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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