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CAPITAL MARKET AND ECONOMIC
GROWTH IN NIGERIA
ABSTRACT
The role of
the capital market in an economy is to strength other sectors of the economy
which make its operation directly fell by other financial institutions. The
study shows the extent the capital market has provided the required find for
the growth of the economy. In other words, the work also reviewed the
contribution of other scholar, interviews were conducted, questionnaire
administered and result obtained were subjected to statistical analysis using
Chi-Square. Based on our findings we recommended that government through the
CBN should straighten the activities of the financial system also young and
growing enterprise should be encouraged by making financial system accessible.
TABLE OF CONTENTS
CONTENT
PAGES
Certification i
Dedication ii
Acknowledgment iii
Abstract iv
Table of Contents v
CHAPTER
ONE: CAPITAL MARKET AND ECONOMIC IN NIGERIA
1.0 Introduction 1
1.1 Background
of the study 2
1.2 Statement
of the problem 8
1.3 Objectives
of the study 10
1.4 Significance
of the study 10
1.5 Research
questions 11
1.6 Scope
and limitation of the study 12
1.7 Organization
of the study 13
CHAPTER
TWO
2.0 Literature
review 18
2.1 The
Nigeria financial system 18
2.2 The
capital market defined 19
2.3 The
role of the capital market 22
2.4 Benefits
and cost of capital market 23
2.4.3 Micro benefits 26
2.4.4 Cost 27
2.5 Efficiency
of the capital market 30
2.6 Allocational
efficiency 31
2.7 Price
determination 32
2.8 Valuation
of common stock 33
2.8.1 Dividends 35
2.8.2 Earning 35
2.9 Transaction
in typical capital market 36
2.10 Capital market and economic
development 37
CHAPTER
THREE
3.0 Introduction 39
3.1 Research
method 39
3.2 Research
design 40
3.3 Sampling
procedures 41
3.4 Data
collection methods 42
3.5 Data
analysis technique 44
CHAPTER
FOUR
4.0 Introduction 46
4.1 Data
presentation and analysis 47
4.2 Data
presentation 48
4.3 Statistical
test of the hypothesis 49
CHAPTER
FIVE
5.0 Summary,
recommendations and conclusion 50
5.1 Summary 50
5.2 Recommendations 51
5.2.1 Suggestion for further study 51
5.3 Conclusion 52
References
Appendix
Research Questionnaire
CHAPTER ONE
CAPITAL MARKET AND ECONOMIC
GROWTH IN NIGERIA
INTRODUCTION
Every
were in the world, the capital market is seen as the engine designed and built
specially to power the economy through capital solvency and efficiency. The
capital market is one those interesting framework evolved by Western
civilization to combine ideas with resources even though they belong to
different people, so that those who has ideas but no money can borrow the money
they need (to realize their dreams) from those who have money but too busy to
think out ideas on how to invest or get their money to work.
The
capital market also come to bear in third world countries because, one of the
major problems facing most of these third world countries today is not having
enough capital (capital formation) which is a vehicle for economic growth and
development that is “resources gap” the other being, the “saving gap” and “marginal
gap” they are of critical importance to the economic units.
The
theme of the project is to analysis the impact of the capital market through
its solvency and efficiency of the capital in an attempt to evaluate Nigerians
presents level of development. Economic (development).
1.1 BACKGROUND OF THE STUDY
The
Nigerian Economy has undergone major structural changes since the birth of the
Country on October, 1960. The structural changes stemmed from a predominantly
agricultural base economy in the 1960s to an economy base mainly dependent on
crude oil production for her foreign exchange earnings since the mid-1980s. The
phenomenal growth is the oil earning was however, not fully internalized within
the system to induce a broad production base with forward and backward linkage
that will indicate the various sectors of the economy which will ensure
macroeconomic sectors of the economy which will ensure macroeconomic
development Huge foreign earning backed by inappropriate macroeconomic policies
led to a consumption production pattern which
was largely import oriented. The implication of the above was a high level of
inflation as a result of low level productivity and also further fuelled
unemployment. The inability to rationalize on importation even when the oil boom
disappeared as a result of the clump in the world oil market in 1980. Led to
the depletion of external reserves and the eventual emergence of trade arrears.
A growing debt burden surfaced in early 1880s as a result of the Jumbo loans
contracted in the late 1970s from the International Capital market at none
concessional rate external debt our standing shot up drastically from U.S
$593.6 million in 1976 to U.S $2.2million in 1987 and U.S $11.5 billion in
1986. By 1988 it had climbed to U.S $27.3 billion and U.S $ 33.2 billion in
1990, U.S $33.4 billion.
In
1991 and fell to U.S $29.5 billion in 1994 it rose to U.S $32.6billion in 1995.
The pursuit of an overall exchange rate policy the subsequent relegation of the
agriculture sector to the background heavy public sector spending (lending to
high inflation) and the huge debt overhanging; all combined created
distortions, in the production declined in the oil earning in the 1980 and the
refused of foreign creditors to open new arenas of credit, necessitated a policy
redirection and payment aimed at the realignment of the domestic production,
consumption and payment pattern with the local resource base on the economy.
These made it imperative to review the macroeconomic policy framework which led
to the birth of the Structural Adjustment Programme, “SAP”. The Structural
Adjustment Programme (SAP) was introduced in July 1986 to eliminate structural
distortions and encourage a broad and diversified productive base of the
economy. The major objective bases of the structural adjustment programme
include amongst other the following:
Diversification
from oil to agriculture and manufacturing valuation of the naira to reflect
market forces interplay. Trade liberalization privatization and commercial of
government enterprises.
Promotion
of locally sources materials deregulation of the economy. The bank and entire
financial system also affected by the structural distortion have been an
integral part of the ongoing structural reforms and have also been prominent in
the implementation of the major policy changes. Since the introduction of SAP
in 1986, growth in domestic output has been sustained although the Nigerian
economy in recent time has had to grapple with the problem of persistent excess
liquidity in the attendant adverse impact of the naira exchange rate, high debt
services obligation which have had a dampening effect on Nigeria government’s
and fiscal operation, relatively high domestic price and unemployment and
continued pressure on the external balance leading to a deficit balance
payment. The performance of the real sector of the economy, through much
improved by the SAP has not maintained a momentum high enough to induce the
desire rates and levels in macroeconomic aggregate the fiscal deficit of the
government was financed, by the government through ways and means advances
which amounted to #15.6billion by the end of June 1992.
Although
debt stock reduced from U.S $33.4 billion at the end of 1991 to U.S
$29.5billion in 1994 through an agreement with the Paris club, the naira
further depreciated as a result of bureau the change” saw the harmonization of
official exchange rate with that of the parallel market on March 5” 1992 the
CBN also removed restrictions on capital transfers.
The
further deregulation of the naira exchange market rate removed substantially
the parallel market premium from over 80 percent as at 4H2 March to
5.6 percent by the end of June 1992. An offshoot of this however was the sharp
rise in interbank rate. Measures to mop up the excess liquidity in the economy
by the CBN further accumulated the pressure on domestic rate of interest with
interbank rates averaging 32 percent in June 1992 and rising further event in
July and August 1992. The high rates of interest amongst other things slowed
down growth in the manufacturing sector as average capacity utilization rate
continued to however around 40 percent: growth in the agricultural output
declined to 2.3 percent in 1992 as compared with 5.5 percent in 1991.
Development in the economy where therefore mixed and varied while the CBN
issued stabilization securities to mop up excess liquidity of 1992,
stabilization securities with #15.5 billion has been issued, thereby bringing
the total value of stabilization securities issued since to #44 million. The
decline in bank liquidity exerted pressure on interest rates and made money
(subset of the capital market) funds relatively more expensively vis-Ã -vis fund
raised in the capital market (i.e. stock market).
1.2 STATEMENT OF THE PROBLEM
From
the foregoing discussion. It is obvious that, the Nigeria economy has gone
through a lot of structural and economy that was dependent on crude oil as its
main stay.
And
also the financial system experienced some reforms all in a bid to attain a
desired level or better still purpose economic development. But the Nigeria
economy today despite the various changes and reforms in still saddled with
lots of macroeconomic problems amongst which are;
Arising
rate in the level of inflation
Arising
rate level of unemployment
Unfavoruable
balance of payment
A
low exchange rate relative to other world currencies; etc
Development
as we know is so because the developed and underdeveloped nations are both
still developing but while the underdeveloped are struggling to catch up with
development the developed are still striving to improve on their already
attained standard. This thereby led to the concepts of “more”, and “less’
developed economic. Bu the case is so bad with Nigeria economy that one cannot
say which is more appropriate to refer to her (Nigeria) as: a developing nation
or an under developing (i.e. if it exists) nation.
The
marginal propensity to save of the average Nigerian research shows, that it is
very low it not negative and this reduces greatly the level of capital
formation accumulation available for investment which further lead to low
productively as posited by the vicious circle theory of under development by
the classical comes the remedy to the vicious circle theory of underdevelopment
that it, the big push theory of development. In as much as the capital market
is assumed to have provided the required capital that can vehicle economic
development via economic growth the country is still far from development based
on the macroeconomic indicators of development.
1.3 OBJECTIVES OF THE STUDY
The
objective of the study is aimed to look at the impact of capital market and
economic growth.
Thus
the following are to be determined.
i. Has
capital market provided the relevant fund for economic growth?
ii. How
well has the medium scale enterprise achieved through the capital market.
iii. Has
the existence of capital market improved the economy?
iv. Is
there any correlation between capital market and economic growth.
1.4 SIGNIFICANCE OF THE STUDY
In
any free enterprise or mix economy, the importance of the capital market cannot
be overemphasized, most economic scholar are of the notion that the greatest
impediment to third world, development is the unavailability of capital for
execution of development projects.
And
this makes the existence of the capital market necessary that is to make
available capital (first order condition). The effectiveness of the capital
market (the second order condition) is enhancing by sound, fiscal and monetary
policies, appropriate legal and regulatory framework and by reasonable balance
in the external payment system. Macroeconomic ability further strengthened by
political stability induced a conducive environment which stimulates investment
and capital formation that are vital to capital market development which in
turn encourage economic growth and development.
1.5 RESEARCH QUESTION
With
the idea posited by the stated problem objective and significance of this
study.
There
is need for the following questions to be answered.
i. Has
the capital market provided the required capital for development?
ii. Why
is Nigeria still underdeveloped, based on the macroeconomic indicators of
development?
iii. How
well has the medium scale industrial achieved from the capital market?
iv. How
well has the existence of capital market improved the economy?
1.6 SCOPE AND LIMITATION
The
study will focus attention on capital market and its influence on economic
development via growth in Nigeria. Owing to the economic hardship prevalent in
the nation currently. It will not be possible for me to cover all the sectors
of the economy in the country. Consequently the scope of this study will be
limited to some selected sectors of the economy with in the cities.
Secondly,
data is the major source of information for the research work and as such it
may not be free from the problem of inadequacies and inconsistencies. Another
limitation of this study is that of time. It is expected that being a student
research project the study will terminate and the final report will be
submitted in a limited time span. It’s hoped that despite the time constraints
associated with the limited scope of the study. The result will be relevant and
serve the purpose for which it’s intended.
1.7 ORGANIZATION OF THE STUDY
This
study is structured into five chapters which is assumed to be conventional in
most Nigeria universities today.
Chapter
one which is the introduction chapter cover a general overview and also
statement objective, significance, scope method and organization of the study
including research question and hypothesis.
Chapter
two deals with the review of related literature on the capital market by
various scholars.
Chapters
three cover the theoretical framework and data presentation where emphasis,
were place on various development theories and issues on the stock exchange
before the data were presented.
Chapter
four which is the penultimate chapter seas us through model specification and
the analysis of result based on the specific model via econometric and
descriptive approaches.
While
chapter five, the final chapter takes care of summary, recommendation and conclusion.
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