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CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The capital market is a highly specialized and organized financial market and
indeed essential agent of economic growth because of its ability to facilitate
and mobilize saving and investment. To a great extent, the positive
relationship between capital accumulation real economic growths has long
affirmed in economic theories (Anyanwu, 1993).
Success in capital
accumulation and mobilization for development varies among nations, but it is
largely dependent on domestic savings and inflows of foreign capital.
Therefore, to arrest the menace of the current economic downturn, effort must
be geared towards effective resources mobilization. It is in realization of
this that consideration is given to measure for the development of capital
market as an institution for the mobilization of finance from the surplus
sectors to the deficit sectors.
The development of capital market in Nigeria, as in other developing countries
has been induced by the government. Though prior to the establishment of stock
market in Nigeria, there existed some less formal market arrangements for the
operation of capital market. It was not prominent until the visit of Mr. J. B.
Lobynesion in 1959, on the invitation of the Federal government, to advice on
the role the Central Bank could play in the development of local money and
capital market. As a follow-up to this, the government commissioned and a set
up the Barback Committee to study and make recommendations on the ways and
means of establishing a stock market in Nigeria as a formal capital market.
Acting on the recommendation of the committee, the Lagos Stock Exchange (as it
was called then) was set-up in March 1960, and in September 1961, it was
incorporated under Section 2 cap 37, through the collaborative effort of
Central Bank of Nigeria, the Business Community and Industrial Development Bank
(Alile&Anao, 1990). With the establishment of the Central Bank of Nigeria
in 1959 and the coming into existence of the Lagos Stock Exchange in 1961 and
Subsequently, the Nigeria Stock Exchange by an Act in 1979, a sound foundation
was laid for the operation of the Nigerian Capital Market for trading in
securities of long term nature needed for the financing of the industrial
sector and the economy at large. After the incorporation of the Lagos Stock
Exchange, it was granted further protection under the law and its activities
was placed under some sort of control by the government, hence the passing of
the Lagos Stock Exchange Act. However, the Lagos Stock Exchange was only
operational in Lagos. By the mid 70’s, the need for an efficient financial
system for the whole nation was emphasized, and a review by the government of
the operations of the Lagos Stock Exchange market was advocated. The review was
carried out to take care of the low capital formation, the huge amount of
currency in circulation which was held outside the banking system, the unsatisfactory
demarcation between the operation of Commercial Banks and the emerging class of
the Merchant Banks, and the extremely shallow depth of the capital.
In response to the problems mentioned above, the government accepted the principle of decentralization but opted for a National Stock Exchange, which will have branches in different parts of the country. On December 2nd 1977, the memorandum and article of association creating the Lagos Stock Exchange was transformed into the Nigerian Stock Exchange, with branches in Lagos, Kaduna, Port-Harcourt, Yola and now in Federal Capital Territory (FCT) Abuja some other cities. The history of Nigeria Capital Market could be traced to 1946 when the British colonial administration floated a N600, 000 local loan stock bearing interest at 3¼% 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. Certainly, potential fund abound in Nigeria, but the overriding consideration in this project is to examine the impact of the capital market in harnessing and mobilizing these resources (fund) to generate economic growth in the country and consequently economic development.
In response to the problems mentioned above, the government accepted the principle of decentralization but opted for a National Stock Exchange, which will have branches in different parts of the country. On December 2nd 1977, the memorandum and article of association creating the Lagos Stock Exchange was transformed into the Nigerian Stock Exchange, with branches in Lagos, Kaduna, Port-Harcourt, Yola and now in Federal Capital Territory (FCT) Abuja some other cities. The history of Nigeria Capital Market could be traced to 1946 when the British colonial administration floated a N600, 000 local loan stock bearing interest at 3¼% 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. Certainly, potential fund abound in Nigeria, but the overriding consideration in this project is to examine the impact of the capital market in harnessing and mobilizing these resources (fund) to generate economic growth in the country and consequently economic development.
1.2 STATEMENT
OF THE PROBLEM
There is abundant evidence that most Nigerian businesses lack long-term
capital. The business sector has depended mainly on short-term financing such
as overdrafts to finance even long-term capital. Based on the maturity matching
concept, such financing is risky. All such firms need to raise an appropriate
mix of short- and long-term capital (Demirguc-Kunt& Levine 1996).
Most recent literatures on the Nigeria capital market have recognized the tremendous performance the market has recorded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Nigerian economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the dearth of finance to the economy constitutes a major setback to its development. As a result, it is necessary to evaluate the Nigerian capital market.
Most recent literatures on the Nigeria capital market have recognized the tremendous performance the market has recorded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Nigerian economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the dearth of finance to the economy constitutes a major setback to its development. As a result, it is necessary to evaluate the Nigerian capital market.
1.3 OBJECTIVES
OF THE STUDY
The broad objective of this study examined the activities and performance of Nigerian
capital market. The specific objectives of the study are as follows:
1.To examines the operations of the Nigerian capital market.
1.To examines the operations of the Nigerian capital market.
2. To evaluate the
performance of the capital market in relation to the economic
growth in Nigeria.
3. To examine
the rate at which new stocks are issued on the capital market.
4.
To make recommendations as to how the operations of the market could be
improve to boost economic growth and development of Nigeria.
1.4 SIGNIFICANCE OF
THE STUDY
The study explored the impact or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of the study was limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.
The study explored the impact or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of the study was limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.
1.5 RESEARCH
QUESTIONS AND HYPOTHESES
This research was guided by the following research questions:
This research was guided by the following research questions:
i. How
is the operation of Nigeria capital market?
ii. What is
the performance of the capital market in relation to economic growth in
Nigeria?
iii. What is
the rate at which new stocks are issued on the Nigerian capital market
iv. How
could the capital market through its crucial role stimulate economic growth in
Nigeria?
The hypothesis that would be tested in the course of this research is stated below as:
H0: That the capital market operations have no impact on Nigerian economic growth.
The hypothesis that would be tested in the course of this research is stated below as:
H0: That the capital market operations have no impact on Nigerian economic growth.
1.7 ORGANIZATION OF
THE STUDY
The study is divided into five (5) chapters and organized as follows:
Chapter one form the
introduction part, this is where the main theme of the research is given. It
comprises of the statement of the problem, objectives of the study, research
questions and hypotheses, significance of the study, scope and delimitation of
the study and organization of the study.
Chapter two is the
literature review of the impact of capital market on the economic growth of
Nigeria.
Chapter three forms
the research methodology which includes sources of data, method of data
analysis and model specification.
Chapter four is the
data analysis while chapter five includes the summary, conclusion and
recommendations.
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