The Impact Of The Capital Market On The Economic Growth In Nigeria (1988-2011)
The purpose of this study is to examine the impact of the capital market on the Nigerian economic growth and development. The study was carried out in the Central Bank of Nigeria (CBN) statistical Bulletins, Nigerian Stock Exchange (NSE) fact books, Security and Exchange Commission (SEC) market bulletins and relevant journals between 1986 and 2011. The data for this study was obtained mainly from secondary sources. The technique used was the multiple regression analysis to test whether capital market indices have impacted on the economic growth of Nigeria proxy by Gross Domestic Product (GDP). The study reveals that market capitalization, government stock, and value of transaction are important capital market variables that are capable of influencing economic growth. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market and more foreign investors should be encouraged to participate in the markets for improvement in the declining market capacity so that it could contribute significantly to the Nigeria-wide economic growth in the country. There is also need to restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transaction and dealing in the stock exchange. Lastly, to boost the value of transactions, there is need for availability of more investment instruments such as derivatives, convertibles, future, and swaps options.
1.1 Background of Study
The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth and development because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation and real economic growth has long been affirmed in economic theories (Anyanwu, 1996). Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resource mobilization. It is in realization of this that consideration is given to measure for the development of capital market as an institution for the mobilization of finance from the surplus sectors to the deficit sectors.
The development of capital market in Nigeria, as in other developing countries, has been induced and fostered by the government. Though, prior to the establishment of stock market in Nigeria, there existed some less formal market arrangements for the operation of capital market. It was not prominent until the visit of Mr. J. B. Lobynesion in 1959, on the invitation of the Federal government, to advice on the role the Central Bank could play in the development of local money and capital market. As a follow-up to this, the government commissioned and a set up the Barback Committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal capital market. Acting on the recommendation of the committee, the Lagos Stock Exchange (as it was called then) was set-up in March 1960, and in September 1961, it was incorporated under Section 2 cap 37, through the collaborative effort of Central Bank of Nigeria, the Business Community and Industrial Development Bank.
With the establishment of the Central Bank of Nigeria in 1959 and the coming into existence of the Lagos Stock Exchange in 1961 and Subsequently, the Nigeria Stock Exchange by an Act in 1979, a sound foundation was laid for the operation of the Nigerian Capital Market for trading in securities of long term nature needed for the financing of the industrial sector and the economy at large. After the incorporation of the Lagos Stock Exchange, it was granted further protection under the law and its activities was placed under some sort of control by the government, hence the passing of the Lagos Stock Exchange Act. However, the Lagos Stock Exchange was only operational in Lagos. By the mid 70’s, the need for an efficient financial system for the whole nation was emphasized, and a review by the government of the operations of the Lagos Stock Exchange market was advocated. The review was carried out to take care of the low capital formation, the huge amount of currency in circulation which were held outside the banking system, the unsatisfactory demarcation between the operation of Commercial Banks and the emerging class of the Merchant Banks, and the extremely shallow depth of the capital market.
In response to the problems mentioned above, the government accepted the principle of decentralization but opted for a National Stock Exchange, which will have branches in different parts of the country. On December 2nd 1977, the memorandum and article of association creating the Lagos Stock Exchange was transformed into the Nigerian Stock Exchange, with branches in Lagos, Kaduna, Port-Harcourt and now in Federal Capital Territory (FCT) Abuja some other cities. The history of Nigeria Capital Market could be traced to 1946 when the British colonial administration floated a N600,000 local loan stock bearing interest at 3¼% for the financing of developmental projects under the Ten-Years Plan Local Ordinance. The loan stock, which had a maturity of 10-15 years, was oversubscribed by more than N1 million, yet local participation of the issued was terribly poor.
Undoubtedly, potential invisible funds abound in Nigeria, but the overriding consideration in this project will be to examine the role of the capital market in harnessing and mobilizing these resources (invisible funds) to generate economic growth in the country and consequently, economic development.
1.2 Statement of the Problem
There is abundant evidence that most Nigerian businesses lack long-term capital. The business sector has depended mainly on short-term financing such as overdrafts to finance even long-term capital. Based on the maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt and Levine 1996).
Most recent literatures on the Nigeria capital market have recognised the tremendous performance the market has recorded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Nigerian economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the dearth of finance to the economy constitutes a major setback to its development. As a result, it is necessary to evaluate the Nigerian capital market.
1.3 Objectives of the Study
The broad objective of this study is to examine the activities and performance of Nigerian capital market. The specific objectives of the study are as follows:
- To evaluate the performance of the capital market in relation to the economic growth in Nigeria;
- To examine the operations of the Nigerian capital market;
- To examine the rate at which new stocks are issued on the capital market.
- To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Nigeria.
1.4 Research Questions
This research shall be guided by the following research questions:
- How does the capital market impact on the economic growth and development process in Nigeria?
- What is the trend of trading activities on the Capital Market?
- What is rate at which new stocks are issued on the Nigerian capital market?
- How could the capital market through its crucial role stimulate economic growth in Nigeria?
1.5 Research of Hypothesis
The hypothesis that would be tested in the course of this research is stated below as:
- H0: That the capital market operations have not contributed to Nigerian economic growth.
- H0: That the capital market operations have contributed to Nigerian economic growth.
1.6 Scope of the Study
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the financial sector). This work will not cover all the facets that make up the financial sector, but shall focus only on the capital market and its activities as it impacts on the Nigerian economic growth. The empirical investigation of the impact of the capital market on the economic growth in Nigeria shall be restricted to the period between 1986 and 2011 due to the non-availability of some important data.
1.7 Significance of the Study
The study will explore the impact or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of study will be limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.
Summary, Conclusion and Recommendations
5.1 Summary of Findings
The study examined the impact of capital market on economic growth of Nigeria between 1986 to 2011. The findings of the study reveal the following
- The regression result confi3rms that there exists positive relationship between the capital market and economic growth. The relationship is statistically significance. This is in essence means that the impact of the capital market on economic growth is strong and significant.
- Another major outcome of the study is that a unit increase in total listing of equity and government stock (TLS) result in an increase in GDP. The implication of this is that the economy responds favourable to measures taken to increase TLS in Nigeria Stock Exchange.
- The positive result of the total listing of equity and government stock implies that funds raised by the industries and governments in the capital market are spent on productive sector which enhance economic growth.
- The result of the value of transaction in the capital market means that the simplicity in buying and selling of securities has potential to influence economic growth positively.
- These findings agree with Ewah, et al (2009) who found that capital market in Nigeria has potentials for growth inducing but has not contributed meaningfully to the economic growth of Nigeria due to low market capitalization etc.
The study reveals that the capital market impact on economic growth via market capitalization, value of transaction and total listing of equity and government stock. As it was observed market capitalization, government stock and value of transaction are important capital market variables that are capable of influencing economic growth. Hence the capital market remain one of the mainstream in every economy that has the power to influence or impact economic growth therefore the organized private sector is to invest in it. The market capitalization have not impact significantly on the GDP while volume of transaction and total listed equities and Government stock have significant impact on the GDP. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market and moreforeign investors should be encouraged to participate in the market for improvement in the declining market capitalization so that it could contribute significantly to the Nigerian economic growth.
In order for the Nigeria capital market to be pivotal force in Nigeria economic growth and development, the following suggestion or recommendation are put forward.
- First improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology like automated trading and settlement practice, electronic fund clearance and eliminate physical transfer of shares.
- There is also need to restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transaction and dealing in the stock exchange. It must also address the reported case of abuse and sharp practices by some companies in the market.
- Since the total listing is significant at 1% level of significance but still far cry compare to other exchange like South African and Egypt. Therefore, these should be increase in the total member listed companies to ensure stable macroeconomic environment in order to encourage foreign multinational companies (MNCs) or their subsidiaries to be listed on the Nigerian stock exchange, relax the listing requirements to the first tier market and ensure tax rationalization in the capital market to encourage quotation and public interest in shareholdings.
- Lastly, to boost the value of transactions in the Nigerian capital market, there is need for availability of more investment instruments such as derivatives, convertibles, future, and swaps options in the market.
- Given the present political dispensation, all the tiers of government should be encourage to fund their realistic developmental programme through the capital market. This will served as a leeway to freeing the resources that may be used in other sphere of the economy.
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