The Impact Of Capital Market Instability On The Growth Of Nigeria Economy

Project and Seminar Topics with material for Banking and Finance

The Impact Of Capital Market Instability On The Growth Of Nigeria Economy


Abstract


The Nigerian stock market is a world class capital market. This study aims to examine the impact of capital market volatility on the growth of the Nigerian economy. The study is conducted on 200 staff of Nigerian Stock Exchange. The research findings were compared with the literature on the effects of market capitalization, volume of transactions, and All Share Index on economic growth in Nigeria. It is concluded that there is significant impact of Market Capitalization on the Ghana stock market; that there are significant impacts of Volume of Transaction on the Nigeria stock market. Capital Market Reform is vital for Nigerian economic growth. This means that capital market reform can contribute to thegrowth of Nigeria on the long-run. Moreover, there is need for availability of more investment instruments such as derivatives, convertibles, futures, swaps, and options in the market.


Chapter One


Introduction

1.1 Background to the Study

In every developing and developed economy, the capital market has been identified as an institution that drives growth and development. The capital market is a conduit for the demand and supply of debt and equity capital then channel funds to firms with relatively high and increasing productivity thus, enhancing economic expansion (Donwa, 2010). Capital market provides a means through which a nation gets the local and foreign investment it needs for sustainable growth and development.

Capital market offers varieties of financial instruments that enable economic agents to pool price and exchange risks through assets with attractive yields, liquidity and risk characteristics (Nwakwo 1991). The financial crises which started in the United States (due to certain laxities in the US financial system), spread to Europe and has become global. Even countries not affected by the crises before are now affected by second round effect (CBN 2009).

Olawale (2015) revealed that stock markets across the globe have been severely affected by the current financial crises ravaging the global economy. This resulted in large loses recorded by these markets since second half 2008 and volatility, making the markets unstable over the years. Yahaya et al. (2011) posited that the financial meltdown impacted negatively on the operational performance and efficiency of the Nigeria stock market. The Nigeria stock market has witnessed volatility over time.

Stock market volatility is a measure for variation of price of a financial asset overtime.it is essentially concerned with the dispersion and not direction of price changes. Issues of volatility in stock market behavior are of importance as they shed light on the data generating process of the returns (Hongyu & Zhicha, 2006) as a result, such issues guide investors in their decision making process because not only are the investors interested in returns but also in uncertainty of such returns. A volatile stock market weakens consumer confidence and drives down consumer spending (Porteba, 2000). The author further indicated that it affects business investment because it conveys a rise in risk of equity investment. This can alter investment equilibrium position of an economy as investors turn to purchase stocks of larger well known firms at the expense of new firms. It can trigger a general rise in cost of capital and directly affect economic growth. Investor’s portfolio allocation would be affected as they would have to hold more stocks in their portfolio in order to reap the benefits of diversification (Frimpong & Oteng-Abaiye 2006)

The positive linkage school of thought has it in view that a well-functioning capital market will precipitate long term economic growth (Alile 1984; Atje & Jovanovich 1993; Oyijide 1994). The opposing school of thought however believes that the alleged positive linkage between capital market development and economic growth is not proven and at best is ambiguous (Dimirgnc-Kuut & Levine 1996; Shleifer and summer 1988). In contributing to this discourse, it was found out that there is a bidirectional causal relationship between stock market development and economic growth.


1.2 Statement of the Problem

Capital market which is a division of financial market has a goal primarily to mobilize long term funds for productive purposes and by so doing provide a means for small as well as large scale enterprises to trade in securities by giving them access to public listing. The Nigeria capital market has evolved with growth of Nigerian economy. The performance of all stock listed and the total values of shares outstanding of its listed companies revealed that the market has enjoyed a decade of unprecedented growth over the years.

Prior to 2008, the total market capitalization increased by over 90.0%, however from a peak in march 2008,capitalization went into spiraling decline dropping by about 45.8% by the end of the year (Security and Exchange Commission 2009). Before the financial crises, the Nigeria capital market had remained illiquid and experienced a downward trend in stock prices. And as a result, the market was becoming very risky to invest and less attractive to long term investors, both foreign and local (Business day 2010).

In a study carried by Osaze (2002), capital market rank behind money market in terms of attractiveness to business organization as a source of finance. Adding that, not less than 60% of total savings is in the money market. This may be attributed the loss of confidence by investors as a result of high risk in the capital market. This situation presents danger for the economy because the money market is not designed to provide development funds for big organizations.

Market performance witnessed a serious hike in 2007, gets to its peak around March 2008 and began to witness a sharp decrease in 2009 due to the contagion effect from the global financial crisis. Trading volume and number of listed securities in the Nigeria stock market have been fluctuating over the years. This study therefore examines the effect of capital market volatility on the growth of the Nigeria economy.


1.3 Research Question

Based on the above stated problems, the following research questions were raised for this study;

  1. What impact does All share index and number of listed securities have on the economic growth of Nigeria?
  2. Investigate the effect market capitalization and market trading volume have on the growth of the economy of Nigeria?

1.4 Significance of the Study

This study specifically examined the effect of capital market instability on the growth of the Nigeria economy. This study is important because, the Nigeria capital market, which was the toast of many enlightened Nigerians both home and abroad, is now experiencing a meltdown as market capitalization has declined especially, in periods ranging from 2007 to 2015. The All share index has also fallen in the same period. Trading volume and total number of listed securities are also experiencing tremendous movement over the years.

This study is expected to complement the efforts of government and policy makers in reviving the Nigeria stock market and implementing improvements that will add value and stability to the market, making it a world class capital market and in turn, enhance the growth of the Nigeria economy. This study would also consolidate existing literature on the issues surrounding the relationship between capital market and economic growth.


1.5 Objectives of the Study

The broad objectives of this study is to examine the impact of capital market instability on the growth of Nigeria economy. In order to achieve the general objective, the following specific objectives were raised;

  1. To determine the impact of All Share Index and total number of listed securities on the growth of the economy.
  2. To examine the effect of market capitalization and market trading volume on the growth of the economy.

1.6 Hypotheses of the Study

  • Ho1: All Share Index and total number of listed securities have no significant effect on the growth of the economy
  • Ho2: Market capitalization and market trading volume has no significant impact on the economy growth of Nigeria.

1.7 Scope of the Study

This study is concerned with the impact of the Nigeria capital market instability on the growth of the economy in particular. However, for simplicity, the study will cover period ranging from 2001 to 2015. This period of 15 years was selected firstly because it is has the most current market situation. Also, half of this particular years experienced boom while the other half experienced a downcast.


1.8 Plan of the Study

The research report of this study is divided into 5 chapters.

  1. Chapter one consist of introduction to the study and it is sub-divided into 9 headings which are background of the study, statement of problem, research questions etc.
  2. Chapter two is the literature review which comprise of the conceptual, empirical and theoretical framework.
  3. Chapter three is the research methodology which mainly concerns itself about the design of the study, the method of data collection, sample size, sampling technique, method of data analysis and the decision rule. The second to the last chapter,
  4. Chapter four comprise of the research data presentation and analysis and the last chapter,
  5. Chapter five is the summary, conclusion and recommendation of the research.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to examine the impact of capital market instability on the growth of Nigeria economy.

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 capital market instability on the growth of Nigeria economy.


5.2 Summary

Based on our findings, it is evidence that though the Nigeria’s capital market has performed fairly well in relation to other capital markets in sub-Saharan Africa, a lot needed to be done to strengthen the link between the capital market and economic growth in Nigeria. As an emerging market, the Nigerian capital market faces a lot of challenges; therefore the policy makers should work out strategies to overcome the challenges. The study implicitly revealed that since the Nigeria stock market commenced operations in the 1960s it has continued to play the traditional role of regulating the activities in the market. The study discovered that the correlation between economic growth and capital.


5.3 Conclusion

Based on the research findings, Capital Market Reform is vital for economic growth in Nigeria. In the era of an ever changing global economic environment, especially now that the current economic approach of most countries is gearing towards transforming their system for rapid and sustained economic growth, Nigeria cannot be left out. the researcher therefore conclude that there is significant impact of market capitalization on the growth of Nigerian economy; that there is significant impact of All Share Index on the growth of Nigerian economy; and that there is significant impact of Volume of Transaction on economic growth in Nigeria. This means that capital market reform can contribute to thegrowth of Nigerian economy on the long-run.


5.4 Recommendations

The researcher recommends that: Having seen that there exists a long-run relationship between GDP and explanatory variables through the use of chi-square table, it implies that government can adopt policies that will help capital market contribute to the growth of Nigerian economy. Government should improve in the dealing of market capitalization by encouraging more foreign investors to participate in the market. There should be public awareness campaign by capital market operators especially now that the country is coming out of the global economic crisis. Lastly, to boost All Share Index in the Nigerian capital market, there is need for availability of more investment instruments such as derivatives, convertibles, futures, swaps, and options in the market.


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