Role Of Capital Market In Industrial Growth And Development In Nigeria

Project and Seminar Material for Economics

Role Of Capital Market In Industrial Growth And Development In Nigeria


The increase in number of fraud and fraudulent activities in Nigeria and around the world emphasized the need for forensic accounting. The aim of this paper is to find out if rules and procedures are properly followed in the public sector transactions, to examine if there is adequate internal control system in the public sector, to ascertain the need for forensic accounting services in the public sector for fraud and corruption issue as well as to verify if the accountant in the public sector have adequate forensic training for fraud and corruption issue. Questionnaire was distributed to elicit information from 50 respondents. The data collected were analyze using chi-square statistical tool. The results of my findings are that fraud and corruption are fundamental problems in the Nigeria public sector and is hampering efficiency in the sector, and that rules and procedures are not properly followed, it was also discovered that forensic accounting will help reduced corruption. I then recommend the introduction of forensic accounting and training of accountant to acquire the skill of forensic accounting and utilization of their services in public sector and also that our legal framework should be implemented in line with management principle of “carrot and stick” whereby those who bend rules and procedures are made to face the full wrath of the law to act as deterrence for others.

Chapter One


1.1 Background to the Study

The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy (Alile 1984).

It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile 1997). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. However, the paucity of long-term capital has posed the greatest predicament to economic development in most African countries including Nigeria.

Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long-term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment.

The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005). Okereke-Onyiuke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans.

In 1986 Nigeria embraced the International Monetary Fund (IMF)-World Bank Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s.The programme was proposed as an economic package to rapidly and effectively transformed the Nigerian economy within two years (Yesufu 1996). However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of government to judiciously implement some of its policy measures Oyefusi and Mogbolu 2003). The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%,interest deregulation from August 1987, financial market reform and public sector reforms which entails the full or partial privatization and commercialization of about 111 public owned enterprises. The Nigerian Stock Exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank 1994; Anyanwu 1993; Anyanwu et al. 1997; Oyefusi and Mogbolu 2003).

The introduction of SAP in Nigeria has resulted in a very significant growth of the country’s stock market as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile1996;Soyode 1990). Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market yet its impact at the macro-economy was negligible. Again the capital market was instrumental to the initial 25 banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005.The stock market has helped government and corporate entities to raise long-term capital for financing new projects, and expanding and modernizing industrial/commercial concerns (Nwankwo 1991).

Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various government and corporations in Nigeria.

The major focus of this research is to empirically assess with the contribution of capital market to economic growth in Nigeria.

1.2 Statement of the Problem

The capital market is one of the main avenues investors invest their hard earned currency in anticipation of good returns or yield. But since the inception of the global economic crunch in addition to a number of causing factors the impact of the capital market has remained rather docile. The federal government effort at revamping it has still not yielded enough result.

In the light of this, the following statement of research questions are being raised.

  1. Does the capital market enhance the growth of the Nigerian economy?
  2. Does the capital market enhance and promote investment in Nigerian economy?
  3. Does the capital market help to increase value of transactions (government and industrial securities)?

1.3 Research Objectives

This research work seeks to achieve the following objectives.

  1. To ascertain whether the capital market enhance the growth of the Nigerian economy.
  2. To critically examine whether capital market enhance and promote investment in Nigerian economy.
  3. To verify whether the capital market help to increase value of transactions (government and industrial securities).

1.4 Scope of the Study

This study is undertaken to evaluate the impact of Nigerian Capital Market as an Instrument in mobilization of investment capital. As such, this study is restricted to all companies quoted on the floor of the Nigerian Stock Exchange market. Temporally or in term of time series, a period of twenty seven years is used i.e. 1981 to 2008 using some market indicators as means of assessing the impact of the capital market in mobilizing investment in Nigeria. It is hoped that this will help to achieve the stated objective of the study.

1.5 Research Hypothesis

The following hypothesis will be tested

Hypothesis I
  • Ho: The capital market does not enhance the growth of the Nigerian economy
  • H1: The capital market still enhance the growth of the Nigerian economy
Hypothesis II
  • Ho: The capital market does not enhance and promote investment on the Nigerian economy.
  • H1: The capital market still enhances and promotes investment on the Nigerian economy.
Hypothesis III
  • Ho: Capital market does not help to increase value of transactions (government and industrial securities) in Nigeria.
  • H1: Capital market helps to increase value of transactions (government and industrial securities) in Nigeria.

1.6 Significance of Study

This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs.


This study will be important and beneficial to stakeholders of an organization to know the role of the Nigerian capital market in mobilizing investment in Nigeria economy.

The Government:

It will acquaint the government of the importance of Nigerian Capital Market and how it should be properly managed.

The public:

This study will help to restore the lost confidence of the public as regard the Nigerian capital market and investment mobilization in Nigeria economy.

Academic/future researcher:

Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.

1.7 Limitations of the Study

A study of this nature is undoubtedly not without some limitations.

The researcher was face with a lot of constraints and difficulties in getting all the needed information from the source documents. The data used in the study are based on available information on capital market from the secondary sources.

However, these limitations will and do not undermine or dampen the benefits of the study and the conclusions reached in the study by the researcher.

1.8 Definition of Terms

This subsection arises because of the need to make clear some technical terms that will be used in this study which are capable of having more than one meaning or interpretation.

Market Capitalization

This is the overall market value of all listed securities on the exchange. It is calculated by multiplying the share price with the total number of shares in issue.

Turnover Ratio

This is the volume of activities undertaken by a company. It is the total number of shares traded at a given period.

Listed Securities

These are long term securities such as bonds, preference shares and ordinary shares which are traded on a recognized stock exchange.

New Issues

These are newly created securities of corporate entities or government offered for subscription to the public.

Trading Floor

This is s specific area of a stock exchange where listed securities are bought and sold.

Clearing System

Procedure put in place by a security exchange to compare trading details between stock brokers before settlement take place.


Securities of a company or government sold by way of public offering or private placement at a given point in time.

Right Issue

A new issue of securities of a company offered to its existing shareholders in proportion to their holding.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of Findings

As reveals in the ordinary least square (OLS) regression, it shows that the Nigeria Capital Market still enhances the level of investment both in private and public sector in Nigeria despite challenges faced by it in recent time i.e. global economy meltdown among others. It was also reveals that value of transaction, new issues, market capitalization and TLNS has positive relationship with the GDP hence contribute to the level of investment in Nigeria.

5.2 Conclusion

We have in the course of this research project work examined the growth and current state of the Nigeria Capital Market in this 21st century. The tremendous advances recorded in the 20th century are no doubt indicative of future prospects, which will translate into bigger challenges in the years ahead. However, information explosion recorded has made Internet trading in securities possible all over the world.

While the Nigerian Capital Market has no doubt recorded significant growth since its inception, a lot still remains to be done in the areas of creating public awareness. Similarly, a lot is still required in the area of improving the operational efficiency, enhancing the depth and breadth of the market and building regulatory capacity. These are required to appropriately position the market to face the challenges ahead.

5.3 Recommendations

  1. The Securities and Exchange Commission (SEC) which is the apex body that regulates and develop the capital market should be empowered financially. That will enable it to promote new markets including capital trade points, future and commodity exchanges as well as promoting the establishing of market facilities, which are very critical to efficient operations of a capital market.
  2. Policies which promote the growth of contractual savings institutions such as Insurance Companies and Pensions Funds that are beneficial to the capital market should be seriously encouraged. Others professionally managed schemes that add fillip to the Nigeria Capital Market should not be overlook in order to facilitate capital formation.
  3. The level of capital market awareness is still on the lower side. Market participants, particularly investors and intermediaries must therefore continue to sensitize the members of public about the Capital Market. Creating awareness should not be restricted to the major urban centers but efforts must be made to capture savings in the rural areas. Regular Jingle of the existence and benefits of the Nigeria Capital Market must be intensified. The Capital Trade Points when established could play a prominent role in this regard. The market as well should develop a wide array of capital market related publications, technical and non-technical, various journal of the activities of the Nigeria Capital Market. Occasional enlightenment campaign such as short courses on stock exchange, to both the educated and semi-literates should be encouraged. With the advert of the internet trade, the success of the Nigeria Capital Market will surely improved.
  4. Liquidity should be improved, because a market, which lacks liquidity will equally lack appeal to the investors. There is no gainsaying that a major challenge which faces the Nigeria Capital Market in this 21st century is the creation of a highly liquid market in which investors could buy and sell with relative stock with ease, and large transactions absorbed without significant changes in prices. A liquid market promotes professionalism and institutionalization as well as deepening of a stock market. Institutional investors are usually very particular about the state of liquidity in a stock exchange market, as it provides easy entry and exist.
  5. New capital market instruments should be developed so as to help deepen the market. Derivatives such as stock index futures, interest and currency future as well as option on indicative market should be fully developed. It provides hedging and speculative opportunities to players. In addition to this, the Abuja Commodity Exchange Market should be made operational so that future contracts in such commodities (underlying assets) such as palm Kernel, cocoa, groundnut, cotton, soyabean and rubber can be traded. This should encourage the development of the agriculture sector and quality of agricultural exports. There is hardly a mature market and fast growing emerging market without a derivative market. The ISA [Investment and Security Act] provides for the establishment of derivatives market such as FUTURE and commodities exchanges.
  6. In the absence of financial and operational transparency, investors, issuers and intermediaries especially foreign entities, would hesitate to be part of it. Institutional investors such as pension funds are regulated in terms of the kinds of asset they may invest upon. They may not be inclined to invest in markets which are not transparent, for fear of loosening their interest. Information about a capital market must be timely and accurate. When corporate information is to be released to the public, extreme care should be taken to avoid, wrong signal that will lead to wrong investment decision. This could lead to loss of money and lack of confidence in the stock exchange market. The SEC [Stock Exchange Commission] and other stakeholders in the market must consequently continue to strengthen transparency of the market.
  7. The intermediation cost which discourages new investors and holders of shares from participating in the market should be reduced. Minimum capital requirement or securities, the honouring of their obligations, the provision of the necessary legal framework laws should be watched regularly. A good functioning stock market will stimulate the equity and bond market and attract foreign financial investment into the economy. This will provide a major source of fund for the nation’s financial sector.
  8. The Central Securities Clearing System (CSCS) should be fully and efficiently utilized. The innovative market infrastructure like the trade alert and the remote access trading should be operational so as to increase the liquidity and transparency of the Nigeria Capital market.
  9. A single non-fragment stock exchange with multiple branches relying on similar regulations will ensure effectiveness, control and the economy as was discussed in this research project.
  10. Investment analysis and advisers should be encouraged to render in-depth financial and investment analysis services to the market on a regular basis. Frequently, only few advisers and analysts are performing this crucial function in Nigeria as at today as many investors are really aware of what to invest upon, when and how.
  11. Some states and local governments in this country should be encouraged to approach the Nigeria Capital Market for long-term capital fund for project on their own merit. However, in recent time some states have sourced fund from Nigeria Capital market.
  12. Government should ensure a stable macro-economic environment for investment purposes. Interest rate should be within a reasonable range so as to stimulate activities in the capital market as well as in the money market. Hence a balanced growth will be attained in both segments of the financial system. Exchange rate should be stable and realistic with inflation held in check. Also a vibrant private sector should be fully encouraged through standard deregulation policies in the economy. This is because effective assets of international financial and capital markets can only mature if interest rates are realistic. Inflation kept low and the naira has a realistic parity with reduced foreign exchanges. The Federal Government should re-visit the recent Nigeria reformation of the naira as proposed under the then leadership of Central Bank of Nigeria Governor – Professor Chukuma Solundo.
  13. The Corporate Affairs Commission (CAC) and other relevant regulatory bodies should take a critical step to check the high rate of poor Corporate Governance and reporting in Nigeria. It is quite common for companies in Nigeria, mostly financial institutions to declare proper profit; i.e. posting of fictitious figure in the annual account. This was revealed by the last year re-capitalization in the banking sector. Put differently the issue is not just selling shares to the investing public to get money out of them but how the monies realized by the issuers of such shares are going to be put into the best possible use to realize the highest possible returns for the investors thereby bolstering their confidence in the market.
  14. Greater incentives should be given out in order to increase the number of securities available for trading. These incentives could be in the form of reducing the cost of accessing the market, tax credits (positive) or tax penalties (negative). Also companies of a minimum size should be compelled to seek quotation in the exchange market.
  15. It should be necessary to set up ethical principles and standards of honesty, fairness, equity, diligence, competence and integrity for market operators, mostly stockbrokers.
  16. Professional intermediaries and regulators, it will be impossible for market to contribute effectively to the realization of the development objectives of the country. It is therefore imperative that significant attention be given to the development of a highly professional and dynamic capital market workforce, which should be able to compete in the global market place. Extensive and continuous training of personnel on an individual company and industry level, local and international must be embarked upon. There is no doubt that the current level of professionalism in the market should be improved upon to meet the challenges of global competition.

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