ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY, THE NIGERIA EXPERIENCE 1986-2006

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ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY, THE NIGERIA EXPERIENCE 1986-2006

TABLE OF CONTENTS

Title Page i

Approval Page ii

Certification iii

Dedication iv

Acknowledgements v

Abstract vi

List of tables vii

CHAPTER ONE: INTRODUCTION

1.1 Background of the study 1

1.2 Statement of the problem 2

1.3 Objectives of the Study 3

1.4 Research Questions 4

1.5 Research Hypothesis 5

1.6 Significance of the study 7

1.7 Scope of the study 8 1.8 Operational and Definition of term 9

1.9 References

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Introduction 10

2.2 Meaning of Capital Market 11

2.3 Characteristics of well Functioning Capital Market 12

2.4 The Role of Capital Market in an Economy 13

2.5 Capital Formation and Economic Growth Process 14

2.6 Sources of Capital Formation 15

2.7 Overview of the Nigeria Financial system 16

2.8 Capital Market and Money Market Distinguished 17

2.9 Historical Development of the Nigerian Capital Market 18

2.10 Instruments or Securities that are traded in the Nigeria Capital Market 19

2.10.1 Fixed Income Securities 20

2.10.2 Equities 21

2.10.2.1 Common Stock 22

2.10.2.2 Preferred Stock 23

2.10.2.3 Derivatives 24

2.10.3.1 Warrants 25

2.10.3.2 Call Options 26

2.10.3.3 Put Options 27

2.10.3.4 Futures 28

2.11 Constituencies of and Major Participants in Nigeria Capital Market 29

2.11.1 Funds Providers 30

2.11.2 Users of Funds 31

2.11.3 Intermediaries/Market Operations 32

2.11.4 Regulators 33

2.12 Operations in the Nigeria (Capital Market 34

2.12.1 Stockbrokers/Dealers 35

2.12.2 The Jobber 36

2.12.3 Investment Banks 37

2.12.4 Issuing Housing 38

2.12.5 Share Registrars 39

2.13 The Nigeria Stock Exchange (NSE) 40

2.13.1 Overview 41

2.13.2 Functions of the Nigeria Stock Exchange 42

2.13.3 Rules and Regulations of the Nigeria Stock Exchange 43

2.13.4 Membership and Organisation of the NSE 44

2.13.5 Pricing of Securities at the NSE 45

2.13.6 Stock Price Movement at the NSE 46

2.13.7 Trading System of the NSE 47

2.13.8 Cleaning Delivery and Settlement System of the NSE 48

2.14 Investments Regulations in the Nigeria Capital Market 49

12.14.1 Introduction 50

12.14.2 The Securities and Exchange Commission (SEC) 51

2.14.2.1 Functions of Securities and Exchange Commission 52

2.14.2.2 SEC and Development of the Nigeria Capital Market 53

2.14.2.3 Regulatory Tools of Securities and Exchange Commission 54

2.14.3 Last Performance of the Capital Market Empirical Evidence 55

2.14.4 Process of Capital Mobilisation in the Nigeria Capital Market 56

2.14.5 Modalities of Stock Market Quotation 57

2.14.6 Listing Requirement 58

2.14.7 Methods of Fund Raising in the Nigerian Capital Market 59

2.14.8 Approval Required 60

2.14.9 Professionals Involved in the Floatation of Securities 61

2.14.10 Benefits of Public Quotation 62

2.14.11 Some Common Problems Associated with Stock Holding 63

2.15 Trend in Nigerian Capital Market Performance (1986-2006) 64

References

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design 65

3.2 Specification of Models 66

3.3 Sources of Data 67

3.4 Techniques of Analysis 68

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Data Presentation 73

4.2 Data Analysis 74

4.3 Regression Results and the Stated Hypothesis 75

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Summary of findings 76

5.2 Conclusion 77

5.3 Recommendation 78

5.4 Suggestion of Further Study/Research 79

Bibliography

Appendix I

Appendix II

LIST OF TABLE

Table 2.1: Market Capitalization (1986 – 2006) 62

Table 2.2: Growth in the Number of Listed Security (1990 – 2006)63

Table 4.1: Yearly: GFCF, GDP, MC, LS, (1986 – 2006) 74

Table 4.2: Natural Log of Table 4.1 75

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The capital market is a financial market that provides facilities for mobilizing and dealings in long-term funds for economic growth and development. Wilkinson (2007) defines capital market as “any place or system where the requirements of business enterprises and public authorities or governments for medium and long-term capital funds can be met”. It is the market in which corporate equity and long term debt securities that is shares and bond (those maturing in more than one year) are issued and traded.

Ajie (2002) is of the view, “that pivotal role of the capital market in any economy could have been dispensed with, if a firm or even an individual for that matter could operate in a financial vacuum”. As a matter of fact, it is because firms for example, operate in close contacts with various financial intermediaries and markets that they are afforded not only the mechanism through which their idle funds can be invested but also one that is capable of satisfying their needs for additional funds.

As observed by Okereke-Onyiuke (2000), raising funds from the Capital Market makes possible among others, the construction of factories, offices, buildings, highways, bridges and the acquisition of machineries. This opportunity which the Capital Market offers facilitates capital mobilization and allocation among several competing activities.

In theory, Capital Markets are intended to provide investors and borrowers with a wide range of trading and investment vehicles and to better mobilize and allocate a country’s financial resources and support economic growth. This market brings together all the providers and users of capital. Buying stock allows investors to gain an equity interest in the company and become part owner. When investors buy bonds, they essentially loan money to the company or government that issued the bond and become creditors of that issuer. The market also provides them with new and more varied saving vehicles as alternative to bank deposit. For borrowers capital markets provide access to more funds for expansion which can help in economic growth. Levine and Zervos (1998) are of the opinion that well functioning capital market, along with well designed institution and regulatory system, foster economic growth through private initiatives.

There is empirical evidence strongly suggesting that well functioning capital market promote long-run economic growth. In particular, Levine and Zervos (1998) find that indicators of capital market performance such as market capitalization, turnover, growth in the number of listed securities, and so on are correlated with economic growth and its sources – total factor productivity growth and capital formation.

In the recent past, capital market performance has received increased attention among governments and development finance institutions, with emerging market accounting for a growing share of the worldwide boom in the capital markets. Countries at different levels of development are promoting the performance of their capital markets with the expectation that these efforts will pay off in terms of faster economic growth.

In Nigeria, the role of the capital market in economic growth of the country has continued to attract increased attention from the government and market practitioners. Al-Faki (2008), emphasizes that “the Nigerian capital market has experienced considerable growth in the last decade. In the last year alone(2007), the Nigerian Stock Exchange all-share index has almost doubled to 51,000 points, and market turnover has also increased”. According to him, the factors responsible for this growth of market are firstly, public enlightenment programmes that the Commission carries out periodically to reach and enlighten the public all over the country. Other factors are the reduction of the cost of transaction which has enhanced competition in the Nigerian capital market. The Commission, in collaboration with other stakeholders, has also continued with the efforts aimed at promoting the reactivation of the bond market in Nigeria.

According to Wilkinson (2007), “deregulation is defined as dismantling or abolition of state intervention in economic matters with the purpose of reducing the influence of the state in the economy, abolishing bureaucratic obstacles and legal regulations”.

The deregulation of the Nigerian economy started with the introduction of the Structural Adjustment Programme (SAP) in July 1986 and since then, conscious efforts are made regularly to put in place new policies and where necessary, fine tune existing ones to ensure rapid and sustainable economic growth of the country; emphasizes reliance on the country’s natural resources (Nigeria, 1986).

As observed by Okereke-Onyiuke (2000), properly articulated and implemented, these government reforms are bound to improve the performance of the Nigerian capital market as a vehicle for increased capital formation thereby leading to rapid economic growth of the country”. This improvement would help the capital market’s ability to mobilize savings, attract new listing and liquidity through increased trading activities (turnover).

Therefore, this study attempts an assessment of the performance of the Capital Market in the deregulated Nigerian economy and covers the period 1986-2006.

1.2 STATEMENT OF THE PROBLEM

A capital market like Nigeria’s is bedevilled with a lot of problems that make exact measurement of its impact on various aspects of the economy quite challenging. Some economic analysts like Okigbo Report(1986) and Odife Report(1996) have observed that the Nigerian Capital Market has performed below expectations as a purveyor of cheap and stable funds for Nigeria’s economic growth due to its underdevelopment, which has impeded long-term funds flow through it. They argue that the performance of the Nigerian Capital Market as a source of long-term financing of Nigeria’s economic growth is inhibited by among other things; pervasive poverty that has impacted adversely on the saving culture; poor partnership spirit of Nigerians that has inhibited the development of public limited companies; poor perception of the market by offshore investors; low public awareness of the benefits of investing in the Capital Market; poor dissemination; few number of trading instruments; low market capitalization; high transaction costs in the market; bad corporate governance among others

The need to eliminate these observed performance inhibitors and therefore enhance the performance of the Nigerian capital market has led the federal government through the Nigeria Stock Exchange (NSE), Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC) to embark on reforms aimed at a broader, deeper and more efficient Capital Market.

The on-going reforms in the capital market in addition to the privatization programme of the government and the consolidation programme taking place in the banking and insurance sectors through the capital market are expected to deepen the market, assist Nigerians in imbibing the culture of investing in the capital market and therefore increase the activities of the capital market.

However, evidence from the Nigerian Capital Market shows that in spite of these deregulation, the market is still characterized by few number of trading instruments, low market capitalization, low market turnover, unrealistic stock pricing, high transaction cost, lack of market transparency, and so on. Thus, there is need for a proper assessment of the performance of the capital market in the deregulated Nigerian economy.

1.3 OBJECTIVE OF THE STUDY

The general objective of this study is to assess the performance of deregulated capital market in the mobilization of long term funds for Nigeria’s economic growth.

Specifically, the study seeks to achieve the following:

Evaluate the impact of deregulated capital market performance measures on capital formation in Nigeria

Examine the impact of deregulated capital market performance measures on the Nigerian economy.

1.4 RESEARCH QUESTIONS

Our research questions are:

How does the deregulated capital market impact on gross fixed capital formation in Nigeria.

How does the deregulated capital market impact on the economy.

1.5 HYPOTHESES OF THE STUDY

This study was guided by the following hypotheses:

Ho1: The capital market performance as measured by market capitalization and growth of listed securities does not have significant positive impact on gross fixed capital formation.

Ho2: The capital market performance as measured by market capitalization and growth of listed securities does not have significant positive impact on gross domestic product.

1.6 SIGNIFICANCE OF THE STUDY

This study is significant for a number of reasons:

The study will expose the performance of the capital market in resources mobilization in a deregulated economy such as Nigeria’s.

The examination of the performance of the capital market in a deregulated Nigerian economy will keep market participants including investors informed in the benefits of the government on business and investment.

The study will also keep policy makers informed as to whether deregulation programmed of the government and reform process are in course, that is, achieving the desired goals and if not the problems militating against it.

Furthermore, the study will show if the reforms made so far in the Nigeria capital market are adequate to bring about the much needed investment flow for economic growth.

In addition, the study will suggest ways to improve the effectiveness of the reform programmed and how best the Nigeria capital market could be invigorated to meet the growth needs of the economy.

Finally, the work will serve as reference material for future and further work in related areas.

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