ABSTRACT
This research work is aimed at
showing the role of capital market on development of Nigeria Economy. It also examined the various economic theories that have postulated the key role of
capital accumulation in the process the economic development of any nation. The
data used were secondary data sourced from CBN and FBS statistical bulletin and
the method of analysis used is the econometric technique with special focus on
multiple regression analysis.
Although, capital can be mobilized
from different sources, both theoretical and empirical analysis have shown that
long term sources of finances are more veritable for productive capital
investments. Consequently, the capital market plays a key role in this
mediation process.
Emphases have been placed on
indicators of stock market size, liquidity and growth over a period of thirty
years; together with their combined effects on the rate of economic growth and development within Nigeria
context. Empirical data were collected and analysed. The result of the analysis
showed a positive relationship between the independent variables measured and
their impact on economic development in Nigeria as measured by the gross
domestic product (GDP). However, linking the paucity m capital market
instruments as well as expansion of capital market finances to increase in real
productive investment and development, it was discovered that very little is
achieved in this respect.
TABLE OF CONTENT
Title page
Certification
Dedication
Acknowledgment
Abstract
Table of Content
Chapter One
1.1 Introduction
1.2 Statement
of Research Problem
1.3 The
Aim and Objectives of the Study
1.4 Research
Question
1.5 The Statement of Research Hypothesis
1.6 Research
Methodology
1.7' Significant
of the Study
1.8 Scope
and Limitations of the Study
1.9 Definition
of Related Terms
1.10 The
Plan of the Study
Chapter Two
Literature Review
2.1 Introduction
2.2 Definitions
and concept of Capital Market
2.3 The Need for
Capital Market
2.4 The Growth
of Capital Market in Nigeria
Chapter Three
The Structure
of Capital Market in Nigeria
3.1 Introduction
3.2 The
Operations of the Nigerian Stock Exchange
3.3 The
Structure of the Nigerian Capital Market
3.4 Listing
Requirements of the Stock Exchange
3.5 Parties to
an Issues and their Responsibilities
3.6 The Nine
Stages of Public Quotation
3.7 Sanctions
for Contravening Post-Listing Rules
3.8 The Capital
Market in Nigeria
Chapter Four
4.1 Research
Methodology, Data Analysis and Interpretation of Results
4.2 Methods of
Estimation of Analysis
4.3 Model
Specification
4.4 Specification
of Data
4.5 Empirical
Results and Interpretation
Chapter Five
Summary, recommendations and Conclusion
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
Bibliography.
CHAPTER ONE
1.1. INTRODUCTION
It is a known fact that the
investment that promotes economic growth and development requires long term
funding, far longer than the duration for which most savers are willing to
commit their funds.
Capital market is a collection of financial
institutions set up for the granting of medium and long term loans. It is a
market for government securities, for corporate bonds, for the mobilization and
utilization of long-term funds for development - the long term end of the
financial system. In this market, leaders (investors) provide long term funds
in exchange for long term financial assets offered by borrowers.
This market embraces both the new
issues (primary) market and secondary market. Such securities might be raised
in an organized market such as the Stock Exchange. In this sense, it involves
consortium under writing, syndicated loans and project financing. Thus, it is a
mechanism whereby economic unit desirous to invest their surplus funds,
interact directly or through financial intermediaries with those who wish to
procure funds for their businesses.
In the Nigerian context, participant includes Nigerian
Stock exchange, Discount Houses, Development banks, Investment banks, Building
societies, Stock Broking firms, Insurance and Pension Organizations, Quoted companies, the
government, individuals and the Nigerian Stock Exchange Commission (NSEC).
The capital market is therefore very
important to any economy because, it encourages savings and real investment in
any healthy economic environment. Through the market, aggregate savings are
channeled into real investment that increases the capital stock and therefore
economic growth of the country.
More so, the capital market
synchronize the divergent preferences for portfolio managers and financial
institutions and those of savers by mobilizing long - term funds for portfolio
managers and financial institutions while providing avenues for savers to
invest when the need arises through the secondary market, without affecting the
operation of the firm, their savings had earlier financed. In other words,
through the secondary market, the capital market converts long-term or
perpetual investment enlarged and economic growth accelerated.
By far the greatest achievement of
the Central Bank of Nigeria since it was established on July 1st, 1959 has been the gradual development of the Nigerian
financial system. The - system consists primarily of the money market for short
term lending and borrowing. The Nigerian Stock Exchange (formally called the
Lagos Stock exchange) is the pivot or the fulcrum around which the entire
capital market rotates. It is the market for the sale and purchase of the securities, stocks and
shares: a market In which those individuals, institutions and governments who
have funds surplus to their immediate requirements can employ them profitably.
Its major significance is that it is the machinery for the mobilization of the
countries resources for economic growth and development. Since its
establishment in 1961, a major local investment outlet has been provided for
Nigerian investors.
As a marketplace where securities
(stocks, bonds, shares) are bought and sold openly with relative ease, the
stock exchange is very important to the investors. The existence of a stock
exchange in a capital market helps to broaden the share ownership base of firms
and evenly distribute the nation's wealth by making it possible for people in
different locations to own shares in a firm in another location by purchasing
the shares, bond/ stock through the simple mechanism of tire stock market.
For the government therefore, the
stock exchange provides the mechanism for exchanging the mobilization of
capital for creating goods and services for the satisfaction and wellbeing of
the citizens. The stock exchange is not only crucial but also central to the
entire mobilization process. This is because it offers an opportunity for
continuous trading in securities.
1.2 STATEMENT OF RESEARCH PROBLEM
The capital or stock markets are
feature of the economics of Western Democracies. They do not exist in communist
or socialist countries for they have no business doing there. In the western
capitalist countries, they constitute the most important institution for
massive capital formation geared towards economic development. The complexity
of capitalist ideology resulted in the control and measures to put the economy
in equilibrium state. Factors such as capital market capitalization rate,
government stock rate, rate of interest charged on financial instruments
amongst others exert some impact on the developmental and growth of the
economy.
Bakare (2000:58) defines
capitalization rate as the discount rate used to determine the present value of
future earnings. It is one of the major determinants of the market size of any
stock exchange. The size of the market capitalization and its growth rate pose
a major influence on the growth and development of the economy. The determination
of this rate is based on the forces of demand and supply of securities.
On the other hand, interest rates
along with monetary aggregates form targets of monetary policy in Nigeria.
Within the period chosen for this study, interest rates in Nigeria were
directly managed by the monetary authorities- the Central Bank of Nigeria. This
control of rate of interest was based on the 156 International Research Journal
of Finance and Economics - Issue 4 (2006) expert advice from financial gurus who perceived
that the economy, as at that period, lack a well developed financial market.
Under this regime control, the federal government of Nigeria did set the deposit
and lending rates of the financial intermediaries at their prevailing levels.
In addition, the government did set the rates for lending to specified sector
of the economy with a view to encouraging (or discouraging) lending to these
sectors.
If the rate of interest paid by banks
to depositors is increased, investors will patronize the banks the more and
fewer investors will invest on the capital market. This will lead to a decrease
in capital investment in the economy. Hence, economic growth and development
will be lowered, because the allocation of capital resources plays a crucial
role in the determination of the rate of the nation's output. If capital
resources are not provided to those in the industries, or if capital is not
made available to sectors which are capable of increasing production and
productivity, the rate of the country expansion (growth) will be retarded.
Thus, the disparity in the
determination of interest rate, capitalization rate by different forces must
have influenced the development and growth of the economy. These influences
constitute the major problem that this study intends to investigate. The
variation in The interest rate might cause investors also to either go to the
bank or buy government development stock (bond), thereby helping in the
development of the economy. The relationship between interest rate and
government stock rate will also be generated in the course of this work. The
capital market is often accessed to strengthen a company's capital base,
diversify it shareholder's base, improve the debt/equity ratio and in some
cases raise money to retire existing short-term liabilities.
However, in spite of the myriad of
ways through which corporate entities and government may raise debt, preference
or equity capital, all of which have their merits and limitations, it becomes
rather paradoxical that small scale investors are not often counseled enough or
exposed to the inherent derivable benefits and associated risks in electing to
go for either equity financing or debt financing in the capital market. Anyanwu
(1993:204) identified ignorance as one of the problems of Nigerian Securities
and Exchange Commission (NSEC) and the capital market is still very low.
Not many of the small scale business
or family-owned business, state and local governments are aware or properly
counseled by the issuing houses about the procedural formalities of actualizing
their full involvement in the capital market activities. The problem of
inability to expose the small-scale businesses, state and local governments to
tap the huge savings in the capital market to raise funds to start, expand,
consolidate and modernize business has been the chief indictment of the issuing
houses that play the intermediary role between issuers and investors.
The Nigerian Stock Exchange still has
a long way to go when compared with those in some developed countries. For
example, up till date it has 7 branches (Lagos, Kano, Kaduna, Ibadan, Port
Harcourt, Onitsha and Abuja) with about 183 companies listed on it. As at July,
1996, about 20 companies were listed on the second-tier securities market. This
looks shallow when compared with Indian Stock Exchange with about 4,344
companies or The London Stock Exchange, with about 5,085 listed companies, It
may seem unfair to compare Nigerian Stock Exchange at 42 with those of Indian
and London that has existed for decades. All The same, it suggests the need for
accelerated development of the market.
The general objective of this study
is to present an overview of the nation's capital market in terms, of raising
finance to assist companies and government on long term basis.
1.3 THE AIM AND
OBJECTIVES OF THE STUDY
The specific objectives of this study
are:
i. To
critically examine the relationship between stock market capitalization rate
and interest rate
ii. To identify the type of
relationship between stock market capitalization rate and government
development stock rate and,
iii. To examine the relationship
between government development stock rate and interest rate.
1.4 RESEARCH
QUESTIONS
i. What is Stock Market Capitalization?
ii. What are the effects of
Capital Market on Macroeconomics Policies?
iii. What
are the problems facing capital Market in Nigeria?
iv, Is there
any significant relationship between stock market capitalization and interest rate?
1.5 THE
STATEMENT OF RESEARCH HYPOTHESES
(1) Ho:
That there is no significant relationship between stock market capitalization
and interest rate.
HA: That there is
significant relationship between stock market capitalization and interest rate.
(2) Ho:
That there is no significant relationship between stock market capitalization
and government development stock.
HA: That there is significant
relationship between stock market capitalization and government development
stock.
(3) Ho: That there is no significant relationship between government
development stock and interest rate.
HA: That there is significant relationship between government development
stock and interest rate.
1.6 RESEARCH
METHODOLOGY
This study employs the Econometric
analysis to test for the relationship between dependent and independent
variables. The study therefore employed ordinary least squares techniques to
examine the effect of interest rate, stock market capitalization, government
development stock rate on gross domestic product. Obtained from 1980 to 2009,
through the publication of Nigeria stock exchange, Central Bank of Nigeria and
other relevant of publications. Sourced through secondary method of data
generation.
1.7 SIGNIFICANT
OF THE STUDY
The study will explore the role of
capital market on development of Nigeria economy, though the scope of study
will be limited to the financial sector. It is hoped that the exploration of
his sector will give a broad view of stock market instruments on economic
stabilization it will serve as an inspiration to other potential students and
institutions or individuals as it will contribute to practical life, knowledge
advancement and stabilization of Nigeria economy.
1.8 SCOPE AND
LIMITATIONS OF THE STUDY
The economy is a large component with
lot f of diverse and sometimes complex parts; this research
work will only look at a particular part of the economy (the financial sector).
This work cannot cover all the facets that make up the financial sector, but will
look at the capital market and its instruments as 'being used by the government
for the stabilization of the economy on its road to industrialization and
economic development. In other words, its focus is not on the entire financial,
which is a combination of both money and capital markets, but will only delve
exclusively on the capital market.
The limitations are lack of data,
information and time.
1.9 DEFINITION
OF RELATED TERMS
The instruments of Nigeria money
market are defined as follows:
Treasury Bills: These are money market; short-term
securities issued by federal government of Nigeria and are sold at a discount.
Treasury Certificates: These are medium term government securities which
nature after a period of one to two years and are intended to bridge the gap
between the Treasury bill and long-term securities.
Call Money Fund Scheme: This is the money lent by the banks on the understanding
that it is repayable at the bank's demand or at short notice.
Commercial Papers: These are short-term promissory notes issued by the
central bank of Nigeria and their maturities vary from 50 to 270 day in varying
denominations.
Certificates Of Deposits: These are inter-bank instruments meant to provide
outlet for the commercial banks surplus funds.
Bankers Unit Fund: It is meant to mop up excess liquidity in banking
system and also to sweeten the market for Federal Government stock
Stabilization Securities: These are issued by Central Bank of Nigeria ideally
to mop up idle cash balance of participating banks.
Eligible Development Stocks: This was approved on April 197'5. Specified their holdings of federal Government of
stocks of not more than three years to mature will count as part statutory
liquid asset for the calculation of their statutory liquidity ratio.
Discount Houses: Is a financial institution devoted to
trading in money securities in the secondary market.
Commercial Banks: Commercial bank are financial
institutions which hold themselves out to the public comprising of individuals,
firms, organization and government by accepting deposits and giving out
advances as 'well as performing other services to their customers.
Central Bank Of Nigeria: Is a non-profit, government
controlled institution which acts as a . banker to· the government, maintaining
the accounts of government departments receiving proceeds of taxation and
making payment on behalf of the government maintaining national debt, issuing
new bonds, prepaying and covering maturing ones.
Merchant Banks: Are basically for wholesale banking,
medium and long-term financing activities, which are outside the traditional
domain of commercial banking.
1.10 THE PLAN OF
THE STUDY
This study is divided into five
chapters, chapter one is the introductory parts from 1.1 to 1.9 while chapter
two contains the literature review.
Chapter three is the Theoretical
frame work on the structure of capital market in Nigeria.
Chapter four is the Research
Methodology, data Analysis and interpretation of Results while chapter five conclude
with Summary, Recommendation and Conclusion.
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