The Role Of Capital Market In A Developing Economy (A Case Study Of Nigerian Stock Exchange)

Project and Seminar material for Banking and Finance

Project and Seminar material for Banking and Finance


Abstract


The Nigerian capital market come into prominence when the Nigerian enterprise decree, which is also known as the indigenous decree was promulgated in 1972, and amended in 1977. The public became aware of the importance of securities as avenue for investment, especially through the introduction of privatization and the N25 billion capital base for banks.

Market in the developing economy. Were stock exchange established in 1961 as Lagos stock exchange in 1977, was used as a case study. It was found out that ital market despite some problems or shortcoming have helped a developing economy like Nigeria with the involvement of Nigerian stock exchange market, which have been machine in for mobilizing private and public savings and making them available for productive investment through share and stocks.

Also it has provided a meeting place for dealing members to buy and sell existing stocks and shares which is an avenue for raising new capital for investment and development of the economy.

The statistics were gotten through use of primary data and secondary data where inferences were drawn to arrive at a given conclusion.


Table Of Contents


Preliminary Page(s)

  • Title Page
  • Approval Page
  • Dedication
  • Acknowledgement
  • Abstracts
  • Table Of Contents

Chapter One

1.0 Introduction

  • 1.1 Overview Of The Study
  • 1.2 Statement Of Problem
  • 1.3 Objectives Of The Study
  • 1.4 Research Questions-
  • 1.5 Scope Of The Study-
  • 1.6 Significance Of Research Study-
  • 1.7 Limitations Of The Study
  • 1.8 Definition Of Terms

Chapter Two

2.0 Literature Review

  • 2.1 Historical Background Of Nigeria Capital Market
  • 2.2 Challenges Of Capital Market-
  • 2.3 Operations Of The Capital Market
  • 2.4 Control Of The Capital Market
  • 2.5 The Impact Of Nigeria Stock Exchange In The Economy
  • 2.6 The Role Of The Capital Market In A Developing Economy
  • 2.7 Comparative Analysis Of Money And Capital Market

Chapter Three

3.0 Research Methodology

  • 3.1 Research Design
  • 3.2 Sources Of Data
  • 3.3 Method Of Data Collection
  • 3.4 Method Of Data Analysis

Chapter Four

4.0 Presentation And Analysis Of Data

  • 4.1 Data Presentation
  • 4.2 Data Analysis

Chapter Five

5.0 Summary, Conclusions And Recommendation

  • 5.1 Summary Of Finding
  • 5.2 Conclusions
  • 5.3 Recommendations
  • Bibliography
  • Appendix

Chapter One


1.0 Introduction

1.1 Overview Of The Study

The capital market is the market for dealings (that is lending and borrowing) in longer-term loanable fund. The market is the source from which industry obtains its capital for establishment, expansion and modernization and from which the government borrows on long-term basis for development purpose.

It offers access to variety of financial instruments that enables economic agents to pool, price and exchange risk. Through assets with affricative yields, liquidity and risk characteristics, it encourages savings in financial form. This is very important for government and other institutions in need of long-term funds and for suppliers of long-term funds who, because of the nature of their liabilities, undertake to maintain part of their assets in the relatively liquid form (Ekezie 19997).

According to Kanu N.O.N (2004) capital market refers to that market for the mobilization of medium and long term founds from the surplus units for allocation to the deficit units of the economy. The market provides opportunities for the issuance and resale of government securities, corporate bonds, stock, shares and, mortgage loan.

A broad definition of the term capital market according to Alile (1986) includes the entire financial system, commercial banks and other financial institutions providing short, medium and long term loans to finance both consumption and investment while an intermediate definition would include only those institutions which are concerned with providing long-term credits however, the narrow definition of capital market rulers to it as involving the problem and prospects of equity investment. The relates to the issue and market of shames, bonds, debentures, and other long-term securities using the service of brokers, dealers and underwriter.

A sketch of a capital market.
  • The presidency
  • Federal ministry of finance
  • Securities and Exchange Commission
  • Capital markets (Participants NSE, investment bank, merchant banks, discount house etc.)
  • Nigerian stock exchange
  • Stock brokers and issuing House
Instruments

It is important we know that the capital market was not in existence before the independence in 1960, rather, what was in existence was a financial system. Which was totally monopolized by expatriate commercial banks. The absence of a capital market in Nigeria within that period, hindered economic development. The non-existence of this market meant that Nigerians who had surplus founds had no such market to invest them in the country. As a result of this, they repatriated such funds for investment overseas especially in London thus, resulting to export of capital which would have been used in the economic development of Nigeria.

In addition, it resulted to lack of a market where Nigerian industrialist and businessmen could raise capital for the operation and construction of their business. On the side of the government, there was no effective tool for monetary policy and control.

With the above situation, there was on obvious need to provide a local market for the borrowing and lending of long-term funds for the economic development of Nigeria. To achieve this objective the central bank of Nigeria went into operation on 1st July 1959. In that same year the Nigeria stock exchange was established and the actual operations started in 1961 with 19 securities lists for trading.

Today, there are over 300 securities listed on the exchange and most of the listed companies have foreign / multinational affiliations and represent a cross section of the economy ranging from agriculture through manufacturing to service,

Following the deregulation of the capital market in 1993, the federal government in 1995 internationalized the capital market with the abolition of laws that constrained foreign participation in the Nigeria capital market. Foreigners can now participle in the Nigeria capital market both as operators and investors with this, the stock exchange has linked up with the Reuerts Electronic contributor system for on line global dissemination of stock market information like trading statistics, all share index etc. all these have contributed immensely to the development of the economy


1.2 Statement Of Problems.

Although the capital market has contributed significantly to the growth and development of the Nigeria economy, certain lingering problems still constrains its optional operations. They include:

Infrastructural Inadequacies:

This has resulted to delays in effecting transactions between issuing houses brokers, dealers, registrars, investors and their bank. The drag in the delivery service discourages many investors who sometimes view with distrust their registrars and brokers when share certificates are undelivered or proceeds of share sold not delivered promptly. Also infrastructural limitations insulate many investors especially those in the rural areas from broker dealer thereby, trading in securities which would have aided development.

  • Ignorance also on the part on most members of the Nigerian public as to the meaning of shares and stocks as well as benefits derivable from market operations
  • Reluctance of the Nigerian businessmen to go to the public for the fear of losing control of family business.
  • Macro-economic instabilities and high cost of raising funds in the market
  • Political instability which makes returns and premiums uncertain and thereby discouraging prospective investors both local and foreign.

1.3 Objective Of Study

Having the above problems in mind as militating against the development of capital market, vie stock exchange market, the purpose of this study is to determine

  1. Contributions of the capital market to economic growth
  2. The possible strategies to enhance the efficiency of the capital market
  3. The relevance of usefulness of Nigerian stock market in the developing economy.

1.4 Research Questions

  1. Does the lick of public awareness militate against the realization of the potential of the stock market in found mobilization?
  2. Does the capital market play any role for the development of a country?
  3. Political instability, does it influence the development of a country capital market?

1.5 Scope Of The Study

This research work revolves on the Nigerian stock exchange and how it aids the capital market in a developing economy like ours.

It is important to note that the capital market is not a single entity; rather it is a network of specialized financial institutions that in various ways brings together suppliers and users of capital which will be fully emphasized in this study. It will also examine the various regulatory bodies of the capital market especially the Nigeria stock exchange.

Thus, the scope will cover the Nigerian stock market, its operations and impact in the economy generally


1.6 Significance Of The Study

This study will be of importance to individuals, private and public companies, financial institution, government parastatals, as it will enable them to understand the role which capital market plays in a developing economy. The part of stock exchange in mobilizing the funds needed for investment by them. Ti is important also because it will encourage the investors to invest into the stock market with the full assurance that their investments are intact.


1.7 Limitations Of The Study

In the cause of this research I encountered few constraints; The reluctance of some respondents to volunteer information because they did not believe the assurance given them that the data collected were purely for academic purposes. Other limitations include financial and time constraint as this report writing was combined with attending of lectures. Also the reference materials I used in writing this project is gotten from different authors and various institution related to this project. Gathering these facts proves a bit difficult.


1.8 Definitions Of Terms

Some terms or concepts have various meanings depending on who or how it is used. The one in thus study are used in the following context.

Stock Market:

It is used interchangeable with the capital market which is an integral part of the countries financial system where money securities are bought and sold.

Share Holder:

A shareholder is one who holds a share certificate, who has a legal title to shares. It is also called or referred to as stock holder

Share Index:

It is made up of a number of bonds, stocks or share selected from a list of various trades or business with their market price added together

Speculation:

It is the buying and selling of goods with the object of gaining from differences in prices.

Stag:

One who speculates on the stock exchange by subscribing to a new issue with the hope of selling his allotment at a profit as dealings.

Bear:

An individual who sells securities has does not own or which he does not want to deliver in the hope that they can be repurchased at a profit before delivery has to be made.

Common Stock:

It is a term for equity or common stock.

Broker:

An intermediary who buys or sells shares on behalf of a client.

Securities:

They refer to various promissory documents adopted as evidence of claim in the market.

Primary Market:

It is where securities are offered for sale in the public from the issuer for the first time.

Secondary Market:

It is where people or investors can buy or sell previously quoted securities and get their money back for alternative uses.


Chapter Five


5.0 Summary, Conclusions And Recommendations

5.1 Summary Of Research Findings

This research was designed to study the role of capital market in a developing economy using the Nigerian stock exchange market as a case study. Empirical data was collected through questionnaires interview and journals etc.
The responded to the questionnaires were analyzed and relevant ones were subject to test of significance
Some conceptual issues were also examined which includes the challenges of the capital market, the operations of the stock market which entails the use of primary market for the issuing of new shares and secondary market for existing securities. Followed by the ways capital market is controlled and why it should be controlled
Furthermore, it examined the impact of Nigerian stock exchange in the economy. The role of the capital market is a developing economy and a comparative analysis of money and capital market were taken into consideration.

The research work also identified the outstanding problems with the view of getting possible strategies to enhance the efficiency of the capital market and discovering the relevance of Nigerian stock market in the developing economy

Finally, it is to clear that the capital market in Nigeria like in all developing economies, is strategies to the overall national economy development. Therefore, the assistance of government is needed in creating more public awareness, create infrastructures and encourage more transparency and independence etc. in other to motivate the corporate users of capital and investors In general and enable the Nigerian stock exchange to render financial services capable of stimulating the nation’s economy.


5.2 Conclusion

Based on the findings of this study, the Nigerian capital market was seen as an important medium for developing the economy and the Nigerian stock exchange was seen as an important instrument used for example, the response to question 12 of the questionnaires 10 respondents were 100% sure that Nigerian stock exchange is an efficient organ in the mobilization of funds in the capital market 20 respondents were 20-50% sure while only 5 respondents were not sure. It was also discovered that the capital Market has been able to achieve this through the raising of long-term funds by quoted companies and channeling these funds to projects which include industrial development. Also from our findings at tested hypothesis, it was agreed upon that capital market has provided a local market for borrowing and lending of long-term funds for the economic development of Nigeria, where 25 respondents said that it was achieved through lending for long-term purposes and raising of fresh funds in the market and only 10 (ten) respondents agreed only on lending for long-term purposes.(derived from question 13 of the questionnaires). This has enable the capital market to mobilize domestic savings for productive investments, promotion of growth of financial services and various forms of institutional savings such as pension funds. A number of problems have however continued to frustrate past efforts strengthen the market for improved performance. Nevertheless government has been asked in the course of this work to help reduce the lingering problems of inadequate technology, high cost of raising funds in the market, strengthening of the internal structures and the operations of the capital market institutions.


5.3 Recommendations

In order to achieve a high modernized and effective market, which would increasingly raise the long-term funds for industrial and other development projects, these recommendation based on the findings of the study are offered:-

  1. The central bank of Nigeria (CBN) should try to improve the Technology such as get equipments that can show the broker his different stages of transactions in the floor of the exchange market in order to enhance transfer and clearing systems in the market.
  2. The capital market management should try to develop a wide array of capital market related publications such as bulletins and journals that is technical and non technical, regular and occasional to educate participants and other interested persons. The bulletins and journals must be inexpensive and widely disseminated.
  3. I will also recommend that the government besides the central security clearing system (CSCS) introduced to modernize the market in terms of computerization; there is still need to create infrastructures like more computers in a more comfortable offices nationwide in order to make the market closer to the masses.
  4. The government should try to avoid, policy or policies that will not give the market autonomy but rather encourage independency and transparency in order to achieve a remarkable progress in the next millennium.
  5. Participants and companies should be encouraged to source for their long-term funds through the capital market in order to make the market strong and vibrant.

The Role Of Capital Market In A Developing Economy (A Case Study Of Nigerian Stock Exchange)


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