The Role Of Capital Market On Development Of Nigeria Economy

Project and Seminar Material for Economics

Project and Seminar Material for Economics


This research work is aimed at showing the role of capital market on development of Nigeria Economy. It also examined the various economic theories that have postulated the key role of capital accumulation in the process the economic development of any nation. The data used were secondary data sourced from CBN and FBS statistical bulletin and the method of analysis used is the econometric technique with special focus on multiple regression analysis.

Although, capital can be mobilized from different sources, both theoretical and empirical analysis have shown that long term sources of finances are more veritable for productive capital investments. Consequently, the capital market plays a key role in this mediation process.

Emphases have been placed on indicators of stock market size, liquidity and growth over a period of thirty years; together with their combined effects on the rate of economic growth and development within Nigeria context. Empirical data were collected and analysed. The result of the analysis showed a positive relationship between the independent variables measured and their impact on economic development in Nigeria as measured by the gross domestic product (GDP). However, linking the paucity m capital market instruments as well as expansion of capital market finances to increase in real productive investment and development, it was discovered that very little is achieved in this respect.

Chapter One

1.1. Introduction

It is a known fact that the investment that promotes economic growth and development requires long term funding, far longer than the duration for which most savers are willing to commit their funds.

Capital market is a collection of financial institutions set up for the granting of medium and long term loans. It is a market for government securities, for corporate bonds, for the mobilization and utilization of long-term funds for development – the long term end of the financial system. In this market, leaders (investors) provide long term funds in exchange for long term financial assets offered by borrowers.

This market embraces both the new issues (primary) market and secondary market. Such securities might be raised in an organized market such as the Stock Exchange. In this sense, it involves consortium under writing, syndicated loans and project financing. Thus, it is a mechanism whereby economic unit desirous to invest their surplus funds, interact directly or through financial intermediaries with those who wish to procure funds for their businesses.

In the Nigerian context, participant includes Nigerian Stock exchange, Discount Houses, Development banks, Investment banks, Building societies, Stock Broking firms, Insurance and Pension Organizations, Quoted companies, the government, individuals and the Nigerian Stock Exchange Commission (NSEC).

The capital market is therefore very important to any economy because, it encourages savings and real investment in any healthy economic environment. Through the market, aggregate savings are channeled into real investment that increases the capital stock and therefore economic growth of the country.

More so, the capital market synchronize the divergent preferences for portfolio managers and financial institutions and those of savers by mobilizing long – term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market, without affecting the operation of the firm, their savings had earlier financed. In other words, through the secondary market, the capital market converts long-term or perpetual investment enlarged and economic growth accelerated.

By far the greatest achievement of the Central Bank of Nigeria since it was established on July 1st, 1959 has been the gradual development of the Nigerian financial system. The – system consists primarily of the money market for short term lending and borrowing. The Nigerian Stock Exchange (formally called the Lagos Stock exchange) is the pivot or the fulcrum around which the entire capital market rotates. It is the market for the sale and purchase of the securities, stocks and shares: a market In which those individuals, institutions and governments who have funds surplus to their immediate requirements can employ them profitably. Its major significance is that it is the machinery for the mobilization of the countries resources for economic growth and development. Since its establishment in 1961, a major local investment outlet has been provided for Nigerian investors.

As a marketplace where securities (stocks, bonds, shares) are bought and sold openly with relative ease, the stock exchange is very important to the investors. The existence of a stock exchange in a capital market helps to broaden the share ownership base of firms and evenly distribute the nation’s wealth by making it possible for people in different locations to own shares in a firm in another location by purchasing the shares, bond/ stock through the simple mechanism of tire stock market.

For the government therefore, the stock exchange provides the mechanism for exchanging the mobilization of capital for creating goods and services for the satisfaction and wellbeing of the citizens. The stock exchange is not only crucial but also central to the entire mobilization process. This is because it offers an opportunity for continuous trading in securities.

1.2 Statement Of Research Problem

The capital or stock markets are feature of the economics of Western Democracies. They do not exist in communist or socialist countries for they have no business doing there. In the western capitalist countries, they constitute the most important institution for massive capital formation geared towards economic development. The complexity of capitalist ideology resulted in the control and measures to put the economy in equilibrium state. Factors such as capital market capitalization rate, government stock rate, rate of interest charged on financial instruments amongst others exert some impact on the developmental and growth of the economy.

Bakare (2000:58) defines capitalization rate as the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The size of the market capitalization and its growth rate pose a major influence on the growth and development of the economy. The determination of this rate is based on the forces of demand and supply of securities.

On the other hand, interest rates along with monetary aggregates form targets of monetary policy in Nigeria. Within the period chosen for this study, interest rates in Nigeria were directly managed by the monetary authorities- the Central Bank of Nigeria. This control of rate of interest was based on the 156 International Research Journal of Finance andEconomics – Issue 4 (2006) expert advice from financial gurus who perceived that the economy, as at that period, lack a well developed financial market. Under this regime control, the federal government of Nigeria did set the deposit and lending rates of the financial intermediaries at their prevailing levels. In addition, the government did set the rates for lending to specified sector of the economy with a view to encouraging (or discouraging) lending to these sectors.

If the rate of interest paid by banks to depositors is increased, investors will patronize the banks the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy. Hence, economic growth and development will be lowered, because the allocation of capital resources plays a crucial role in the determination of the rate of the nation’s output. If capital resources are not provided to those in the industries, or if capital is not made available to sectors which are capable of increasing production and productivity, the rate of the country expansion (growth) will be retarded.

Thus, the disparity in the determination of interest rate, capitalization rate by different forces must have influenced the development and growth of the economy. These influences constitute the major problem that this study intends to investigate. The variation in The interest rate might cause investors also to either go to the bank or buy government development stock (bond), thereby helping in the development of the economy. The relationship between interest rate and government stock rate will also be generated in the course of this work. The capital market is often accessed to strengthen a company’s capital base, diversify it shareholder’s base, improve the debt/equity ratio and in some cases raise money to retire existing short-term liabilities.

However, in spite of the myriad of ways through which corporate entities and government may raise debt, preference or equity capital, all of which have their merits and limitations, it becomes rather paradoxical that small scale investors are not often counseled enough or exposed to the inherent derivable benefits and associated risks in electing to go for either equity financing or debt financing in the capital market. Anyanwu (1993:204) identified ignorance as one of the problems of Nigerian Securities and Exchange Commission (NSEC) and the capital market is still very low.

Not many of the small scale business or family-owned business, state and local governments are aware or properly counseled by the issuing houses about the procedural formalities of actualizing their full involvement in the capital market activities. The problem of inability to expose the small-­scale businesses, state and local governments to tap the huge savings in the capital market to raise funds to start, expand, consolidate and modernize business has been the chief indictment of the issuing houses that play the intermediary role between issuers and investors.

The Nigerian Stock Exchange still has a long way to go when compared with those in some developed countries. For example, up till date it has 7 branches (Lagos, Kano, Kaduna, Ibadan, Port Harcourt, Onitsha and Abuja) with about 183 companies listed on it. As at July, 1996, about 20 companies were listed on the second-tier securities market. This looks shallow when compared with Indian Stock Exchange with about 4,344 companies or The London Stock Exchange, with about 5,085 listed companies, It may seem unfair to compare Nigerian Stock Exchange at 42 with those of Indian and London that has existed for decades. All The same, it suggests the need for accelerated development of the market.

The general objective of this study is to present an overview of the nation’s capital market in terms, of raising finance to assist companies and government on long term basis.

1.3 The Aim And Objectives Of The Study

The specific objectives of this study are:

  1. To critically examine the relationship between stock market capitalization rate and interest rate
  2. To identify the type of relationship between stock market capitalization rate and government development stock rate and,
  3. To examine the relationship between government development stock rate and interest rate.

1.4 Research Questions

  1. What is Stock Market Capitalization?
  2. What are the effects of Capital Market on Macroeconomics Policies?
  3. What are the problems facing capital Market in Nigeria?
  4. Is there any significant relationship between stock market capitalization and interest rate?

1.5 The Statement Of Research Hypotheses

  1. Ho: That there is no significant relationship between stock market capitalization and interest rate.
    HA: That there is significant relationship between stock market capitalization and interest rate.
  2. Ho: That there is no significant relationship between stock market capitalization and government development stock.
    HA: That there is significant relationship between stock market capitalization and government development stock.
  3. Ho: That there is no significant relationship between government development stock and interest rate.
    HA: That there is significant relationship between government development stock and interest rate.

1.6 Research Methodology

This study employs the Econometric analysis to test for the relationship between dependent and independent variables. The study therefore employed ordinary least squares techniques to examine the effect of interest rate, stock market capitalization, government development stock rate on gross domestic product. Obtained from 1980 to 2009, through the publication of Nigeria stock exchange, Central Bank of Nigeria and other relevant of publications. Sourced through secondary method of data generation.

1.7 Significant Of The Study

The study will explore the role of capital market on development of Nigeria economy, though the scope of study will be limited to the financial sector. It is hoped that the exploration of his sector will give a broad view of stock market instruments on economic stabilization it will serve as an inspiration to other potential students and institutions or individuals as it will contribute to practical life, knowledge advancement and stabilization of Nigeria economy.

1.8 Scope And Limitations Of The Study

The economy is a large component with lot f of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the financial sector). This work cannot cover all the facets that make up the financial sector, but will look at the capital market and its instruments as ‘being used by the government for the stabilization of the economy on its road to industrialization and economic development. In other words, its focus is not on the entire financial, which is a combination of both money and capital markets, but will only delve exclusively on the capital market.

The limitations are lack of data, information and time.

1.9 Definition Of Related Terms

The instruments of Nigeria money market are defined as follows:

Treasury Bills:

These are money market; short-term securities issued by federal government of Nigeria and are sold at a discount.

Treasury Certificates:

These are medium term government securities which nature after a period of one to two years and are intended to bridge the gap between the Treasury bill and long-term securities.

Call Money Fund Scheme:

This is the money lent by the banks on the understanding that it is repayable at the bank’s demand or at short notice.

Commercial Papers:

These are short-term promissory notes issued by the central bank of Nigeria and their maturities vary from 50 to 270 day in varying denominations.

Certificates Of Deposits:

These are inter-bank instruments meant to provide outlet for the commercial banks surplus funds.

The Role Of Capital Market On Development Of Nigeria Economy

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The Role Of Capital Market On Development Of Nigeria Economy


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