The Capital Market As A Tool For Economic Development

Project and Seminar Material for Economics

Abstract

This study is on the capital market as a tool for economic development. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

Chapter One

Introduction

1.1 Background of the Study

Economic growth in a modern economy hinges on an efficient and effective financial sector that pools domestic savings and mobilizes capital for productive projects. Absence of effective capital market could leave most productive projects which carry developmental agenda unexploited. Capital market connects the monetary sector with the real sector and therefore facilitates growth in the real sector and economic development. The fundamental channels through which capital market is connected to the economy, economic growth and development can be outlined as follows:

The contact between agents with deficit of money and the ones with monetary surplus can take place in a direct way (direct financing), but also by the means of any financial intermediation form (indirect financing), situation in which specific operators realize the connection between the real economy and the financial market. In this case, the financial intermediaries could be banks, investment funds, pension funds, insurance companies or other non-bank financial institutions. Even if, traditionally, the companies appeared only as agents with deficit of money, in the last two or three decades it could be noticed a change in the financial behavior of the modern firms: these are not considering anymore the financial market (both the capital and the monetary market) only as sources for rising funds (as issuers of financial assets), but appears more often as buyers of financial assets. The capital market fulfills the transfer function of current purchasing power, in monetary form, from companies which have a surplus of funds to those which have a deficit, in exchange for reimbursing a greater purchasing power in the future; in this way the capital market makes possible to separate the saving act from the investment one. Capital market has played major roles during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various government agencies and companies in Nigeria. Capital market increases the proportion of long-term savings (pensions, funeral covers, etc.) that is channeled to long-term investment. Capital market enables contractual savings industry (pension and provident funds, insurance companies, medical aid schemes, collective investment schemes, etc.) to mobilize long-term savings from small individual household and channel them into long-term investments. It fulfills the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future. In this way, capital market enables corporations to raise capital/funds to finance their investment in real assets. The implication will be an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. It encourages broader ownership of productive assets by small savers. It enables them to benefit from economic growth and wealth distribution, and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization. In addition, the capital market mechanism allows not only an efficient allocation of the financial resources available at a certain moment in an economy – from the market’s point of view – but also permits to allot funds according the return and the risk – from the investor’s point of view – offering a large variety of financial instruments with different profitableness-risk characteristics, suitable for saving or risk covering. Nowadays, the protection against financial risks becomes a necessity, imposed by the transformations in the global economy, by the accented instability and the financial crisis that affects without discrimination both developed and emerging stock markets. Covering the risk, that could be realized by the help of different operations, market orders or derivatives, defines the function of insurance against risks, specific function of the capital markets. The capital market allows risk dispersion between investors (of the diversifiable risk), exactly in the same measure in which each of them is willing to assume it, too. From the issuers’ point of view, the money which is necessary for the development or the unfolding of their activity can be mobilized by the help of the capital market at accessible costs, theoretically speaking smaller than those possibly obtained by the help of the banks or by other financial intermediaries. Capital market also provides equity capital and infrastructure development capital that has strong socio-economic benefits through development of roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. These projects are ideal for financing through capital market via long dated bonds and asset backed securities. Infrastructure development is a necessary condition for long-term sustainable growth and development. In addition, capital market increases the efficiency of capital allocation by ensuring that only projects which are deemed profitable and hence successful attract funds. This will, in turn, improve competitiveness of domestic industries and enhance ability of domestic industries to compete globally, given the current momentum towards global integration. The result will be an increase in domestic productivity which may spill over into an increase in exports and, therefore, economic growth and development. Moreover, capital market promotes public-private sector partnerships to encourage participation of private sector in productive investments. The need to shift economic development from public to private sector to enhance economic productivity has become inevitable as resources continue to diminish. It assists the public sector to close resource gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital. It also attracts foreign portfolio investors who are critical in supplementing the domestic savings levels. It facilitates inflows of foreign financial resources into the domestic economy. Recent empirical research linking capital market development and economic growth suggests that capital market enhances economic growth and development. Countries with well-developed capital markets experience higher economic growth than countries without. Evidence indicates that, while most capital markets in African countries are relatively underdeveloped, those countries which introduced reforms that are geared towards development of capital markets have been able to grow at relatively higher and sustainable rates. A study in 2011 showed that South Africa, the country whose capital market is the largest and most developed in Africa, in terms of market capitalization and trading volume, has been growing significantly since 2000. Its average per capita real GDP over the last 8 years has been at 3.2 %. Countries like Egypt, Ghana, Tanzania, Botswana and Mauritius, whose capital markets have been developing recently, were able to realize average per capita growth rates of more than 2.8% for the past 8 years. However, some economies which did not have formal or effective capital market like Lesotho, Seychelles and Ethiopia could not manage to realize average per capita growth rates above 2.7 % over the past 8 years. Even those countries with small and less developed capital market like Swaziland and Uganda did not manage to realize average per capita growth rates above 2.7 % during the past 8 years (CBL Economic Review, August 2009, No. 109). The role of capital markets is vital for inclusive growth in terms of wealth distribution and making capital safer for investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite. Innovation, credit counseling, financial education and proper segment identification constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for multiple financial products and services across the country. This writing has sought to demonstrate an important role played by capital market in economic growth and development. Capital market enhances efficient financial intermediation. It increases mobilization of savings and therefore improves efficiency and volume of investments, economic growth and development.

1.2 Statement of the Problem

In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economy. The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities (Obadan, 1998). Deducing from the extensive studies on the theoretical expectations on the role of capital markets on economic growth which have formed the core of normative economics, the capital market is expected to contribute to economic growth through the transmission mechanisms of savings mobilization, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, and enhanced incentive for corporate control amongst others. However, an x-tray on the path of “positive economics” which is concerned with “what is” rather than “what should be” reveals that the argument in the literature on the growth effects of capital market has not been adequately resolved

1.3 Objective of the Study

The objectives of the study are

To ascertain the impact of capital market on economic development
To ascertain the relationship capital market and economic development
To ascertain the relationship between transaction in capital market and economic development
To ascertain the relationship between the volume of shares traded in the capital market and economic growth

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: there is no impact of capital market on economic development
H1: there is impact of capital market on economic development
H02: there is no relationship between transaction in capital market and economic development
H2: there is relationship between transaction in capital market and economic development

1.5 Significance of the Study

The study will give a clear insight on the capital market as a tool for economic development. The study will be beneficial to students, government and the general public. The study will serve as a reference to other researchers that will embark on this topic

1.6 Scope and Limitation of the Study

The scope of the study covers the capital market as a tool for economic development. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Definition of Terms

Capital Market:

A capital market is a financial market in which long-term debt 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

Economic Development:

Economic development is the process by which a nation improves the economic, political, and social well-being of its people. … Consequently, as economist Amartya Sen points out, “economic growth is one aspect of the process of economic development

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the capital market as a tool for economic development. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the capital market as a tool for economic development

5.2 Summary

This study was on the capital market as a tool for economic development. Four objectives were raised which included: To ascertain the impact of capital market on economic development, to ascertain the relationship capital market and economic development, to ascertain the relationship between transaction in capital market and economic development, to ascertain the relationship between the volume of shares traded in the capital market and economic growth. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

This study examined the contribution of capital market to economic growth and it was found to be positive. This suggests that for a significant growth to be achieved in an economy, the main focus of policy makers should be on measures to promote growth in the stock market. This is a very pertinent and prerequisite consideration for any economy desiring increase rapid economic growth.

5.4 Recommendation

In order to enhance the development of the Nigerian capital market as the engine of economic growth, it is recommended that government should remove impediments to stock market development in the form of tax, legal and regulatory barriers because they are sometimes disincentives to investment. In order to increase the ease with which investors can purchase and sell shares, thus guaranteeing liquidity on the stock market, the Nigerian Security and Exchange Commission should improve on the trading system. Given that the stock market operate in a macroeconomic environment, it is therefore necessary that the environment must be an enabling one that will promote and encourage investment opportunities for local and international investors

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