The Impact Of Capital Market On The Economic Growth Of Nigeria

Project and Seminar Material for Economics

The Impact Of Capital Market On The Economic Growth Of Nigeria


Abstract


This research work was embarked upon with a view to determine the impact of the capital market on the economic growth of Nigeria. The capital market was set up to achieve specific objectives which would boost the economy such as encourage domestic savings and increasing the quantity and quality of investments. The capital market offers access to a variety of financial instruments which are very essential for government and other institutions in need of long term funds. The data was obtained from the CBN Statistical Bulletin (1980 – 2009) and analyzed using ordinary least square analysis. The result 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 development of the industrial sector.


Chapter One


Introduction

1.1 Background of the Study

The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation real economic growths has long affirmed in economic theories (Anyanwu, 1993).

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 resources 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 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 (Alile&Anao, 1990). 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 was 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. 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, Yola and now in Federal Capital Territory (FCT) Abuja and 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. Certainly, potential fund abounds in Nigeria, but the overriding consideration in this project is to examine the impact of the capital market in harnessing and mobilizing these resources (fund) 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& Levine 1996). Most recent literatures on the Nigeria capital market have recognized 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 Research Questions

This research was guided by the following research questions:

  1. What is the performance of the capital market in relation to economic growth in Nigeria?
  2. How could the capital market through its crucial role stimulate economic growth in Nigeria?

1.4 Objectives of the Study

The broad objective of this study examined the activities and performance of Nigerian capital market. The specific objectives of the study are as follows:

  1. To evaluate the performance of the capital market in relation to the economic growth in Nigeria.
  2. To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Nigeria.

1.5 Hypothesis of the Study

The hypothesis that would be tested in the course of this research is stated below as:

  • H0: That the capital market operations have no impact on Nigerian economic growth.

1.6 Significance of the Study

The study explored the impact or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of the study was 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.


1.7 Scope and Limitation of the Study

The economy is a large component with lot of diverse and sometimes complex parts; this research work only looked at a particular part of the economy (the financial sector). This work did not cover all the facets that make up the financial sector, but 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 was restricted to the period between 1980 and 2009 due to the non-availability of some important data.


1.8 Organization of the Study

The study is divided into five (5) chapters and organized as follows: Chapter one form the introduction part, this is where the main theme of the research is given. It comprises of the statement of the problem, objectives of the study, research questions and hypotheses, significance of the study, scope and delimitation of the study and organization of the study. Chapter two is the literature review of the impact of capital market on the economic growth of Nigeria. Chapter three forms the research methodology which includes sources of data, method of data analysis and model specification. Chapter four is the data analysis while chapter five includes the summary, conclusion and recommendations.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary of Findings

The study examined the impact of capital market on economic growth of Nigeria between 1980 and 2009. The findings of the study reveal the following

  • The market capitalization (LMCAP) was found to have a negative relation with the real gross domestic product (LRGDP). Its significance test shows that LMCAP has an insignificant impact on RGDP.
  • Another major outcome of the study is that the LTNI has a positive relationship with RGDP. The significance test shows an insignificant impact of LTNI on the RGDP
  • The LVTS in the regression result has a positive relation with the RGDP.
  • The significance test also reveals an insignificant impact of LVTS on the RGDP.
  • The total listing of equity on government stock (TLS) has a positive relationship the RGDP. The significance test also shows a significant impact on the RGDP. The implication of this is that the economy responds favourably to measures taken to increase TLS in the Nigerian stock exchange

5.2 Conclusion

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 more foreign 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.


5.3 Policy Recommendations

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 5% level of significance but still far cry compare to other exchange like South African and Egypt. Therefore, there 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 encouraged 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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Frequently Asked Questions


Does the capital market matter for economic growth and development in Nigeria?

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.

What is the capital market?

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.

Does capital accumulation promote economic growth?

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.

What is the history of Lagos Stock Exchange?

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.

Do capital market operations contribute to economic growth in Nigeria?

H0: That the capital market operations have contributed to Nigerian economic growth. 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).

What is the capital market?

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.

Does capital accumulation promote economic growth?

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.

What is the history of Lagos Stock Exchange?

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.

What are the basics of capital market?

Under the multiple control measures such as the Three Red Lines policy and centralized land supply, the development of property developers is once again put on hold, leaving the capital markets fraught with pessimism about the property development industry. Nowadays, property developers are taking on unprecedented challenges.

What is the role of capital accumulation and formation in growth?

Therefore, capital accumulation, by increasing the productivity of the workers, plays an important role in the growth of the economy. From the viewpoint of economic growth capital formation is important also because it makes large-scale production and greater degree of specialisation possible.

What is the relationship between capital accumulation and consumption?

As the economy keeps up its higher rate of capital accumulation and moves along the growth path OB beyond W, it will be having higher consumption than along the growth path OA. It is generally agreed among economists that capital accumulation late progress of economic growth are closely correlated.

How does capital accumulation affect the productivity of the workers?

Therefore, we see that capital accumulation makes the use of indirect or round-about methods of production possible and thereby greatly increases the national product and is helpful in bringing about rapid economic growth. Moreover, productivity of the workers depends upon the amount of capital per worker.

How does capital investment affect the US economy?

In the U.S., there were more purchases of capital goods in 2018, including industrial equipment, transportation, software, and structures, such as buildings or factories. Therefore, capital investment can make a significant impact on economic growth.

What is the history of the Nigerian Stock Exchange?

The Nigerian Exchange Group (NGX Group) formerly known as the Nigerian Stock Exchange, dates its history back to 15 September 1960 when the Lagos Stock Exchange was founded.

What is the Nigerian Stock Exchange NSE index?

The Nigerian Stock Exchange NSE Index is a major stock market index which tracks the performance of all stocks listed on the Nigerian Stock Exchange.

What is the Nigerian Stock Exchange (NGX)?

The Nigerian Stock Exchange (NGX, officially Nigerian Exchange Group) is a leading integrated market infrastructure in Africa servicing the continent’s largest economy. The Exchange provides capital access to companies seeking to take advantage of the financial markets to fund their business expansion.

What will the Nigeria Stock Market be worth in 12 months time?

The Nigeria Stock Market NSE is expected to trade at 27312.81 points by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 26381.66 in 12 months time. Trading Economics members can view, download and compare data from nearly 200 countries,… 

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