Financial Sector Liberalization And Capital Market Development In Nigeria

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Financial Sector Liberalization And Capital Market Development In Nigeria


This Research study was carried out to find the link between financial sector liberalization and capital market Development. As part of the Structural Adjustment Programme (SAP) of 1986, the Nigerian Government initiated a large scale restructuring

Of the financial sector and the liberalization of the regulations concerning financial institutions and markets. This was justified on the basis of existing market failures which arose from externalities and lack of information

Using the econometric techniques, we found, that financial liberalization increased the real deposit ratio and also will lead to a substitution into financial asset resulting in a greater supply credit to finance real investment for capital market development and economic growth. Consequently, we recommend that for macroeconomic stability, efficiency and proper development of the financial system, direct control should be discouraged while indirect control should be encouraged through the market mechanism.

Chapter One

1.0 Introduction

1.1 Background to the Study

Just like other African Economies, Nigeria’s financial sector is underdeveloped and unorganized. It is characterized by dualism, market segmentation and spatial fragmentation [Iyoha, 2002]. Financial sector facilitates the conduct of trade transactions, the efficient use of financial resources, mobilization of savings and risk taking which are central to sustained Economic Growth and Development.

According to T.W. Oshikoya and Osita Ogbu [1995], financial liberalization in several African countries has been implemented largely through Structural Adjustment Programs. In Nigeria, until the adoption of structural adjustment program in 1986, financial repression and bureaucratic control of interest rates were the order of the day.

Economic Development creates demands for particular types of financial arrangements and the financial system responds automatically to these demands. Finance, is argued to act as a catalyst in the process of Development but if repressed could become fetters or obstacles to the Growth process [Ikhide, 1997].

Even though the money and capital markets in Nigeria are not as deep as desirable, a start seems to have been made in the late 1980s and early 1990s to develop a more robust and balanced financial structure that would improve the ability of the domestic financial system to mobilize savings and contribute to self sustained Economic Growth [Iyoha, 2002].

The objectives of the liberalization are to build more efficient, robust and deeper financial systems, which can support the growth of private sector enterprise. Efficiency entails two components; which are improved credit allocation and more or higher quality financial services for a given level of inputs [Brown Bridge and Gayi, 2001].

The role played by the financial sector is an Economy can be important in determining Economic Growth. A growing empirical literature demonstrates that the Development of the financial system has positive effects on the long run rate of Economic Growth and the volume and efficiency of investment [Fry, 1995 Philip Arestis et al, 2002], through the removal of the elements of financial repression, particularly controlled interest rates, financial sector liberalization is expected to lead to higher nominal and real interest rate [Emenuga, 2001].

The capital market is divided into two segments: the primary market where companies’ shares are issued for the first time before being quoted on the stock exchange and secondary market where is trading is done in existing stocks. The capital market has served as a source of long- term fund to finance investment in the private sector of the Nigerian Economy.

The liberalization of the financial sector involved liberalization of interest rates, promotion of market based system of credit allocation and enhancing completion and efficiency of the regulatory and supervisory framework [Ikhide, 1997]

1.2 Statement of Problem

This study attempts to examine the extent to which the liberalization policy has resolve the problems existing in the system which are direct controls, the pervasive Government intervention in the financial system and the resultant stifling of competition and resource misallocation.

This study attempts to find out the extent to which the liberalization policy has resolve the problem of externalities, which relates to the distortions caused by high and volatile inflation.

This study is concerned with the impact of the liberalization policy on the information problems, which is in the form of informational asymmetries between the suppliers and uses of financial services.

1.3 Scope of the Study

This study will undertake an analysis of the financial liberalization policy with a view to identifying the reason that led to the adoption of the policy. The focus will be on measuring the influence and effects of financial sector liberalization on some capital market Development indicators as far as the availability of Data permits. The period of the study is from 1970- 2004 in order to carry out a trend analysis on the before the liberalization period [1970 – 1985] and after the liberalization [1986 – 2004].

1.4 Justification of the Study

Financial sector reforms in Nigeria has embraced a number of policies designed to increase the size, improve the efficiency and raised the diversity of the financial system. This goal is achieved through financial liberalization which is viewed as the process of moving towards market- determined prices on all classes of financial products, characterized by symmetric entry and exit conditions to all participants increasing internationalization as represented by the opening up of domestic markets to international competition [Ikhide, Yinusa, 1998].

The liberalization of financial institutions and markets is an improvement in financial intermediation, which is considered a necessary condition for stimulating investment, raising productive capacity and fostering Economic Growth and Development.

1.5 Objectives of the Study

The general objective of this study is to determine the extent to which financial liberalization have led to the development of the capital market in Nigeria. To achieve this general objective, the following specific objectives will be examined.

  1. To provide a comprehensive insight into the structure of the capital market in Nigeria.
  2. To examine the impacts of liberalization on the Development of the capital market.
  3. To access the impact of reform policies like debt conversion programs.

1.6 Research Questions

This study will be based on the following Research Questions:

  1. Has the financial sector liberalization measures been effective in achieveing its stated objectives?
  2. Has the financial sector liberalization measures been able to solve the repressed nature of the Nigerian capital market?
  3. Has financial sector liberalization measures improved the efficiency in resource allocation and quality of investment in Nigeria?

1.7 Research Hypothesis

  1. Ho; financial sector liberalization does not have a positive impact on capital market Development.
    Hi; financial sector liberalization does have a positive impact on capital market Development.
  2. Ho; capital market development does not have a positive impact on Economic Growth.
    Hi; capital market developments do have a positive impact on Economic Growth.

1.8 Methodology of the Study

The study will adopt Econometrics techniques to estimate the Models. We will use the Ordinary Least Squares (OLS) method of estimation and the Cochrane- orcutt correction method.

1.9 Sources of Data

The Data used for this study are obtained essentially from the publication Central Bank of Nigeria statistical bulletin and Central Bank of Nigeria Annual Statement of Accounts. Others may be obtained from Nigeria Stock Exchange and other International Economic Journals.

1.10. Outline of Proposed Chapters

The final report will be organized into five chapters.

  • Chapter 1 Introduction.
  • Chapter 2 Literature Review
  • Chapter 3 Theoretical framework and Research Methodology for the Study.
  • Chapter 4 Data Analysis and Interpretation Empirical Result.
  • Chapter 5 Summary, Policy Recommendation and Conclusion.

Chapter Five

5.0 Summary, Policy Recommendation and Conclusion

5.1 Summary

This Research work was carried out to determine the relationship between financial sector liberalization and capital market development in Nigeria. This study has focused on the provision of evidence from the Nigerian economy on the performance of the capital market with the on-going liberalization exercise.

A major aspect of the reform has to do with the restructuring of the financial sector and the liberilation of the regulations concerning financial institutions and markets. In this Research study, an improvement in fiancial intermidation was considered a necessary condition for stimulating Investment, raising productive capacity ansd fostering economic growth. Several versions of the financial sector liberalization exist (Aziakpono, 1999), but in this study, we adopted the Mckinnon and Shaw hypothesis. This is more relevant to Nigeria as a developing nation. The basis of the hypothesis is that financial markets in developing countries like Nigeria, are fragmented, and the repressed nature of the capital markets in these countries tend to retard the efficient allocation of resources, leading to low quality investment.

5.2 Theoretical Findings

Financial liberalization has witnessed changes in the financial size, its structure and its institutional importance. Due to the prevalence of financial market imperfections or failure, some form of Government intervention was needed to facilitate credit supply etc. But the Central Bank of Nigeria is still assuming a dominant position, that is, an indication that the monetary authorities are controlling the financial system. In order to ensure balance, the monetary stability and fiscal balance is needed for overall economic development.

5.2.1 Empirical Findings

This study revealed the following:

  1. The real deposit rate of interest was significant and had impact on the financial sector liberalization.
  2. The financial sector liberalization had impact on capital market development in Nigeria.
  3. And capital market development had impact on economic growth.

5.3 Policy Recommendation

The implication of financial liberalization is that an increase in the real deposit ratio will lead to substitution of financial asset resulting in a greater supply of credit to finance real investment.

The liberalization process was implemented in haste and was not complemented with appropriate fiscal reform to ensure a balanced approach. Therefore, we recommend that government should adopt a balanced fiscal and monetary approach in future financial sector reform.

Government should to revitalize the financial market through the granting of tax incentives to public companies and through specialized financial institution and arrangements like Unity Trust, Second Tier Securities Market and building societies.

An important area of the financial sector liberalization has been the important in the growth of the capital market for domestic resource allocation. This can be influenced in the domestic side through the implementation of Macro Economic policy reforms and by development in the world financial market, which favour diversification and the need to generate high equity portfolio returns.

Furthermore, to ensure macro economic stability, efficiency and proper development of the financial system, direct control should be discouraged while indirect control through the market mechanism should be encouraged to promote competition, innovation and diversification in the financial system.

5.4 Conclusion

This Research Study examines the link between financial sector liberalization and capital market development. From the empirical result real interest rate was the crucial variable in the process of financial liberalization. Other determinants are; net foreign saving inflow, real per capita income and interest rate differential are necessary for the success of financial liberalization.

It was expected that liberalizing interest rates would lead to high real interest rates and more financial savings. But the reverse was the case. Through efficient intermediation, the higher savings would increase the level of investment resulting in higher real income.

Therefore, the analytical under pinning for financial sector liberalization in Africa (Nigeria) has been based on the financial sector interferes with development.

5.4.1. Limitation of the Study

This essay suffers major set- backs at the initial stages. It was faced with the difficulty of scarcity of adequate materials. Also the limited time has hampered a much more detailed analysis. It is hoped that in spite of these physical and human limitations. This study would provide a guide to other Researchers who might want to carry out their studies in related subjects.

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