The Role Of The Nigerian Stock Exchange In The Growth Of The Nation

Project and Seminar Material for Marketing

Abstract

The Nigerian stock exchange (NSE) plays an important role in the economic growth of the nation. This research work is aimed at examining the role of the NSE in the growth of Nigerian capital market. The study was conducted in Onitsha stock exchange, which is one of the largest stock exchanges in the world. The research was conducted through the administration of questionnaires consisting of both structural and open-ended questions. The data collected from questionnaires sent,completed and retured by respondent were analyzed and the following results were obtained: (a) there are various advantages that accrue to companies quoted in the Nigerian Stock Exchange; (b) the hash and stringent legal regulatory authorities are also a cog in the wheel of progress in the quotation of companies in the stock market; (c) The failure of these institutional investors to perform their roles in the absence of large individual mined the performance of the country’s capital market and entire economy. (d) Due to many socio-political and economic factors such as poor policy implementation, long military rule, high interest rate, low capital formation and so on, the Nigeria stock exchange has not been able to achieve its primary objectives towards the development of the economy.

Chapter One

Introduction

1.1 Background of the Study

The Nigerian capital market by logical extension has an international and colonial reference just like our political and entire economic life. Following the realization by the colonial masters that inadequate finance or capital was a major independent particularly to the industrial growth and economic development, they started by setting the first commercial Bank in Nigeria in 1892, the central Bank of Nigeria in 1959 and the first merchant Bank in 1960.

These Banks provided only short term funds that is to say that they are money market institutions. The money market is a financial market where short term securities are bought and sold. This means that the securities have maturity period of less than one year. But no meaningful investment can be achieved with the availability of only short term capital. Capital market on the other hand, is the financial market wher short term securities are traded in the capital market is also defined as “a complex of institutions and mechanisms through which intermediate term funds and long-term funds are pooled and made available to business, government and individuals as well as where instruments already outstanding are transferred” (Nwanko, 2002). The capital market therefore, has a maturity period of more than one year.

The money market due to its inability to meet the hopes and aspirations of the investors led to the development of the capital market in Nigeria to cater for medium and long-term funds.

The capital market in nigeria comprises of the following institutions:

The Nigerian stock exchange
The Nigerian industrial development Bank (NIDB)
The securities and exchange commission (SEC)
The Nigerian Bank for commerce and industry (NBCI)
The Nigerian Agricultural and co-operative Bank (NACB)

The stock exchange market is an organized market where stocks, shares debentures, e.t.c are purchased and sold. The market is divided in two sectors. These are the demand and supply sides, there are several institutional participants on both sides. These institutional investors gather resources from large number of subscribers and invest them in the stock market. The stock exchange of the first among equals in institutions that comprises the capital market. It is the wheel on which the capital market revolves and pivot central to the economic growth of a Nation.

It is due to the pivotal and enviable roles played by the stock exchange market to the economic growth of a nation that necessitated this research study. This is because according to Oladele Olashore (2000) “nevertheless, the size of the Nigerian stock exchange is small relative to the size of the economy, when compared with that of the world’s emerging market”. Also according to him (2000) “desoite the changes which have so far taken place in the Nigerian capital market it is still considered as being under developed”.

According to Okoro, S.C(2002) “many profitable investments require that capital be committed for a long period of time. This is at variance with the natural inclination of the average investors who will not like tp part with his savings for a long period. Therefore, by providing opportunity to divestment, stock exchanges allow savers to acquire a financial asset and to sell it quickly and cheaply if they need their savings or want to alter their portfolios. Thus investments are made less risky and more attractive. At the same time companies enjoys permarient access to capital raised through equity and bond issues by facilitating long term more profitable investments, efficient capital markets improve the allocation of capital and enhance prospects for long-term economic growth and development.

In 1999 the Lagos stock exchange act of 1999 established the Lagos stock exchange in Nigeria.

The basis for the establishment of Lagos stock exchange was laid with the publication of the bur bank report in 2002 and it was finally set up on 5th June 2003. In 2005, the Lagos stock exchange with headquarters in Lagos and branches in Kaduna and Port Harcourt. The Lagos stock exchange was in 1975 the only stock exchange in west Africa and sixth in Africa.

The Nigerian stock exchange as one of the organs of the Nigerian capital market is a secondary market generally referred to as the stock exchange and it is the prime operational institution in the capital market. Presently, it has six trading floors located in Lagos, Kaduna, Port Harcourt, Kano, Onitsha and Ibadan and the latest addition at the federal capital territory, Abuja.

There are some bottle necks that hamstrung the orderly development of the Nigeria stock exchange and impeded its ability to generate long-term funds flow- through it. Inadequate number of quoted companies and strict operating rules and regulations in the Nigerian stock exchange market, lack of investible funds by individual investors and poor perception of the Nigerian stock market by off-shore investors in terms of keeping to international financial reporting standards this constraining foreign portfolio flow: inadequate technological known how and dearth of trained man power development in the capital market and finally, the erosion of confidence on the ability of the capital market to mobilize funds for investment purposes and absence of venture capitalist companies.

Increasingly, it would appear that government has begun to recognize what a vibrant stock market has in store for the long term financing of Nigeria’s economic development. This must have informed the setting up of the Odife pariel on capital market reforms with the benefit of hind sight, however, the implementation of the panel’s recommendation on the setting up of a rival stock exchange at Abuja is to say the least of a classical example of how to throw the baby away with the bath water. In taking this line of action, government was under the illusion that all that was competition of free up the capital market to play it’s role of mobilizing long-term capital effectively. Unfortunately, problems rarely lend themselves to such simplistic solutions. While the Abuja stock exchange lasted, it was unable to attract any new company to the exchanges other than some of those already quoted on the Nigerian stock exchange.

A stock exchange is a place where long-term securities like shares and bonds are traded.

This research study will therefore investigate, examine and evaluate the problems faced by the stock exchange market, their extent and the ways to solving the problems with a view to improving the operations of the stock exchange towards economic growth and development.

1.2 Objective of the Study

Generally objective of this study is fund out in the Nigeria stock exchange plays any role in the growth of the capital market.

To examine the impact of the few number of quoted companies and all rules and regulations in the Nigerian stock exchange market.
To work out modalities, which will ensure that funds are made available through the stock market by off-shore investors in terms of keeping to international financial reporting standards that have constrained foreign portfolio flow
To determine how to make the capital market more active and efficient through technological advancement and trained manpower development.
To investigate and suggest how more confidence could be reposed on the capital market by investors and venture capitalist companies.

1.3 Research Question

The research seeks to find solutions to the following question.

How can we examine the impact of the few number of quoted companies and all rules and regulation in the Nigerian stock exchange market.
How can we ensure that funds are made available through the stock market by off-shore investors in terms of keeping to international financial reporting standards that have contracted foreign portfolio flow.
Why do will determine capital market more active and efficient through technological advancement and trained manpower development.
How can we reposed on the capital market by investors and venture capitalist companies.

1.4 Statement of Hypothesis

Hypothesis (1) One

Ho: The Nigerian stock exchange does not play a prominent role in the growth of the capital market.
Hi: The Nigerian stock exchange plays a prominent role in the growth of the capital market.

Hypothesis (2) Two

Ho: There is no significant effect of the poor development of the stock market on foreign investors.
Hi: There is significant effect of the poor development of the stock market on foreign investors.

Hypothesis (3) Three

Ho: There is no significant contribution of quoted companies to the effective performance of the stock market.
Hi: There is significant contribution of quoted companies to the effective performance of the stock market.

1.5 Significance of the Study

The study will establish the ways the Nigerian stock exchange assists the country in the growth of it’s capital market.

It will improve the confidence of the investors and venture capitalist companies in the ability of the capital market to provide funds needed for investment purpose in Nigeria.

1.6 Scope and Limitations

The research study is intended to bring light “the role of the Nigerian stock exchange in the economic growth of nation”. It is supposed to cover all the branches including the Headquarters in Lagos. But due to time factor, finance and that the branches are far flung, this research will be limited to the data collected from the Nigeria stock exchange market in Onitsha branch.

But the greatest constraints and limitations came from the difficulties encountered in getting information in this country. This is because of the fear of workers that the information give out by them may be used against the company again, there is always the problem of non-availability of the necessary information due to our poor culture of storing information even in this era of computer.

1.7 Definition of Term

Each aspect of economic activity or profession has its own terminologies, which are normally known by those engaged in such field. This aspect of the research has defined some of the common terms used in the stock exchange market.

Bulls:

Are those who buy shares at N1.00 hoping to sell at say N2.00

Bears:

Are those who sell shares today at N1.00 hoping to buy them back tomorrow at N0.95

Stockbroker:

Are those allowed to sell shares on the floor of the stock market.

Jobbers:

Those who are allowed to stock of securities.

Investors:

A person or an institution that buys stock and shares intending to keep them and profit the interest or dividend paid.

Capital:

Any form of wealth employed for the production of more wealth.

Capital Mobilization:

The process of building up or calling or monies for investment purposes.

Capital Formation:

This is the process of arranging or organizing funds or monies for the purpose of investment.

Instruments:

These are means or tools through which money is invested on stock.

Intermediate:

This is the medium of investment.

Investment:

This is an item or commodity on which money is invested with the hope of yielding future benefits in form of interest or dividends.

Institutions:

These are establishments, foundations, established law or organizations, which invests funds on stocks.

Securities:

These are evidence of debts or of property ownership bonds or stocks.

Chapter Five

Summary of Findings, Conclusion and Recommendation

5.1 Summary of Findings.

In chapter four,the data collected from questionnaires sent,completed and retured by respondent concerning “the role of the Nigerian stock exchange(NSE) in the economic Growth of the Nation”was analyzed and the following results were obtained;

There are various advantages that accrue to companies quoted in the Nigerian stock exchange. Funds have been identified as the life-work of business. The capital market fortunately is the best source of funds. These funds can be expended in the financing of new products, acquisition of new machines, diversification of business e. t. c.
There are many constraints which may not allow any business concern to enjoy all of the advantages of being quoted in the stock market.
The hash and stringent legal regulatory authorities is also a cog in the wheel of progress in the quotation of companies in the Nigerian stock market and indeed in the Nigerian capital market.
The level of investment in the Nigerian capital market is very low. Comparing Nigerian capital market with that of emerging markets in Africa, it was discovered that both South Africa and Egypt has more quoted companies in their stock market than Nigeria. This is regardless of the fact that Nigeria has abundant crude oil deposits that could have developed the economy and made more companies attain the feet of being quoted in the stock market.
The importance of research and development must be emphasized in the ever-changing socio-political and economic world. Unfortunately, this has not been the case in the Nigerian capital market. This has made experts to describe the Nigerian capital market as “domesticated and rudimentary”.
Capital market plays pivoted role in fostering socio-economic development while the stock exchange is the hub of the capital market. Hence, the capital market plays an enviable role in the economy of every country. That some country are described today as “developed countries” may not be unconnected with the state of their capital market.
So many reasons have been adduced for the lack of confidence by investors in the Nigerian capital market. These reasons among others include; lack of market infrastructure, poor technological development and the perception of our country as corrupt.
The absence of foreign investors or where the few available one are disinvesting calls for concern. This is because there is low turnover, low profitability due to large number of federal governments fixed interest rate securities and so on in the Nigerian stock exchange (N S E).
The institutional investors such as insurance companies, merchant banks, development banks e. t. c have not been performing their primary roles to the Nigerian capital market.
The failure of these institutional investors to perform their roles in the absence of large individual mined the performance of the Nigerian capital market and entire economy.

5.2 Conclusion

This research work “The roles of the Nigerian stock exchange (NSE) in the economic growth of the nation” was analyzed in two hypothesis. These are Null hypothesis, which states that; the Nigerian stock exchange plays a prominent role in the growth of the capital market and that the Nigerian stock exchange has significant influence in capital market growth.

The review of related literature which were mainly texts, journals and periodicals confirmed that the Nigerian stock exchange (NSE) plays an important role in the economic growth of the nation.

However, due to many socio-political and economic factors such as poor policy implementation, long military rule, high interest rate, low capital formation and so on the Nigerian stock exchange has not been able to achieve its primary objectives towards the development of the economy.

5.3 Recommendations

From the foregoing analysis and discussion of the field work (research) on “The role of Nigerian stock exchange in the economic growth of the nation”, the following recommendations are hereby made:

It is imperative that a string and stable economic environment must be supported by stability in political sphere. Indeed without political stability, an economy cannot make meaningful progress nor can its capital market flourish. it also begets certainty, encourages investments and inspires confidence in the capital market. Hence, everything should be geared towards ensuring stable policy in the Nigeria economy.
There should be favourable legal environment in which business can operate effectively, displicts resolved quickly and transparency and property right protected. This will restore confidence in the capital market thereby influencing foreign investors in our capital market.
Improving the liquidity of the capital market which will make it more appealing through easy buying and selling of shares without significant changes in prices. Again, this will promote professionalism and institutionalization as well as deepen the stock market.
There is also the need to develop new instruments and markets. This will introduce derivatives in the market for example stock index forecast and options on individual stock e.t.c.
Promotion of transparency in the market. As long as the capital market is seen to be transparent, investors, issuers and intermediaries especially foreign investors would want to be a part of it. There should be accurate and timely information which would again lead to good investment decisions.
There is also need to promote professionalism with a crop professional intermediaries and regulators, it will be possible for the market to contribute effectively to the realization of our dreams in this 21st century. It is therefore imperative that significant attention be given to the development of highly trained professionals and a dynamic capital market or work force. Extensive and continous training of personnel both on individual, company and industry level, local and abroad must be intensified.
Improvement of regulatory environment is also highly recommended. The regulatory institutions will need to enhance the quality of their manpower. Rules and regulations should be made clear toward off ambiguity and non-compliance.
Polices which promote the growth f contractual savings institutions such as ans insurance companies and pension funds would be beneficial to the capital market. Similarly, the development of unit trust and other professionally managed schemes would add fillip to the market and facilitate capital formation.
Market participants, particularly investors and intermediaries should sensitize the public about the capital market. Creating awareness should not be restricted to the major urban centres but efforts must be made to capture savings in the hinterland.
The Nigerian Bond market should also be developed. This development will evolve market driven prices which would fluctuate with prevailing realities. An active Bond market would also serve as an important avenue for the sourcing of fund for the development of state and local Governments and also for infrastructure financing for the federal government.
New listings should be vigorously encouraged through incentives and reduced cost of accessing the market. The Lagos stock exchange Act 1960 should be repealed tot bring all transactions in gilt-edge securities to the floor of the stock exchange.

Finally, if the above recommendations are put in place, the Nigerian stock exchange market will definitely be comparable to that of the rest of developed countries. This will inevitably develop the Nigerian capital market particularly and the Nigerian economy in general.