THE ROLES, OPERATIONS AND STRUCTURE OF NIGERIAN CAPITAL MARKET AND ITS IMPACT ON THE GROWTH OF NIGERIAN ECONOMY

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THE ROLES, OPERATIONS AND STRUCTURE OF NIGERIAN CAPITAL MARKET AND ITS IMPACT ON THE GROWTH OF NIGERIAN ECONOMY

ASTRACT

This study examines the roles, operations and structure of the Nigerian capital market. It also went ahead to examine the relationship between capital market development and economic growth. Time series data obtained from Central Bank of Nigeria (CBN) and Nigeria stock Exchange (NSE) were analyzed using simple regression model. The data set covers annual time series data from 1990-2005. Results showed that capital market development indicators like market size, liquidity and efficiency exert positive influence on Economic growth.

TABLE OF CONTENTS

Title page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract v

Table of Contents vi

Chapter One

1.0 Introduction

1.1 Background of the Study 1

1.2 Statement of Research problem 5

1.3 Objective of the study 7

1.4 Research Questions 8

1.5 Research Hypothesis 8

1.6 Scope of the study 9

1.7 Significance of the study 9

1.8 Limitation of the study 10

1.9 Definition of Terms 11

References 12

CHAPTER TWO: LITERATURES REVIEW

2.1 The Nigeria Financial System and Capital Market Development 13

2.2 The Concept of Capital Market 15

2.3 Roles of the Nigerian Capital Market 16

2.4 Capital Market and Economic Growth Channels of Linkage 19

2.5 Nigerian Market measures 22

2.6 Characteristics of the Nigeria Market 24

2.7 The Role of Government in the Capital Market 24

2.8 Money Market 28

2.9 Capital Market and Fund Raising 28

2.10 Nigerian Capital Market and It’s Structure 29

2.11 Functions of Capital Market 31

2.12 Government Policies, Capital Market Development and Economic Growth 32

2.13 Instruments Employed at the Capital Market 33

2.14 Regulators and Operators of Nigerian Capital Market 30

2.15 Margin Loans, Capital Market Development and Economic Growth 35

2.16 The Effect of Privatization on Capital Market Development 37

2.17 Capital Market Operation 41

2.18 Theories of Economic Growth Models 43

2.19 Empirical Review: origin and Development of Capital Market in Nigeria 45

References 50

Chapter Three

3.1 Research Methodology 54

3.2 Nature and Sources of Data 54

3.3 Population and Sample 55

3.4 Description of Research Variables 56

3.4.1 Dependent Variable 56

3.4.2 Independent Variable 56

3.4.2.1 Stock Market Turnover Ratio 56

3.4.2.2 Stock Market Capitalization Ratio 57

3.4.2.3 Total Value of Shares Traded Ratio 57

3.5 Technique for Analysis 58

3.6 Specification of Models 59

References 62

Chapter Four

4.0 Data presentation and Analysis 63

4.1 Data presentation 63

4.2 Variable Determination 68

4.2.1 Gross Domestic Product Per Capita 68

4.2.2 Stock market Capitalization Ration 71

4.2.3 Turnover Ration 75

4.3 Data Analysis 77

4.4 Regression Analysis 83

References

CHAPTER FIVE: SUMMARY OF RESEARCH

FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1 Introduction 89

5.2 Summary of Research Findings 90

5.3 Conclusion 92

5.2 Recommendations 93

Bibliography 98

LIST OF FIGURES

Figures 1: The structure of the Capital Market in Nigeria 30

Figure 2: Instruments of the Nigeria Capital Market 34

Figure 4.1.1: Stock Market Capitalization from 1990 – 2005 66

Figure 4.1.2: Value of Shares Traded from 1990 – 2005 67

Figure 4.1.3: Non-GDP 1990 – 2005 68

Figure 4.2.1 Non-Oil GDP Per Capita from 1990 – 2005 71

Figure 4.2.2: Market Capitalization Ratio from 1990–2005 73

Figure 4.2.3: Value of Shares Traded Ration from 1990–2005 75

Figure 4.2.4: Turnover Ratio from 1990-2005 77

Figure 4.3.1: Stock Market Efficiency 78

Figure 4.3.2: Stock Market Liquidity and Economic Growth 79

Figure 4.3.3: Capitalization Ratio and Non-DGP Per capita 81

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A major engine of economic growth and development of any nation is its capital market.

The capital market is a market where equities, shares and bonds are issued and traded either via exchange or over-the-counter market. It impact positively on the economy of any nation by providing financial resources through its intermediation process, for the financing of long-term projects.

The capital market is made up of various institutions (financial) established for the purpose of mobilization and efficient utilization of long-term development of any financial system. This is a market where investors provide long-term funds and are given long-term financial assets (securities) in exchange by the borrowers otherwise known as the issuers. Capital market is very important in any nation that needs to grow economically and otherwise because; it facilitates the provision of fund for new business and already existing business, income for lenders and finally promotes investment in corporate securities.

In principle, a well-develop capital market should increase savings and efficiently allocate to productive investments, which leads to an increase in the rate of economic growth. The market contributes to the mobilization of domestic saving by enhancing the set of financial instruments available to savers to diversity their portfolios.

A well-developed capital market share – ownership provides individuals with a relatively liquid means of sharing risk when investing in promising projects. Capital markets help investors to cope with liquidity risk by allowing those who are hit by a liquidity shock to sell their shares to other investors who do not suffer from a liquidity shocks. The result is that capital is not prematurely removed from firms to meet short-term liquidity needs. Moreover, capital markets play a key role in allocating capital to the corporate sector, which will have a real effect on the economy on aggregate.

The market is usually organized into primary where new securities are bought and sold and secondary market where outstanding securities are bought and sold. However , the capital markets not really a market in the traditional African sense. It is rather a network of institutions that arranged for long-term financial instruments, like debentures stocks, mortgages, and shares (Okafor, 1983).

It is a known fact that capital provides the impetus for the effective and efficient combination of factors of production to ensure sustainable economic growth. The capital market which is the major segment of any financial market provides a setting through which medium and long-term funds are provided by saving surplus unit and channeled into production by deficit units.

Capital market from the monetary growth perspective provides a means for the exercise of monetary policy through the issues and repurchase of government securities in liquidity market. In addition, a well-developed and active market alters the pattern of demand for money, and booming market creates liquidity, and hence spurs economic growth.

The market has strategic roles it plays it in the financial system of a nation. Levine (1991) listed these roles as: mobilization of saving for investment, corporate governance, creating investment opportunities for small investors, raising capital for business, redistribution of wealth, barometer of the economy, and government capital raising avenue for development projects.

There is a strong argument amongst economists as it concerns the relationship between capital market and economic growth, some are for while, others are against. Economic growth is an increase in the economy’s ability to produce real output of goods and services (Baye and Jamsen, 2006). Putting it in a different form, economic growth is the result of abstention from current consumption. There are however two forms of commodities, which are consumption and capital goods, where capital goods are used for the production of other commodities. In practice, household buy consumption goods while firms buy capital goods. Be it as it may , all incomes are not spend and this result to net savings (saving minus borrowing) is positive. For this reason, household abstaining from current consumption for future consumption make resources available for investments in capital goods, which add to the nation’s capital stocks and provides for expanded production, and so an economy grows (Samuelson, 1980).

The researcher is not ignorant of the fact that , so many empirical studies on capital (stock) market development and economic growth has been carried out by Economist researchers like Demirguckunt and Levine, 1996a, b; singh, 1997; Rousseau and Wachtel, 1998; Atje and Jovanovic, 1993; Levine and Zervos, 1996; Agarwal, 2000; and a host of other seasoned researchers. However, most of their works are on cross-country basis. It is on this ground, that the researchers thought it worthwhile filling the gap of the relationship between capital (stock) market development and economic growth in a single country, using Nigerian economy as a case study.

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