IMPACT OF GOVERNMENT BONDS ON CAPITAL MARKET PERFORMANCE IN NIGERIA

ABSTRACT

Nigeria capital market is relatively new and has many factors influencing it. The capital market is for sourcing of long term loans, while the floating of government bonds will likely stimulate the capital market in its size and activities. Thus, the study investigated the effect of government bonds on capital market performance in Nigeria within the period of (1990 – 2016). The method of analysis used in testing the hypothesis was the Ordinary Least Square (OLS) technique. The study among other things reported that, Federal government of Nigeria bonds has a significant impact on capital market performance in Nigeria, Federal government value of trade bonds has a significant impact on capital market performance in Nigeria and Federal government total new issue has a significant impact on capital market performance in Nigeria. Based on the findings, the study recommended that: The government should continue to acquire funds majorly through FGN bonds. As shown in the result, FGN bonds have a significant positive impact on capital market performance in Nigeria. To continue boosting the value of trade in the Nigerian capital market, there is need for availability of more investment instruments such as derivatives, convertibles, future and swaps options in the market. Total new issues are very important to the growth of any capital market. Therefore, government should continue to employ appropriate trade policies such as establishing National Association of Securities Dealers (NASD) that promote the inflow of international capital and foreign investment, so as to enhance the production capacity of the nation.

TABLE OF CONTENTS

Cover page                                                                                                         i

Title page                                                                                                            ii

Declaration                                                                                                         iii

Certification                                                                                                       iv

Dedication                                                                                                          v

Acknowledgement                                                                                              vi

Table of Contents                                                                                               vii

List of Tables                                                                                                     ix

Abstract                                                                                                              x

CHAPTER ONE: INTRODUCTION                                                                                     1         

1.1 Background of the study                                                                                                   1

1.2 Statement of Problem                                                                                                       2

1.3 Objectives of the study                                                                                                     3

1.4  Research Questions                                                                                                    3

1.5 Research Hypotheses                                                                                                        3

1.6 Scope and limitation of the study                                                                                     4

1.7 Significance of the study                                                                                                  4         

1.8 Definition of terms                                                                                                           5

CHAPTER TWO: REVIEW OF RELATED LITERATURE                                               6

2.1 Conceptual Framework                                                                                                    6

2.1.1 The concept of capital market                                                                                       6

2.1.2 Roles of the Nigerian capital market                                                                             7

2.1.3 Capital market and economic growth channels of linkage                                           8

2.1.4 Definition of Bonds and the Bonds Market                                                                   10

2.1.5 Overview of the Nigerian Bonds Market                                                                      12

2.2 Theoretical Framework                                                                                                    12

2.2.1 The Nigerian stock market in perspective                                                                     14

2.2.2 Nigerian stock exchange specific reforms                                                                     17

2.3  Empirical Literature Review                                                                                      19

CHAPTER THREE: RESEARCH METHODOLOGY                                                         25

3.1  Research design                                                                                                          25

3.2 Area of Study                                                                                                                    25

3.3Sources of data collection                                                                                                  25

3.4  Description of Variables                                                                                             25

3.5 Model Specification                                                                                                         26

3.6 Techniques of Analysis                                                                                                    27

3.6.1 T- Statistics                                                                                                                    27

3.6.2 F- Statistics                                                                                                                    27

3.6.3 R- Squared                                                                                                                     28

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION             29

OF FINDINGS

4.1 Introduction:                                                                                                                     29

4.2 Descriptive analysis                                                                                                          30          

4.3 Analysis, Discussion of Findings and Hypotheses Testing                                                                      31

4.3.1 Test of Hypothesis                                                                                                         32

4.4 Discussion of Result                                                                                                         34

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction                                                                                                                      35

5.2: Summary of Findings                                                                                                      35

5.3 Conclusion                                                                                                                        36

5.4 Recommendations                                                                                                            36

References                                                                                                                              37

Appendix

LIST OF TABLES

Table1: Data Presentation                                                                                                      29

Table 2: Descriptive Statistics                                                                                                30

Table 3: Presentation of Ordinary Least Square Regression (OLS) Result.                                    31

CHAPTER ONE

INTRODUCTION

            1.1           Background of the study

The Nigerian capital market is relatively new and has many factors influencing it. The capital market is for sourcing of long term loans, while the floating of government bonds will likely stimulate the capital market in its size and activities. According to Securities and Exchange Commission (SEC, 2000), the bond market is preferred as the ideal mechanism for the exchange of claims among buyers. Government bonds have interest bearings securities in the capital market and also mutual relationship with itself, thus government stock as an instrument gives the capital market room to exist. The presence of government bonds in the Nigerian capital market can be traced to the early twentieth century (20th) and also floating of a bond in 1946 by the then colonial government. The Federal government development bonds which were formally introduced in 1959 was designed to provide long term finance for government projects and later most proceeds are leased on regular basis till 1986 when deregulation of the capital market started. The recent challenges of the capital market in Nigeria are due to economic meltdown from 2009, according to CBN (Central Bank of Nigeria) annual report on its fair share on government bonds. The dismal performance of the banking sector was owing to reforms, administrative charges and others of the CBN and SEC and also counter policies within and outside the market are some factors that have inhibited the capital market as well and the impact of government bonds.

The development of capital market in Nigeria, as in other developing countries has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some less formal market arrangements for the operation of capital market. It was not prominent until the visit of Mr. J. B. Lobynesion in 1959, on the invitation of the Federal government, to advice on the role the Central Bank could play in the development of local money and capital market. As a follow-up to this, the government commissioned and a set up the Barback Committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal capital market. Acting on the recommendation of the committee, the Lagos Stock Exchange (as it was called then) was set-up in March 1960, and in September 1961, it was incorporated under Section 2 cap 37, through the collaborative effort of Central Bank of Nigeria, the Business Community and Industrial Development Bank (Alile&Anao, 1990). 

1.2       Statement of Problem

The secondary objective of floating government bond is to source for funds which could be in form of loan accessible to state governments. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the dearth of finance to the economy constitutes a major setback to its development.

Most authors on the Nigerian capital market literature have recognized the significant impact the capital market has on the economic growth and development of Nigeria, but to some extent the capital market have under gone some challenges which include; unstable macro-economic environment, poor system of supervision and regulation, limited range of securities, inhibited foreign capital inflow etc. This research work attempts to ascertain if government bond has been able to influence capital market growth and economic development in Nigeria. In Nigeria, much work has not been done to empirically investigate the impact of government bonds on capital market growth in Nigeria. This is the gap in knowledge the researcher is attempting to fill. 

1.3       Objectives of the study

The main objective of the study is to determine the impact of government bond on capitals market growth in Nigeria.

The specific objectives of the study are to:

1.     Determine the impact of Federal government bonds on capital market performance in Nigeria.

2.     Investigate the impact of Federal government value of trade on capital market performance in Nigeria.

3.      Evaluate the impact of Federal government total new issue on capital market performance in Nigeria.

1.5  Research Questions

1.     How has Federal government bonds impacted on capital market performance in Nigeria?

2.     To what extent has Federal government value of trade impacted on capital market performance in Nigeria?

3.     What is the impact of Federal government total new issue on capital market performance in Nigeria?

1.5       Research Hypotheses 

The research hypotheses stated in null form are as follows:
H₀1: Federal government bonds has no significant impact on capital market performance in Nigeria.

H₀2: Federal government value of trade impacted has no significant impact on capital market performance in Nigeria

H₀3: Federal government total new issue has no significant impact on capital market performance in Nigeria

1.6 Scope and limitation of the study

This study attempts to investigate the impact of government bonds on capital market growth in Nigeria. Data will be extracted from the entire stock market list in the Nigerian stock exchange annual reports and statement of accounts, Central Bank Statistical bulletin, and stock exchange fact book over a period of time specifically 1990 to 2016 which is the scope of the study. This document will form the source of data collection. The researcher may likely encounter challenges in the course of the study.

a) Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study       

b) Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7       Significance of the study

The study will enable the government to understand when to float bonds and how to set up policies to achieve a stable macro-economic environment animal at fostering the growth of the capital market. The study will also help to enable investors to seek for better return on their investment in fixed income securities. Also the study will go a long way to enabling students to understand the meaning of capital market growth and government bond. Researchers can build on this research work for further study by expanding the scope of for their academic purpose. 

1.8       Definition of terms

Government bond: This is also known as “sovereign bond” is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face  value on the maturity date.

Capital: According to Adam Smith, capital is that part of a man’s stock which he expects to afford him revenue

Capital Market: A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

Economic Growth: Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. 

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