
References                                                                               74


CHAPTER ONE
1.1   INTRODUCTION
The acquisition of industrial knowledge and technology is one of the distinguishing factors between the developed and developing economics. Every economy seeks to acquire appropriate industrial base to move the economy from a traditional and low level of production to a more automated and efficient system of mass processing and manufacture of goods and services which is only possible through the combination of suitable technology management techniques and other resources. Acquiring these industrial capabilities is considered as economic potential for improved economic growth and development, acquire these industrial capabilities, diverse resources of which the financial system constitutes an important factor is required. And because of the importance of this financial system in developing industrial capabilities, every economy seeks avenues to acquire them, one of such avenues is raising fund through the capital market.
The financial system is a framework within which capital formation takes place, in other words, the framework within which the savings of some members of society (spending unit) are made available to other members of society (deficit spending unit) for productive investments. A financial system comprises the entire categories of institutions and institutional arrangement established to serve the needs of modern economics, put differently and clearly, the financial system provides the economic system with the allocative conduct through which scattered saving of the masses of the society are first aggregated and then disaggregated among economic units, (Ezirim;1985). This service is rendered through provision of financial resources to meet the borrowing needs of individual business enterprises and government of facilities to collect and to invest savings funds and of a sound payments mechanism.
The financial system therefore, consists of financial institution, financial instruments, rules, convention and norms has facilitates and regulate the flow of fund through the macro economy. The system itself if controlled by the government through the agency of the central bank of Nigeria, which supervises the activities of financial intermediaries and monitors adherence to the governments monetary and fiscal policies. The major types of financial intermediaries are commercial banks, merchants, banks, development finance institutions, investment trust and mortgage institutions.
The financial system plays a very important role in the provision of investible resources that enhance the growth and development of the economy. Within the financial system is the framework called the financial market, which is classified into two main categories; the money market and the capital market? The money market deals in short and medium term financial instruments that is readily convertible into cash and whose maturity ranges between a few days and two years. It exists primarily as a means of liquidity adjustment and includes the treasury bills, treasury certificates, commercial papers, bankers’ acceptance, etc.
The capital market on the other hand, deals with instruments or long-terms securities and claims with maturities longer than one year such as bonds, debentures and equity stocks. The Nigerian capital market has been and is still a major source of finance to both government and firms in the country. It has existed in Nigeria since 1960 and has progressed steadily over the years. The use of capital market reduces over reliance on the money market, assist in promoting a solvent and competitive financial sector as well as fostering a healthy stock market culture. The importance of the capital market cannot be under estimated. It is the fundamental instrument of capital formation in any economy. Investment cannot take place in a vacuum. Capital is required a well-developed capital market ensures the availability of capital funds for investment and development project usually required long gestation periods, which the funds from the money market cannot sustain. This means that the absence of a viable capital market in an economy would result in shortage of long-term funds and would hamper investment and hence stunt economic growth.
In this study, we shall limit our scope of analyzing the impact of this sub-sector on the development of the national economy using the activities of the Nigeria stock exchange (NSE) as our anchor point.



1.2   STATEMENT OF PROBLEM
The Nigerian capital market though having been in existence since 1960 became more prominent when the Nigerian enterprises promotion decree was promulgated in 1972, and amended in 1977. The public became aware of the importance of securities as avenues for investment. This awareness has increased in recent home with the introduction of government policy of privatization and commercialization in 1988, which led to accelerated growth in the size of the capital market and the variety and number of economies available to the public for investment. In spite of these, there is sample evidence to show that many Nigerian investors do not seem to know much about the benefits derivable from the capital market, i.e, what investing in securities implies. For instance (Ekpenyong, 1994), unclaimed dividends in quoted companies run into millions of naira, hundreds of share certificates are also returned unclaimed, some investors do not even known what to do with dividend warrant, many business springing up and die on a daily basis, where as their owners could have easily taken advantage of the capital market to invest their funds and save themselves of the agony of losses. Some once flourishing private businesses, even on the verge of collage due to dearth of capital for expansion or modernization most often shy away from the capital market.
There is need against this background, to throw some light on the activities of the Nigeria capital market and how their activity transmutes to the development of the entire economy. The Nigerian capital market has played a major role in the economic growth of this country, apart from its fund mobilization function, it performs intermediary role by making it possible for those who have surplus funds to be able to loan it out to those in need of it for productive purpose. This study must be able to expose the various nuance of the capital market including its development roles as well as its problems and prospects, in this way the public will be equipped to understand the place of the capital market in economic growth. However, given the broadness of the capital market, the study may be narrowed and limited to the stock exchange; a market that deals entirely with the tradable securities. Such a study should be able to expose how the stock exchange impacts on the growth of the economy and specifically resolve the following questions; how has Nigerian stock exchange (NSE) improved market capitalization and capital formation in the economy as well as industrial production and gross domestic production. It is our believe that through this mechanisms, our understanding of the stock exchange and its impact on the development of the Nigerian economy will be improved upon.
1.3   OBJECTIVE OF THE STUDY
This study is primarily aimed at critically examining the impact of the Nigerian capital market through the Nigerian stock exchange (NSE) on the various sectors of the economy. In outlining these contributions, the researcher would investigate the following.
1.     How the activities of the Nigerian stock exchange (NSE) affect capital formation within the domestic economy.
2.     If there is a relationship between market capitalization and industrial production (growth rate).
3.     How the market capitalization of the Nigerian capital market has enhanced the gross domestic products.

1.4   RESEARCH QUESTIONS
The following research question will be answered in the cause of this work.
1.     To what extent has the activities of the Nigerian stock exchange contributed to the gross fixed capital formation in the economy?
2.     Is there a relationship between market capitalization and industrial production growth in the Nigerian economy?
3.     How has the market capitalization of the Nigerian stock exchange enhanced economic growth?
1.5   HYPOTHESIS
In order to render these questions researchable, the researcher has formulated following hypotheses
H01: There is no significant relationship between the total market capitalization and the gross fixed capital formation in the economy.
H02: There is no significant relationship between market capitalization and industrial production (growth rate).
H03: There is no significant relationship between total market capitalization and gross domestic product.
1.6   SIGNIFICANCE OF THE STUDY
The need for a study of this magnitude cannot be over emphasized. Little attention has been given to finding out the extent to which the capital market (here represented by the Nigerian stock exchange) impacts on the Nigerian economy. The result from the study is expected to be beneficial to the individual investors, business, firms, and the government and of course the entire economic well-being of the citizenry. It will also help to enlighten members of the public on the meaning shares and stocks, and the need to ensure for unforeseen contingencies by inculcating in them the savings and investment habit. By listing out the benefits derived from capital market operations, the individual investor will be able to discard their “buy and hold” attitude of various securities.
This research work will be significant to business firms and government in that it is going to bring out the usefulness of raising funds in the Nigerian stock exchange and other institutions in the capital market with regards to reduction in risk and involvement of the public in economic growth. The study is also aimed at encouraging investors to patronize the stock exchange market to join hand and with others do enhance their position and that of the economy at large.
This study is also expected to identify some problems that the participants in the capital market may have encountered and to suggest ways of refrying them. Again, the result is intended to contribute to the existing stock of knowledge, and its application will permit a healthy operation of the capital market. The recommendations and findings of the study are also expected to be of great assistance to future researchers, future market participants and future policy makers.
1.7   SCOPE AND LIMITATION OF THE STUDY
This study covers the period between 1980, and 2001, this period is considered long enough for the market to significantly impact the Nigerian economy. During the analysis, the focus of the study as earlier mentioned is limited to using the activities of the Nigeria stock exchange (NSE) as our anchor point, because this body is representative enough of the capital market.
The problems encountered in the cause of carrying out this research are in two dimensions namely, finance and time. Money was required to support the researcher travels to obtain data as well as the production of this readable copy. Time was also another constraint as the researcher have in apportion his limited time among this research work, especially the hypothesis formation which took some time.
1.8   DEFINITION OF TERMS  
In this research work, the following terms shall be used and are hereby defined as;
Capital Market
The capital market is the long term end form financial market. It is made up of market and institutions, which facilities the issuance and secondary trading of long term financial instruments. Unlike the money market which functions basically to provide short term funds, the capital market provide funds to industries and government to meet their long-term capital requirements, such as financing for fixed investment like buildings, plants, bridges, etc. it deals on various securities like the government development loan stock, industrial loan stocks in other words debenture and equity.
SECURITY
In this context, it is used to mean documentary evidence of ownership or entitlement to claim upon the assets of the issuing organization which may be a business firm, government or a quasi-government organization security include government debt, both long and short term, company shares, and company debt.
STOCK EXCHANGE
An institution through which company shares and government stock are traded. It provides an outlet for people who for one reason or the other wish to dispose of their equity holding to do so. In this study, it is the representative of the capital market.
ECONOMY
Economic activities, such as the use of available resources in an organization in a way that saves time and money. In other words, avoiding waste in the course of its operations.

PRIVATIZATION
The transfer to private ownership and control of assets or enterprises, which were previously under public ownership. Privatization may be used more efficiently under private ownership, to reduce the power of central authorities, in other to raise revenue for the government or to attempt to spread property ownership more widely in society.
MARKET CAPITALIZATION
The market value of a company issued shares. It is the share price times the number of shares issued.
SIZE OF THE CAPITAL MARKET
This refers to the number of securities listed in the capital market, and it includes government development stocks, industrial loan stocks, and equities.
GROSS DOMESTIC PRODUCT (GDP)
This is one of the main measures of economic activity. It is the total value for any given period of time, say one year.
GROSS FIXED CAPITAL FORMATION
Consists of durable goods rather than stock and work in progress, it measures the total change in the value of fixed, excluding stocks at current prices.
GROSS CAPITAL FORMATION
This is the total change in the value of fixed capital plus the change in stock.
INDUSTRIAL PRODUCTION (GROWTH RATE)
The index of production covering the productive sectors of the economy, this is a weighted average of the indexes for manufacturing, mining, public utilities and construction, etc.  It is mainly based on measures of physical volume, it exclude private and public services.
VALUE OF TRANSACTION
The monetary value of securities quoted in the Nigerian stock exchange.


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