ABSTRACT
This Research study was carried out to find the link
between financial sector liberalization and capital market Development. As part
of the Structural Adjustment Programme (SAP) of 1986, the Nigerian Government
initiated a large scale restructuring
Of the financial sector and the liberalization of the regulations
concerning financial institutions and markets. This was justified on the basis
of existing market failures which
arose from externalities and lack of information
Using the econometric techniques,
we found, that financial liberalization increased the real deposit ratio and
also will lead to a substitution into financial asset resulting in a greater
supply credit to finance real investment for capital market development and
economic growth. Consequently, we recommend that for macroeconomic stability,
efficiency and proper development of the financial system, direct control
should be discouraged while indirect control should be encouraged through the
market mechanism.
TABLE OF CONTENT
Title
page---------------------------------------------------------------------------------------------
I
Certification page -----------------------------------------------------------------------------------
II
Dedication
-------------------------------------------------------------------------------------------III
Acknowledgement----------------------------------------------------------------------------------IV
Abstract-----------------------------------------------------------------------------------------------V
Table of
content-------------------------------------------------------------------------------------VI
Chapter 1.0 Introduction----------------------------------------------------------------------------1
1.1 Back ground
to the study-------------------------------------------------------------1
1.2 Statement
of Problem-----------------------------------------------------------------3
1.3 Scope of
the Study--------------------------------------------------------------------3
1.4 Justification
of the study-------------------------------------------------------------4
1.5 Objectives
of the study
-------------------------------------------------------------4
1.6 Research
Questions-------------------------------------------------------------------5
1.7 Research
Hypothesis------------------------------------------------------------------5
1.8 Methodology
of the study------------------------------------------------------------6
1.9 Sources of
Data------------------------------------------------------------------------6
1.10 Outline
of chapters-----------------------------------------------------------------6
Chapter 2.0 Literature Review
---------------------------------------------------------------------7
2.1
Introduction-----------------------------------------------------------------------------7
2.2 The
Nigerian Financial
System------------------------------------------------------9
2.2.1 The
Money Market-----------------------------------------------------------------11
2.2.2 The
Capital
Market----------------------------------------------------------------13
2.2.3 The
Nigerian Stock Exchange----------------------------------------------------19
Chapter3.0Theoretical framework and Research
Methodology------------------------------24
3.1
Introduction---------------------------------------------------------------------------24
3.2
Theoretical Issues on Financial Sector Liberalization in LDCs----------------24
3.3
Research Design----------------------------------------------------------------------27
3.3.1
Model
Specification----------------------------------------------------------------27
3.3.2
Data
Sources------------------------------------------------------------------------28
3.4 Nature of Research
Method---------------------------------------------------------28
3.5 Method
of Data Presentation and Analysis----------------------------------------29
Chapter 4.0 Data Analysis and
Results----------------------------------------------------------33
4.1
Introduction---------------------------------------------------------------------------33
4.2
Presentation of
Data-----------------------------------------------------------------33
4.3 Data
Analysis and
Result-----------------------------------------------------------34
4.4
Testing of Hypothesis and Results
Discussion.----------------------------------35
Chapter5.0 Summary, Findings and
Conclusion-----------------------------------------------45
5.1 Summary
----------------------------------------------------------------------------45
5.2 Theoretical
findings-----------------------------------------------------------------46
5.3
Recommendation and limitation of the
study.-----------------------------------47
5.4
Conclusion----------------------------------------------------------------------------48
Appendices –
Bibliography, Tables and results
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE
STUDY
Just like other African Economies, Nigeria’s
financial sector is underdeveloped and unorganized. It is characterized by
dualism, market segmentation and spatial fragmentation [Iyoha, 2002]. Financial
sector facilitates the conduct of trade transactions, the efficient use of
financial resources, mobilization of savings and risk taking which are central
to sustained Economic Growth and Development.
According to
T.W. Oshikoya and Osita Ogbu [1995], financial liberalization in several
African countries has been implemented largely through Structural Adjustment
Programs. In Nigeria,
until the adoption of structural adjustment program in 1986, financial
repression and bureaucratic control of interest rates were the order of the
day.
Economic
Development creates demands for particular types of financial arrangements and
the financial system responds automatically to these demands. Finance, is
argued to act as a catalyst in the process of Development but if repressed
could become fetters or obstacles to the Growth process [Ikhide, 1997].
Even though the money and capital markets in Nigeria are not
as deep as desirable, a start seems to have been made in the late 1980s and
early 1990s to develop a more robust and balanced financial structure that
would improve the ability of the domestic financial system to mobilize savings
and contribute to self sustained Economic Growth [Iyoha, 2002].
The objectives
of the liberalization are to build more efficient, robust and deeper financial
systems, which can support the growth of private sector enterprise. Efficiency
entails two components; which are improved credit allocation and more or higher
quality financial services for a given level of inputs [Brown Bridge
and Gayi, 2001].
The role played
by the financial sector is an Economy can be important in determining Economic
Growth. A growing empirical literature demonstrates that the Development of the
financial system has positive effects on the long run rate of Economic Growth and
the volume and efficiency of investment [Fry, 1995 Philip Arestis et al, 2002],
through the removal of the elements of financial repression, particularly
controlled interest rates, financial sector liberalization is expected to lead
to higher nominal and real interest rate [Emenuga, 2001].
The capital market is divided into two segments: the primary market
where companies’ shares are issued for the first time before being quoted on
the stock exchange and secondary market where is trading is done in existing
stocks. The capital market has served as a source of long- term fund to finance
investment in the private sector of the Nigerian Economy.
The liberalization of the financial sector
involved liberalization of interest rates, promotion of market based system of
credit allocation and enhancing completion and efficiency of the regulatory and
supervisory framework [Ikhide, 1997]
1.2 STATEMENT OF
PROBLEM
This study attempts to examine the
extent to which the liberalization policy has resolve the problems existing in
the system which are direct controls, the pervasive Government intervention in
the financial system and the resultant stifling of competition and resource
misallocation.
This study attempts to find out the extent to
which the liberalization policy has resolve the problem of externalities, which
relates to the distortions caused by high and volatile inflation.
This study is concerned with the impact of the
liberalization policy on the information problems, which is in the form of
informational asymmetries between the suppliers and uses of financial services.
1.3 SCOPE OF THE STUDY
This study will undertake an
analysis of the financial liberalization policy with a view to identifying the
reason that led to the adoption of the policy. The focus will be on measuring
the influence and effects of financial sector liberalization on some capital
market Development indicators as far as the availability of Data permits. The
period of the study is from 1970- 2004 in order to carry out a trend analysis
on the before the liberalization period [1970 – 1985] and after the
liberalization [1986 – 2004].
1.4 JUSTIFICATION OF
THE STUDY
Financial sector reforms in Nigeria has
embraced a number of policies designed to increase the size, improve the
efficiency and raised the diversity of the financial system. This goal is
achieved through financial liberalization which is viewed as the process of
moving towards market- determined prices on all classes of financial products,
characterized by symmetric entry and exit conditions to all participants
increasing internationalization as represented by the opening up of domestic
markets to international competition [Ikhide, Yinusa, 1998].
The liberalization of financial institutions
and markets is an improvement in financial intermediation, which is considered
a necessary condition for stimulating investment, raising productive capacity
and fostering Economic Growth and Development.
1.5
OBJECTIVES OF THE STUDY
The general objective of this study is to determine the extent to which
financial liberalization have led to the development of the capital market in Nigeria. To
achieve this general objective, the following specific objectives will be examined.
1. To provide a comprehensive
insight into the structure of the capital market in Nigeria.
2. To examine the impacts of
liberalization on the Development of the capital market.
3. To access the
impact of reform policies like debt conversion programs.
1.6 RESEARCH QUESTIONS
This study will be based on the
following Research Questions:
1. Has the financial sector
liberalization measures been effective in achieveing its stated objectives?
2. Has the financial sector
liberalization measures been able to solve the repressed nature of the Nigerian
capital market?
3. Has financial sector
liberalization measures improved the efficiency in resource allocation and
quality of investment in Nigeria?
1.7 RESEARCH HYPOTHESIS
Ho: financial sector liberalization
does not have a positive impact on capital market
Development.
Hi:
financial sector liberalization does have a positive impact on capital
market Development.
Ho: capital market development does
not have a positive impact on Economic Growth.
Hi:
capital market developments do have a positive impact on Economic
Growth.
1.8 METHODOLOGY OF THE
STUDY
The study will adopt Econometrics
techniques to estimate the Models. We will use the Ordinary Least Squares (OLS)
method of estimation and the Cochrane- orcutt correction method.
1.9 SOURCES OF DATA
The Data used for this study are obtained essentially from the publication
Central Bank of Nigeria
statistical bulletin and Central Bank of Nigeria Annual Statement of Accounts.
Others may be obtained from Nigeria Stock Exchange and other International
Economic Journals.
1.10. OUTLINE OF
PROPOSED CHAPTERS
The final report will be organized
into five chapters.
Chapter 1 Introduction.
Chapter 2 Literature Review
Chapter 3. Theoretical framework and Research
Methodology for the Study.
Chapter 4. Data Analysis and Interpretation Empirical
Result.
Chapter 5. Summary, Policy Recommendation and
Conclusion.
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