The Impact Of The Capital Market On The Economic Growth In Nigeria (2001-2023)

Project and Seminar Material for Economics

The Impact Of The Capital Market On The Economic Growth In Nigeria (2001-2023)


Many efforts have been made towards understanding the relationship between capital market and the economic development of Nigeria. The capital market of every economy is setup for the attainment of specific objective which includes economic growth and stability; Data were collected and analyzed using ordinary least square analysis. These include F-test, to determine the significance of the entire regression plan, T- test to test for the significance of the individual variables and the second order test, which include test for autocorrelation, normality test and heteroscedasticity. The result of the study shows that the capital market has a positive and significant impact on the country’s economic development. On the strength of this evidence, this work recommends that government should introduce policies to motivate and encourage the market. If these recommendations are efficiently implemented, the effectiveness of the Nigerian capital market will be enhanced.

Table of Content

  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content
  • List of Tables
  • Abstract

Chapter One:


  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organisations of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Sources of Data
  • 3.2 Method of Evaluation
  • 3.3 Model Specification

Chapter Four:

Data Presentation and Analysis

  • 4.1 Data Presentation
  • 4.2 Analysis of Data
  • 4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One


1.1 Background to the Study

Every economy seeks to 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 the manufacturing of goods and services. For this level of development to be attained, there must be a sound financial system which would serve as the back bone of such an economy. If this is pursued, acquiring industrial capabilities would be easily attained since it is considered as the economic development. As a result of the importance of the financial system in developing industrial capabilities every economy seeks avenues to acquire them one of such avenues is raising funds through the capital market.

The capital market deals with instrument or long term securities with maturity period longer than one year such as bonds, debentures and equity stocks. The capital market in Nigeria has been a major source of finance to the government; industries etc. to meet their longer term capital requirements such as financing for fixed investments on buildings, plants bridges etc. 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 is the fundamental instrument of capital formation in any countries economy since no instrument takes place in a vacuum. A well-developed capital market ensures the availability of capital funds for investment and developing project usually takes a long gestation period which the funds from the money market cannot sustain. This implies that the absence of an efficient capital market in an economy would result in shortage of long term funds and would harm investment and hence militates against economic development.

An active capital market aids the mobilization of savings for economic growth and development. encourages the efficient allocation of resources through changes in wealth ownership and composition, catalyzes the creation of a healthy private sector, and facilitates the promotion of rapid capital formation (Iyoha 2004).Nigeria has a growing capital market, which has since its inception served as a veritable source of long term funds to finance investment. Some of the reasons for promoting an active capital market in Nigeria include;
Mobilization of savings for economic growth and development.

Encouragement of efficient allocation of resources through in changes wealth ownership and composition.

The Capital market in any country is one of the major pillars of long-term economic growth and development. The market serves a broad range of clientele, including different levels of government, corporate bodies and individuals within and outside the country. Capital formation entails accumulated savings out of the current incomes of either organization or individual. It is investment in fixed assets which in part is financed with monies raised through the capital market (Al-Faki, 2006). The Capital market has been one of the major means through which foreign funds are injected into most economies and the tendency towards a global economy is more visible there than anywhere else. It is therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring the overall economic growth of a nation (Emenuga, 1998).

The development of the capital market has generated two major sets of economic benefits. First, it has improved the allocation of capital, because the prices of corporate debt and equity respond immediately to shifts in demand and supply, changes in the outlook for an industry (and/or company) are quickly embodied in current asset prices. The signal created by change in price of a security encourages investors as a result of higher prices or discourages themdue to lower prices; this is because the investors often used the prices of securities to predict the likely trend of the market as either bullish or bearish. Businesses with high returns attract additional capital quickly and easily. When there is decline in demand, prices drop, and this signal makes investors to cut the flow of capital to the industry which leads to a decline in economic growth. The ability of companies in their early stages of development to raise funds in the capital markets is also beneficial because it allows these companies to grow very quickly. This growth in turn results into general increase of output in the economy (Abdullahi, 2005).

Although interest in identifying a formal link between financial system and economic growth is fundamental, the basic intuition behind this relation is relatively easy to surmise. This is because of the fact that the main goal of the capital market is the channeling of funds from the surplus sector unit to the deficit sector unit of the economy. It plays a major task in human capital investments which are essential elements of economic growth and development. From this point of view, one should expect that as the capital market develops and deepens, then efficient allocation of the financial resources for the investment is facilitated and thus the frontier of production possibilities is increased (Adam & Sanni, 2005).

Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Financial markets play an important role in the mobilization of financial resources for long term investment through financial intermediation. The financial market, which comprises the capital and money markets as well as other submarkets, plays crucial roles in the functioning of any modern economy. However, for the purpose of this research work emphasis will be on the capital market. The capital market is believed to be an important sector of every economy whether it is developed or developing. This is because of the fact that the capital market performs a vital role in the growth of the economy by providing the avenue through which foreign investors make investment in the country which in turn may boost the growth of the economy in terms of foreign Direct Investment (Daniel, 1999).
The capital market mobilizes long-term debt and equity finance for investments in long-term assets. Capital markets also help in boosting the financial system as well as improving the economic growth of a country. The capital market supplements traditional lending activities of the financial institutions such as banks by providing risk capital (equity) and loan capital (debt). By means of these instruments, the market is able to mobilize long-term savings and provide capital to investors to finance long-term investments thereby broadening ownership of productive assets (Daniel, 2004).

Dealers in the securities segment of the capital market include banking institutions, stockbrokers, investment and merchant bankers and venture capitalists that intermediate between the market and the public. Well- functioning financial markets are very crucial for the promotion of global financial integration. An efficiently functioning domestic financial market can better position a country’s competitiveness in the markets for global capital (Senbet & Otchere, 2005).

Accessing global markets for capital, through a well-functioning financial system, lessens a country’s reliance on foreign aid and other forms of external borrowing. It has been pointed out by a number of financial analysts that financial globalization allows for the sharing of local security risks.

Given the benefits associated with having well-functioning financial systems, a number of African countries have endeavored to put in place various measures aimed at developing the financial sector. Financial sector reforms have therefore been widely used as policy measures to encourage the development of domestic financial systems as well as the dismantling of barriers to international capital flows. African financial markets have been increasingly integrated with the other world capital markets. The encouraging drive towards globalizing capital flows in Africa has led to the growing relevance of emerging capital markets in the continent (Harris, 1997).

The impact of the capital market performance is determined by a number of elements, which include how financial assets are priced, such as the size of the stock market, market capitalization, number of listed equities, transactions in buying and selling of securities (liquidity) which in this case refers to the volume of transactions and new issues of securities.

1.2 Statement of the Problem

The objectives of the capital market at any point in time are geared towards attaining an appreciable development and growth in the economy and providing a channel for engaging and mobilizing domestic savings for productive investment. 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.

In the last two decades, the link between financial intermediation and economic growth is a subject of high interest among policy makers and economics around the world, There have been attempt to empirically asses the role of capital market and economic development.This have varied in methods and results.

Adjasi and Biekpe(2005) found a significant positive impact of capital market on economic development in counties classified as upper middle income the same way(Chen et al 2004) elaborated that the nexus between capital returns that is stock returns and output growth and the rate of stock return returns is a leading indicator of output growth various studies such as spears (1991 Levine and zerous,1998, comincioll,1996 and Demirquc-Kunt 1994) have supported the view that capital market promote economic development with well functional financial sector or banking sector, capital market can give a big boost to economic development. (Behadur and nevpone2006) concluded that stock market fluctuation predicted the future growth of any economy and causality is found in real variables.

There are also alternative views of roles that capital market play in economic development. Apart from the view that stock market maybe having no real effect on development, there are theoretical concepts that shows that capital market development may actually hurt economic development. For instance, (stiglitz 1985, 1994 bencivera and smith 1991 and Bhide1993) noted that capital market can argue that due to their liquidity stock market may hurt development and growth since saving rates may reduce due to externalities

In capital accumulation diffuse ownership may also negativity affect corporate governance and invariably the performance of listed firms, this impending the growth of capital markets? This suggests that there is neither theoretical nor empirical consensus on the impact of capital market on economic development.

1.3 Objective of the Study

The objective of the study is to evaluate the contribution of the Nigerian stock exchange to the development of the Nigerian economy. The specific objective are

  1. To examine the impact of capital market on the Nigerian economy.
  2. To examine the impact of capital market on the Nigerian banking system.

1.4 Research Questions

This study is aimed at assessing the activities of the Nigerian capital market and the impact it has to the development of the Nigerian economy. The following questions are therefore raised to guide the study;

  1. What is the impact of capital market on the economic development of Nigerian?
  2. What is the impact of Nigerian capital market on Nigerian banking system?

1.5 Research Hypothesis

According to Nwana 1998 „‟A hypothesis formulation is aimed at delimiting the direction of searching for evidence everywhere, anywhere it is based on the above premise that the following hypothesis is formulated to guide this work

  • Hoi There is no significant impact of capital market on the economic development of the country.
  • HO2 There is no significant relationship between the Nigerian capital market and banking system.

1.6 Significance of the Study

The importance of a developed and liable capital market in the economic development of Nigerian cannot be our emphasized. This analysis is important as it would examine to what extent the capital market has contribution to economic development of Nigerian.

The result from this study is expected to be of great importance to individuals, investors, and business. Firms and the entire economy as a will also help to enlighten the members of the public on the meaning of stocks and shares inculcating in them the savings and investment habit.

However, the government and policy makers would find this research handy, especially in area of policy formulation in restricting the Capital market, for an improved performance of the aimed at boosting investors to patronize the stock exchange market in other to enhance their effect on the economy. This study is also expected to identify some problems encountered in the capital market by participants and suggest possible means of rectifying them.

1.7 Scope of the Study

The focus of the study is limited to the activities of the Nigerian capital market. And will cover the period 2001- 2023. this study has no doubt encounter problems in terms of both internal and external validity. Like any other research study, this too has some limitations. The problem encountered in the case of embarking on this research is in two dimensions, finance and time.

1.8 Limitations of the Study

The study will acknowledge and communicate its limitations, such as potential data constraints, the evolving nature of corporate governance, and contextual factors that may impact the generalizability of findings.

Finance is required to enable the researcher to travel from one place to another to obtain necessary data for the study and also to produce a readable copy.

Time is also another constraint as the research had to apportion her limited time in ensuring the research becomes successful.

1.9 Definition of Terms

Capital Markets:

Capital markets are venues where savings and investments are channeled between suppliers and those in need of capital.

Economic Growth:

Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of increase in the real and nominal gross domestic product.

1.10 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 Summary

This study has developed a prudent multiple regression model for the purpose of explaining and analysing empirically, the impact of capital market performance on economic growth in Nigeria. Using multiple regression analyses to model development, the study estimates the relationship between four explanatory variables; market capitalization, total new issues, volume of transaction and listed equities and one explained variable, Gross Domestic Product, by means of the ordinary least square technique.

The study hypothesized a significant impact between the four explanatory variables and the Gross Domestic Product and the findings of the research are based on the time series data collected for the period 2001 – 2023 from the NSE, SEC and CBN. The result of the study reveals that the four predictor variables market capitalizations, total new issues, volume of transaction have an aggregate significant impact at I per cent level of significance and listed equities is at 5 per cent level of significance on the GDP.

The foregoing provided the justification for the rejection of all the null hypothesis of the study. The study also reveals that market capitalization, has the highest impact on the GDP followed by total new issues and then the volume of transaction and finally listed equities.

5.2 Conclusion

Based on the findings of the research, the study concludes as follows:

First, the study has provided evidence on the four independent variables; market capitalization, total new issues, volume of transaction and listed equities in explaining and predicting economic growth in Nigeria. The study concluded that the four variables have played a significant role in influencing the capital market performance on Nigeria’s economic growth.

Secondly, the study also establishes significant positive relationship between total new issues and economic growth. It is therefore concluded that as new issues are raised and floated in the market, this in turn increases the number of shares traded and economic growth equally expands as well as impacting on the GDP.

Thirdly, the study documents a significant positive relationship between volume of transaction and the gross domestic product. This concludes that the volume of transaction is an important factor in determining the magnitude of trading of shares in the capital market and it goes a long way in improving the performance of the market and as well increases the efficiency of the market which invariably improves the economic growth of Nigeria.

Among the predictable variables market capitalization contributes highest to economic growth. In respect of volume of transaction the study concluded as having the lowest contribution to the aggregate impact of capital market performance on economic growth in Nigeria.
In addition, in respect of listed equity, the study concludes that listed equity of Nigerian capital influences the performance of the market and improves economic growth.

Finally, the study concludes that there is a complete absence of serial correction between market capitalization, total new issues, volume of transaction and listed equities as proxies of capital market performance.

Also the correlation matrix reveals that, market capitalization has the highest relationship with economic growth which signifies more contribution of capital market performance to Nigeria’s economic growth.

5.3 Recommendations

Based on the findings and conclusions of the study, the following recommendations are hereby presented:

  1. Firstly, there is need for improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology that will ensure a free flow of information in the market to attract more investors as well as increase new issues which will automatically increase the quantum of market capitalization. There is also the need to restore confidence in the market by the Securities and Exchange Commission and the Nigerian Stock Exchange through ensuring transparent and fair trading transactions and dealings in the stock exchange. Government should remove impediments to market growth in form of legal and regulatory barriers because they are sometimes disincentives to investment.
  2. Secondly, as observed the total listed equities in the NSE are still very low compared to other stock markets like those of South Africa and Egypt. Therefore, to increase the number of listed companies there is need to ensure stable macroeconomic environment, to encourage foreign multinational companies or their subsidiaries to be listed on the Nigerian stock exchange and also to improve the trading system in order to increase the ease with which investors can purchase and sell shares. iii. Furthermore, the government should invest more and develop the nation’s infrastructure in order to create an enabling environment for businesses to grow and for productivity and efficiency to thrive which will bust economic activities.
  3. Thirdly, total new issues are very important to the growth of any capital market. Therefore, government should employ appropriate trade policies such as establishing National Association of Securities Dealers (NASD) that promote the inflow of international capital and foreign investment, so as to enhance the production capacity of the nation. The Government should restore the confidence of shareholders (investors) due to the declining fortune of the stock market.

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