The Role Of Financial Intermediation On The Capital Market And Economic Development

Project and Seminar Material for Economics

The Role Of Financial Intermediation On The Capital Market And Economic Development


Abstract


This study investigates the impact of financial intermediaries on capital market development in Nigeria employing co-integration. To capture the activities of financial intermediaries, five proxies were used to explain financial intermediaries which include credit to the private sector to GDP, broad money supply and total bank savings while on the other hand, market capitalization was used to capture capital market development covering the period of 1981 to 2016. The result revealed that in the long run, credit to private sector and money supply will lead to an increase in capital market development while banks total savings and government expenditure results to a decrease in capital market development in the long run. The study recommends that the Central Bank of Nigeria should ensure that the domestic credits provided by the banking sector are directed into their appropriate uses and government expenditure be directed to productive sectors and recurrent expenditure be reduced by government. Credit facilities should also not be restricted to the large-scale manufacturing industries only, but it should also be extended to small and medium scale enterprises.Abstract: This study investigates the impact of financial intermediaries on capital market development in Nigeria employing co-integration. To capture the activities of financial intermediaries, five proxies were used to explain financial intermediaries which include credit to the private sector to GDP, broad money supply and total bank savings while on the other hand, market capitalization was used to capture capital market development covering the period of 1981 to 2016. The result revealed that in the long run, credit to private sector and money supply will lead to an increase in capital market development while banks total savings and government expenditure results to a decrease in capital market development in the long run. The study recommends that the Central Bank of Nigeria should ensure that the domestic credits provided by the banking sector are directed into their appropriate uses and government expenditure be directed to productive sectors and recurrent expenditure be reduced by government. Credit facilities should also not be restricted to the large-scale manufacturing industries only, but it should also be extended to small and medium scale enterprises.


Chapter One


Introduction

1.1 An Overview of the Study

In every country, there exist a financial system that is responsible for the regulating the financial environment of the country, determine the types and amount of funds to be issued, cost of funds and the uses of these funds.
The financial system plays fundamental role in the growth and development of an economy, particularly by serving as fulcrum for financial intermediation between the surplus and deficit units in the economy. It consists of financial intermediates, financial markets, financial institutions rules, norms and conventions that facilitate and regulate the flow of funds within the macro economy.

Banks and other financial institution are providers of liquidity and payment services and therefore represent an important nerve center of the economy and the link between the real and financial sectors., in particular, they facilitate the intermediation of financial resources through the promotion of the savings and investment process, as well as, constitute the institution framework for the conduct of monetary policy and channel for the transmission mechanism. Thus, the financial system is the hub role of financial intermediation, anchor payment services and is the bedrock of monetary policy implementation.

The development of the financial system charges in tandem with the development in the economy. The Nigeria financial system has continued to transform in character, ownership, structure, depth and extent of the instruments, number of institutions and regulatory framework. The financial system is the counter-part of the real system and because the financial system has to do with the provision of finance the facilitate activities in the real sector, any deficiency therein will reflect negatively on the real system and will have negative impact on the economy as a whole.

The financial system thus function primarily for the purpose of allocating and utilizing financial resources efficiently for economy advancement. The financial market comprises two broad segments; the capital and the money markets. Institutions or organization in both markets constitute financial intermediates that play the vital role of intermediation and other roles in the economy.

The Money Market: is the market which creates opportunities for raising and investing short-term funds. It is also refers to a collection or group of financial institutions or exchange system set up for dealing with short-term credit instruments. The various financial instruments that are exchange or traded in the money market include treasury bill, treasury certificates, commercial paper, bank acceptance etc.

The Capital Market: On the other hand, is simply the aspect of the financial system which mobilized medium to long-term funds and channel same into industries and government for project financing. It is distinct from the money market which function principally to meet the short-term financial requirement of household (individuals), corporate bodies and government. The capital market is a connection of instrument, institutions, individuals and facilitates acting in concert to facilitate the savings and investment process and consequently fostering socio-economic development. The capital market has two segments

  • The primary market (New issue)
  • The secondary market

The primary market is the market that provides mechanism for corporate bodies and government to raise funds through the issuance of securities, which are subscribed by the general public of private placement.

The Securities and Exchange Commission (SEC) sits at the apex of the primary market, regulating the issues of public companies and all private companies with foreign participation. The operators or intermediates in this market are issuing house, stock broking firms, the registrar, underwriter, receiving banker, trustee, solicitors to the issue, the reporting accountant and issuer. Investors pass on their resources to some of these institutions for investment purposes. The role of intermediation played by these intermediates in the primary market will be discussed extensively in chapter two of this research work.

The secondary market by contrast provides an avenue for the sales and purchase of existing securities, that is, securities which have been sold in the primary market and which are being disposed off by the initial or subsequent holders of the security. It therefore enable investors to easily convert their holding of securities into cash.

The major instrument used to raise fund at the Nigerian capital market includes:

  • Equity: Ordinary shares and preference shares.
  • Debt: Government bonds (federal, state, local government).
  • Industrial Loan: Debentures stock and bonds.

The major participants in the Nigerian capital major are as follows:

  • The Securities and Exchange Commission (SEC)
  • The market intermediaries or operators
  • The Central Banks of Nigeria (CBN)
  • The Nigerian Stock Exchange (NSE)
  • The Federal Ministry of Finance (FMF)

The regulatory bodies of Nigerian Capital Market are:

  • The Federal Ministry of Finance (FMF)
  • The Central Bank of Nigeria (CBN)
  • The Securities and Exchange Commission (SEC)
  • The Nigerian Stock Exchange (NSE)

The constituencies in the Nigerian Capital market can be broadly classified into four categories.

  • Fund providers (individuals, unit trust, pension fund)
  • Users of funds (companies, Government)
  • Intermediates (Stock broking firms, issuing houses, registrars, audit firm)
  • Regulators (SEC, NSE, CBN, FMF)

Some of these constituencies of the Nigerian capital market will be discussed in details in capital market will be discussed in details in chapter two of this research work.


1.2 Statement of the Research Problem

Financial intermediation will not be necessary, if the lender and the borrower can come into direct contact and would infact not be necessary if there is no deficit or surplus sector or unit.

According to the United Nations, as of the year 2008, there were 26 countries in the world that qualified as countries with “low human development” (United Nations Development Programme 2008b). Low human development is defined as a country with an HDI value of less than 0.5. Of the 26 countries, all but one (Timor-Leste) are located in sub-Saharan Africa. Not one country in contiguous sub-Saharan Africa (in other words excluding island states) is considered to have “high human development.” The country with the highest human development index (HDI) rating located in contiguous sub-Saharan Africa is Gabon, with an HDI value of 0.729 (United Nations Development Programme 2008a). To put this HDI value in perspective, countries with similar HDI values are the Philippines, Paraguay, Sri Lanka, and Jamaica (United Nations Development Programme 2008a). It is clear that along with the highest rates of poverty in the world and stagnant economic growth, sub- Saharan Africa is also home to the least educated and least healthy populations in the world. It is therefore, against the need to explore the role of finance in tackling developmental issues in developing economies with bias to sub Saharan African countries that this study examined the impact of financial intermediation on financial market and economic development of Nigeria.


1.3 Objectives of the Study

The general objective of this study is to examine the impact of financial intermediation on capital market and economic development Nigeria.

However, the specific objectives of this study are:

  1. To ascertain the impact of financial intermediation on capital market
  2. To assess the impact of financial intermediation on economic growth
  3. To assess the impact of financial intermediation on ecocnmic growth

1.4 Research Question

  1. What is the impact of financial intermediation on capital market ?
  2. What is the impact of financial intermediation on economic growth ?
  3. What is the impact of financial intermediation on ecocnmic growth ?

1.5 Significance of the Study

This study will be significant to the following groups. There are:

Government Policy Makers

Monetary and fiscal policies play a significant role in accelerating development by influencing the cost of availability of fund, controlling credit, maintaining balance of payment equilibrium as well as taxation. Thus, this study will assist in providing government policy makers with the necessary tools needed at formulating economic policies that will enhance the current drive for sustainable development especially in the sub Saharan African region. Academia

This study examined the impact of financial intermediation on economic development in sub Saharan African Countries. The study of economic development has attracted the attention of economists’ right from Adam Smith to Marx and Keynes. However, most of these studies have reviewed its impact based on developed economies. However, this study primarily is based on underdeveloped countries in the sub Saharan African region; thus, this study will increase literature in this area of finance and economics.


1.6 Scope / Limitation of the Study

The scope of the study covers the role of financial intermediation on the capital market and economic development, but in the cause of the study, there were some factors that limited the scope of the study;

Time Constraint:

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

Inadequate Materials:

Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.

Financial Constraint:

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).


Chapter Five


Summary and Conclusion

This empirical work employed ARDL approach to cointegration model to investigate the impact of financial intermediaries on capital market development in Nigeria. To capture the activities of financial intermediaries, three proxies were used to capture the activities of financial intermediaries; they include credit to the private sector to, money supply, total bank asset, while on the other hand, total value of stock traded was used to capture capital market development covering the period of 1981 to 2015.

The study revealed that credit to the private sector results in an increase in capital market development. Uremadu (2008) also concluded that banking systems credit to the economy have positive and significant impact on stock exchange trading values. Similarly, money supply significant positive effect on capital market development, this suggests that the volume of money supplied by government in the economy is expected to lead to development in the capital market in the long run.

On the other, total saving of banks has a negative effect on capital market development implying that banks total savings reduces capital market development while government expenditure brings about a decrease in capital market development. This is dissimilar to the earlier study of Uremadu (2008) also concluded that government expenditure has positive and significant impact on stock exchange trading values. The study suggests that financial intermediaries have significant effect on stock market development in Nigeria in the long run. This is similar to the result obtained by Demirguc-Kunt and Levine (1996); Yartey, (2008) who revealed that financial intermediary has a positive effect on stock market development.

As observed from our result, credit to the private, has a positive insignificant impact on capital market development. In order to reverse this trend, there is a need for banking institutions to revise the modalities for lending to the private sector and not just fund real assets but finance investment in financial asset which will promote capaital market development. Also, the Central Bank of Nigeria should ensure that the money supply into the economy are used judicious and ensure that domestic credits provided by the banking sector are directed into their appropriate uses. Credit facilities should not be restricted to the large-scale manufacturing industries only, but it should also be extended to small, medium scale enterprises and inventors in the capital market as this will go a long way in stimulating development of the capital market and economic growth.

Based on the above conclusion, this study recommends that government should restore confidence to the market through regulatory authorities which will bring about transparency, fair trading transactions and dealing in the stock exchange, encouraging more foreign investors to participate in the market and also to increase investments instruments such as derivatives, convertibles, swap and option in the market.


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