The Role Of Regulatory Bodies In The Capital Market Development In Nigeria (A Case Study Of Securities And Exchange Commission)

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The Role Of Regulatory Bodies In The Capital Market Development In Nigeria (A Case Study Of Securities And Exchange Commission)


The main objective of the study is to examine the roles of regulatory bodies in the capital market development in Nigeria with special reference to Security and Exchange Commission and, also, the in-depth analysis of the operations of the Nigerian Capital Market. The findings made from data obtained during the course of the research work. The discussion was obtained from internet searched and relevant textbooks. Through the research, it is clearly showed that capital market has contributed immensely to the development of Nigeria economy but encountered some problems. However, certain recommendation were made to the regulatory authorities on how to remove some impediments that tends to hinder the growth and performance of this market with a view of stabilizing and inducing suitable growth of Capital Market.

Chapter One


1.1 Background Of The Study

The malfunctioning in the economy system brought about the birth of the Structural Adjustment Programme (SAP) in 1986.

The policy package in the Structural Adjustment Programme includes among other things which are deregulation of interest rate structure and dividend policy. With this new wave of market liberation, capital market has now become a more viable option for capital formation. More companies now use the market the market facilities for strengthening the balance sheet and growth in the process, there has been a flurry of right issue offer for subscription for equity and debentures stock.

The rapid economies development of any economy depends, among other things, on ready access of adequate financial resources (Alile and annao, 1990). The desire to develop financial market in an economy is intimately connected with the objective of accelerating industrial and agricultural development. Among this financial market is the Stock Exchange, while deals with the mobilization of both medium and long term funds (Sule and Momoh, 2009).

The total amount of capital raised on the market between 1989 and 1991 was about N3.8 billion which represent the half of the entire capital raised over the year, while capital raised on the market from 1992 to date is about N5.2 billion which shows the increment in the capital raised by companies in companies in the previous years.

The need for capital market regulation is motivated by the desire to protect the investing public from malpractice. Having instill confidence in the system and ensure financial market been stable for the growth and development of the capital. Regulatory bodies are therefore to police activities in the market with the ultimate aim of preventing and minimizing the abuse which might affect the investor’s confidence. The need for regulatory mechanism in the market brought about the birth of Security and Exchange Commission in 1960.

Moreover, in the recent time before the horrible occurrence of the Global Economy Meltdown, there is effectiveness and efficiency in the operation and activities of the capital market, which shown in an increase in the numbers of trading floors of the Nigeria Stock Exchange and as well the so-call over trading system was replaced with the Automated Trading System (ATS) with bids and offer now matched by stockbrokers on the trading floor of the Stock Exchange through network of computers.

The development of the Nigerian capital market has some other reasons too. A number of Nigerian banks are investing in the Nigerian stock market so that they can roll the money and can earn some good profit from the market. The recently introduced minimum capital requirements for the bank have encouraged the banks to choose the stock markets. The Nigerian capital market is still gaining depth and so that it was a bit risky for the banks to take the decision but they took the risk and the results are very positive. It not only encouraged the individual investors but at the same time provided some good support to the growth of the Nigerian capital market.

It is true that the Nigerian capital market is performing well and the country is experiencing some historical public offers by the banks like the Zenith Bank. But at the same time, it is also true that the market has to go a long way to because still now the NSE’s market capitalization is, much lower than the GDP. According to the ongoing trends, the market capitalization should be nearer to the GDP or in certain cases it is more than the GDP as in the case of Johannesburg that recorded 239% of GDP. The turnover ratio of Nigeria stock exchange was 12.4% in 2005. The Nigerian bond market is also passing through a developing phase.

But in the middle of 2007 down through 2008, due to the Global Financial Crisis that started in United States (USA) and United Kingdom (UK), has crippled the operations and activities of the Financial Institutions globally which included Nigeria Capital Market and Nigerian economy as whole.

This incident has hindered the confidence and discourage of the investor from investing in the capital market, which made most of the investors to preferred investing in real sector of the economy i.e. buying of properties e.g. Land, Building houses e.t.c. rather than investing in financial sector of the economy e.g. Stock, Bonds etc. This situation leads to the huge withdrawals of capital in the market. Also, resulted to losses in equity markets, and volume of activities of the Nigeria Stock Exchange (NSE) has dropped drastically, which slowed down investment activities in the secondary market.

However, the regulatory bodies (authorities) have being making every effort to resurrect and restore the confidence of the investors in the market. According to Director-General of NSE, Ms. Arunma Oteh in the Business and Finance News (dated Tuesday, 24th of July, 2010), stated that The Nigeria Capital Market is undergoing a metamorphosis, while change is an inevitable effect of growth. Meanwhile, it’s clearly known that capital market is a barometer of the Nigeria economy. So, the regulatory authorities have begun to take some steps by implementation of the Chief Compliance Officer Certificate Programme on corporate governance.

Another recent development in Nigerian Stock Exchange is the current capitalization which is about $75 billion (N12 trillion) as at Tuesday, 24th of January, 2012 with the exchange the exchange rate of 1 USDP= 158.853 NGN, while the Nigerian Stock Exchange (NSE) is targeting a market capitalization of $1 trillion (N159 trillion) in the next five years being 2016. Also, Director-General of NSE, Ms, Arunma Oteh Has stated in Nigeria Business and Finance (Swarm Point) dated Tuesday 20th of July, 2010 that the recent policy made which is termed new rules and regulations on the book-building, its aimed to stem the tide of market in fractures that deny shareholders returned on their investment.

Finally, it’s clearly seen that the regulatory authorities has being putting in place various strategies and policies to resurrect the efficiency in the market and restored the confidence of the investors in the capital market. Persistence in the effort of the regulatory bodies will lead to stability in the market and it will in turn bring about an increase in the numbers and spread of shareholders / investors.

The study is an attempt to look at roles played the regulatory bodies and how they have been able to put sanity into operation of the capital market.

1.2 Statement Of The Problem

Given the number of years since the Nigerian Stock Exchange has been established and the substantial financial resources available in the country, coupled with existing institutions, one can claim that the entire spectrum of the capital market has not been sufficiently active, especially when compared with the capital unit of similar or lesser aged units in other developing countries. The factors responsible for this could be identified to include

  • High cost of transaction
  • Lack of transparency
  • Poor economy performance e.t.c

The performance of the Nigerian Stock Exchange was overcast in 2009 by global financial and economy crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria.

The spiral effect of the global economics crisis on the Nigerian Capital Market continued through Nigerian Stock Exchange in 2009 with the exorbitant lending rate mounting pressure on the stock market as a result of massive borrowed fund in the market. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigerian Stock market to crash. Sere – Ejembi (2008) noted that it is not the global financial crisis and the speculative subprime mortgage bubbles and bust alone that is responsible for the crash of the stock market, other contributory factors lent support. Some of these, namely: margin lending by the Deposit Money Banks (DMBs), stock price appreciation that had no correlation with the fundamentals in the quoting companies and local Investor’s opting to invest in foreign capital market to take advantage of the low stock prices.

This study intends to evaluate the roles of Securities and Exchange Commission in terms of capital market activities and determine the extent to which it has contribute to the development of Nigeria Capital Market and to the capital formation process of the economy.

1.3 Research Question / Hypothesis

  1. Ho: That the capital market is not a cost avenue for fund -seeker to source for long term Funds
    Hi: That the capital market is a cost avenue for fund –seeker to source for long term funds
  2. Ho: That the roles of Securities and Exchange Commission doesn’t contribute to the economy development
    Hi: That the roles of Securities and Exchange Commission contribute to the economy development

1.4 Objective Of The Study

He study attempt to make in-depth analysis of the operation of the Nigeria Capital Market and show the extent at which regulatory bodies have been able to control its operation as well as how they have been able to improve its development.

1.5 Justification Of The Study

Alice (1992) said that the capital market in Nigeria regulated by the following bodies:

  1. The Nigeria Federal Ministry of Finance (NFMF)
  2. Central Bank of Nigeria (CBN)
  3. The Securities and Exchange Commission and (SEC)
  4. The Nigerian Stock Exchange (NSE)

However, this study is focused on two of the above bodies; the Securities and Exchange Commission, it shows the genesis of these regulatory bodies and their roles towards the capital market development in Nigeria for simplicity. This study is divided into five chapters; chapter one, introduction, background of the study, the statement of the problem, objective of the study and justification of the study are also highlighted, chapter two is for the literature review while chapter three espouses research methodology, research question and hypothesis, chapter four takes a look at introduction, presentation of data analysis and testing and interpretation of hypothesis, finally, chapter five is devoted to summary, conclusion and recommendation.

1.6 Scope Of The Study

The scope of the study will be limited to the regulatory bodies in capital market especially their roles, how far it has gone in achieving its establishment, purpose of existence in capital market.

1.7 Limitation Of The Study

The focus here is to analyze the effectiveness of the importance of these bodies in the economy; the project does not seek to and will not formulate new policies for the system further suggestions will be made on how to improve on existing ones.

1.8 Organization Of The Study

The study shall commence by a background of the study matter which include the following

  • Statement of the problems
  • Research question / Hypothesis
  • Objective of the study
  • Justification of the study
  • Scope of the study
  • Limitation of the study and
  • Definition of terms, justifying the need for the study in chapter one.

Chapter two shall present related literature concerning the roles of regulatory bodies in the capital Market development. The chapter shall also present the theoretical framework for the study. The research methodology shall then be outlined in chapter three.

While the chapter four focuses on data analysis and testing and interpretation of hypothesis. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendation.

1.9 Definition Of Terms

Capital Market:

Traditionally, this has referred to the market for long term debt instruments (those that mature in more than one year). That is, the market where capital is raised. A capital market is a market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the primary market where new issues are distributed among investors, and the secondary markets where already existent securities are traded.

Financial Market:

A financial market that works as a conduit for demand and supply of debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and invitees through a variety of financial instruments (bonds, notes, shares) called securities. A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares.


This can be defined as a debt instruments yielding a fixed rate of return over a set period of time that can be traded in the market like any other security. Bonds are essentially a loan the issuing organization received from the investors who in turn becomes the creditor. Bonds typically have a maturity period during which they cannot be normally traded for full value unless specified otherwise. The rate of return offered by bonds will be lower compared to stocks due to bonds offering security against turbulent markets.

Primary Market:

Also called the new issue market is the market for issuing new securities. That is, a market for new capital will be traded over a longer period. Also called the new issue market is the market for issuing new securities. Many companies, especially small and medium scale, enter the primary market to raise money from the public to expand their businesses. They sell their securities to the public through an initial public offering. The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capitals that will be traded over a longer period.

Secondary Market:

Is the market where, unlike the primary market, an investor can buy a security directly from another investor in view of the issuer. It is also referred as “after market” i.e. a market meant for the trading of existing issues. It’s a place where any type of used goods is available. In the secondary market shares are maneuvered from one investor to other, that is, one investor buys an asset from another investor instead of an issuing corporation. So, the secondary market should be liquid.


Debentures are long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. Debenture is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise.


The term stock means shares. Different companies sell a part of their shares in the stock market and the buyers purchase these shares and become a partner in the company’s profit.

Treasury Bill:

These are promissory notes issued by government and sold to lender of funds by the Central Bank acting as agent of government. The Treasury Bills do not yield any interest before they mature. They are usually sold at discounts on their respective face values. In that respect they are like zero-coupon bonds.

Stock Brokers:

These are the major operators in the secondary market. They are the only duly authorized dealers on the Stock Exchange that bring the Securities into the market. i.e they are the agents who buy and sell securities on behalf of clients (investing public).

Commercial Paper:

An investor may agree to lend credit to an organization for a short period of time in return for a mutually agreed rate of interest. Most commercial papers are negotiable instruments.

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