STOCK MARKET CAPITALISATION AND INTEREST RATE REGIME UNDER A DEMOCRATIC EXPERIMENT

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STOCK MARKET CAPITALISATION AND INTEREST RATE REGIME UNDER A DEMOCRATIC EXPERIMENT

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The financial system in any economy assumes the highest position in economic development. The Nigerian financial system consists of banks and non bank financial institutions, financial markets, financial instruments of different kinds and duration, rules and regulations that guide the system as well as the mechanism by which the components of the system within the overall economic system interrelate. The financial market comprising of capital, money and foreign exchange markets, and a component of the Nigerian financial system acts as a conduit pipes through which scattered resources are mobilized to those deficit areas that will put it into productive use. These institutions play colossal roles in the development of the economy. The effectiveness and efficiency in performing these roles, particularly the intermediation between the surplus and deficit units of the economy depends on the level of development of the financial system (Aderibigbe, 2004). This explains the motive behind various economic reforms especially pension funds and other financial sector reforms in the country. Emekekwe, (2005:20) noted that the purpose of financial markets is to allocate efficiently savings in an economy to ultimate users of funds, either for investment in real assets or for consumption.

The process of financial intermediation involves the mobilization and allocation of funds through the financial markets by financial institutions (banks and non banks) and by the use of financial instruments. Mobilization of fund for economic development has been a salient issue to economic development. As a result, savings and investment has been most important development economic variables and a focus of development economists (Olagunde, et. al., 2006). Existing literature shows that ways through which resource mobilization affects the economic growth and development are through money and capital markets.

The stock exchange, the center piece of the secondary capital market happens to be one of these important institutions for effective fund provision. The overall growth of the economy depends on how efficiently the stock market performs its function of resource allocation to various economic units. This function enables firms to harness long term cheap capital fund for increase productivity and thus enhancing economic growth. It is imperative to deepen the financial market for desired economic development and global competitiveness (Yartey, 2008). This however could be achieved through a long term security market for investment instruments with long gestation period. The subject matter of this research revolves around stock market development and what determines its development in Nigeria.

According to Encarta Encyclopedia (1999:253), a market generally speaking is “a gathering in a public place for buying and selling merchandise”. A financial market is an institution or arrangement that facilitates the exchange of financial assets (Baye and Jansen, 2006:31). Fabozzi, et. al., (1994: 6) defines it as a market where financial assets are exchanged or traded. As such, one could think of a market as the place where those with a demand finds supply. Virtually, all aspects of human endeavor entail the use of money either self generated or borrowed. In capital market, the stock in trade is money which could be raised through various instruments under well governed rules and regulations carefully administered and

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