ABSTRACT
The essence of this project is to evaluate the efficiency
of capital market in economic development in Nigeria. Accordingly, some of the
objectives of the study are to highlight the activities of the Nigeria capital
market in relations to economic development as a means of providing credit and
investment funds in the economic of the country.
This project also tends to show the efficiency of the
Capital Market in Nigeria particularly the development of National building and
economic and growth pursuance. It has impacted positively on the country.
TABLE OF CONTENT
CONTENTS
PAGES
Title Page ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Chapter one
Introduction
1.1
Background of the Study 1
1.2
Scopes of the Study 3
1.3
Objectives of the Study 6
1.4
Purpose of the Study 7
1.5
Limitation of the Study 7
1.6
Definition of key words 8
Chapter two
Literature Review 9
Chapter three
Summary, Conclusion and
Recommendation
3.1
Summary of the Study 17
3.2
Conclusion 17
3.3
Recommendation 18
References
CHAPTER ONE
1.1 BACKGROUND
OF THE STUDY
Over the years, credit institution
exit in the country (Nigeria) even during the time of barter, goods were given
in exchange for a promise of reimbursement at a futune date and where other
assets are not available or acceptable as collateral. Children were often used
with coming of Europeans into the country and the introduction of currency, credit
became better organized with the emergency of local money lenders and
agricultural cooperatives whose surpluses were given out as loan. A formal
capital market did not develop in Nigeria until the eve of independence because
the economic policy of the British colonial government in the country was
geared towards the interest of the imperial government in England.
The real concept of the capital market
as it is known today was introduced into Nigeria 1946 in when the ten year plan
local ordinance was promulgated. This allowed for the floating of local loans
to the tune of N300,000,000 (three hundred million naira). The units were
multiples of 10 (ten pounds), at an interest rate of 3½% with a maturity of
between 10-15 years. Incidentally, there was an over subscription by over
500,000 though not surprisingly the bulk of the response came from the United
Kingdom (UK) and not within the country.
In 1951, there was another attempt at
capital accumulation in public sector when a local development fund was created
in order to finance four commercial corporations. Payment arising from revenue
were paid into the fund and soft loans, with easy repayment terms, were
advanced to these corporation from the fund between 1946 – 1956. The British
government was said to have carried out an open door policy and this was
described as the first conscious effort by the British to give investment
opportunities to Nigeria and revolutionized the capital market. Despite this
growth held back in the capital market and industrial sector, because growth
would have had the effects of reducing the market of British goods.
By and large, the Federal Minister of
commerce and industry sponsored a study in 1958 under Prof. Barback to look
into the means of fostering a share markets in Nigeria. The favourable report
of the Barback committee led to the formation of the Lagos stock exchange in
1960 it was incorporated in the same year through the efforts of the Central
Bank of Nigeria (CBN). Formal operations, however did not commence until in
June 1961 with securities worth N80 million.
DEFINITION
OF CAPITAL MARKET / ECONOMY
Capital market can be defined as a market for long term
funds used in the financing of business and government such financial
intermediaries as saving back, savings and loan association collect the funds
insurance companies, stock brokers and investment companies, stock brokers and
investment companies which channel them to users. The lender of long term funds
receives claims such as stock, bonds, mortgages savings accounts and insurance
policies.
The capital market is a significant
part of the financial market, which promotes economic growth and development.
This is achieved among the things by shifting society’s saving into a higher
investment returns i.e. it improves resources allocation. The development
capital market assist in the mobilization and allocation of saving among
competing users, which were critical to the determination of growth and
efficiency of the economy for instance, capital market has helped to provide
the platform where government and the public may raise long term funds for
their investment needs. The state, local government and their parastatals use
this market to raised funds for their development projects. Funds for their development projects.
The Longman dictionary of contemporary
English defines economy as the system by which a country’s money and goods are
produced and used.
STRUCTURE
OF THE CAPITAL MARKET
The capital market may be divided into the broad sub market
and commodity market as depicted in the diagram.
Stock market commodity market
The stock market is the sector of the
capital market where stocks, bond, funds, etc and derivatives are traded.
STOCK
MARKET SEGMENTS
When it is developed, the stock market has be segment
depicted in the diagram below:
·
Primary
Stock Market
·
Primary
Secondary Stock Market
·
Secondary
Stock Market
Primary Stock Market: This is the segment where funds are
sourced through the issuance of a new security (equity/debt fund) and the
proceeds of offer go to the corporate issuer. Both securities and exchange
commission and the Nigeria Stock Exchange and involved in the primary market
activities. The issuing houses and stockbrokers also plays a prominent role.
Secondary Stock Market: The secondary stock market is the
segment where securities holder dispose of their holding and the proceeds of
sale go to the individual and not the corporate issuers of the securities. It
is securities stock exchange market where the offenor (seller) exchanges his
stock, security for money.
Primary Secondary Stock Market: This segment accommodates secondary
market transaction that are effected off the floor of a security exchange using
the primary market infrastructure of flow-chart. An excellent example of
primary secondary operation is shown during government privatization programme.
1.2
SCOPE OF THE STUDY
The scopes of this study are as follows; and to start with,
is the principal instrument used for raising funds in capital market.
a.
Equity Floatation
This is usually through the ordinary
shares or common stock, which refers to the capital of the owners of the firm.
They broadly give the holder the residual ownership of the assets and earning
of a company. The owner is by virtue of this share conferred with some other
right: the right to receive notices of Annual General Meeting (AGM) and vote at
such meetings. Their returns are usually through payment of dividend, bonus
issues and right issue as the case may be. And these returns are expected to
rise along with time, both from income and capital point of view, the ordinary
shareholders has at least some protection against depreciation in the value of
money. Equity is the value of an asset of a company after all debts, the
securities are perpetuities since they exist in perpetuity until the holder
decides to sell or until the company goes into liquidation. Thus, they are
viewed as a source of permanent capital with no contractual payment by the
firm. An interesting fact about equity finance is the fact that the company is
not under pressure to pay back the money to its. Shareholders. It is only that
it has to declare dividend on profit after consideration for cash flow
requirement sources of finance, particularly in the era of volatile interest
rate.
b.
Debt Conversion to Equity
The debt conversion program was
introduced by the federal government to reduced the country’s external debt
obligation. Under this programme, interested investor can buy Nigeria’s off
shore debt for conversion into naira for equity investment in qualifying
projects in Nigeria. The medium, through which this transaction is consummated
remains with the capital market through regulatory bodies.
c.
Mergers and Acquisition
Mergers and acquisition have become
important survival strategies for most companies in Nigeria. Generally, a
merger is a combination of two or more companies legally leases to exist and
the survival company continues to exist in it’s original name. However, each of
the combining companies will transfer it’s assets and liabilities to the new
company, thus, the books of each of the old companies will be closed.
On the other hand, acquisition is the
taking over of a business concerned by a more resource based outfit. Mergers
and acquisition have been used by most companies to source for funds in the
event of cash flow problems. Among other things, merger and acquisition arises
when smaller companies with inadequate resources base or technical assistance
combine with larger companies with sufficient expertise and technical know-how.
This process gives a synergy effect to large economics of scale. Example of
this is what is going on now in banking sector.
d.
Loan Stock/ Debenture Stock, Preference Stock and Bond
There are corporate loans stocks that
are standard for finance long term capital requirement unsecured loan stock may
be issued if the finance profile of the firm is sound. At times, the loan stock
may be secure by floating charge, specific charge or even a general credit
position of the borrower. Debenture is to company while development loan stock
is to government. Another feature is tax shield effect of interest payment. In
summary, they are long term capital finance in the capital market.
e.
Loan Stock and Debenture Stock
It is a form of borrowing by a company
from a general public acknowledge by the company in form of certificate. The
term “debenture” is usually referred to as borrowing without specification
collateral such borrowings are based on the general credit position of the
borrower. Debenture is to company while development loan stock is to
government.
f.
Preference Stock and Bond
Preference stock carried a fixed rate
of return and ranking in priority to ordinary shares for earnings and capital
realization. They are usually classed along with share capital rather than capital
partly because of their performance but because their earnings are by way of
dividend which may only be paid if the company makes profits and if its cash
can sustain it. A preference share is however similar to loan capital in
respect of being a fixed income security in contrast to ordinary shares which
have variable income. A bond represents a debt that is owned by the issuer of
the bond (the owner of the bond in case where the creditor or some other
persons are financing the debt). The bond agreement usually contains a long
term repayment of the debt with an obligation.
STOCK
BROKING FIRM
Stock broking firms can be described as middlemen between
the investors and the stock exchange and also between the users of funds and
the stock exchange. They make their profit by collecting commission and rates
on behalf of the Nigeria securities and exchange commission and stock exchange.
Stock broking firms in Nigeria increased from only twenty (20) in 1975 to about
800 in 2005. The increase was elicited by the increase demand for financial
intermediaries.
g.
The Investors
Investors in Nigeria capital market could be individuals or
institutional. Individual investors in the stock market are persons who utilize
their excess liquidity to purchase stock. The institutional investors on the
other hand, are those institutions (mostly financial) with large comparatively
stable liquidity, which they invest in the capital market. Examples of such
institutions are brokers boards insurance companies and financial company.
1.3
THE OBJECTIVES OF STUDY
A capital
market exist to assist in the transfer of founds from the excess unit (savers)
to the necessary borne of two factors, namely: the reliance on money as a
medium of exchange in the modern economy and implicitly faith which is given to
market price in free enterprise system as a means of allocating societal
wealth. Also in competitive market
economics, because price is determined by the forces of demand and supply these
forces tend to reflect buyers and seller collective judgment of the relative utility of the
particular commodity vis-à-vis other available commodities. Competitive market
price is relied upon to allocate the total societal resources efficiently.
The capital market includes the entire
financial system, including the commercial banks and other financial
institutions providing shorts, medium and long term loans to finance with
consumption and investment. The capital market in it’s narrowest sense, evolves
the problem and prospects of equity investment. The capital market performs
numerous important functions which have been identified in many texts, write
ups and by different writers. The functions are such as:
i.
Financial
intermediation from funds surplus to funds deficit institutions
ii.
Offering
enterprises new and wider opportunities for obtaining funds
iii.
Acting
as a means of exchanging securities at mutually satisfactory prices thereby
creating liquidity through it’s pricing mechanism
iv.
Acting
as a means of ascertaining services / prices
v.
Acting
as an easily accessible means of efficiently trading in securities
vi.
Allocating
and rationing funds among competing users
vii.
Allocation
of scares market
viii.
Creating
of a continuous market in quoted securities
ix.
Aiding
of new financing.
1.4
PURPOSE OF THE STUDY
The purpose of this study could be
enumerated as follows:
i.
To
enable the youths of Nigeria to know what capital market is, how it comes in
existence, how it work and how to operate it in case one gets engaged in it.
ii.
It
gives more knowledge about the beneficiaries of capital markets
iii.
To
empower the youths or any business owners to work hard in businesses
iv.
To
provide a central meeting point for members to buy and sell existing stocks and
shares and for granting quotation to new ones
v.
To
provide opportunities for raising fresh capital
vi.
To
provide machinery for mobilizing private and public savings and making these
available for productive investment through stock and shares
vii.
To
protect the public from shady dealings and practices in quoted securities with
the objectives of ensuring fair dealing
viii.
It
aids government funds to participate with foreign investors in establishing
industrial projects
ix.
The
provision of an efficient market
x.
The
provision of a reliable market
1.5
LIMITATION OF THE STUDY
Some reference of this study pose
problems and limitation in the introductory stage. Through, there is not
research methodology without prejudice, it is quite understood that the process
of research is full of many problems.
Basically, access to periodicals,
journals, central bank and the capital market participant operators, financial
and economic review is limited. Consequently, time constraints and financial
constraints posed a serious problem the study. However, it is hopeful that the
information presented in this study will be used in arriving at a useful
general conclusion.
1.6 DEFINITION
OF KEY WORDS
a.
Asset: An
advantage, a help the property of a person, company etc
b.
Bond: A
promise to pay or do something
c.
Bonus: An
extra payment in addition to rages or something extra
d.
Collateral: An additional security for payment of a debt
e.
Capital:
Money for running a business, money invested, accumulated wealth
f.
Consummated: Completed or perfected
g.
Dividend: Particular share of profit or something
h.
Debt: What
one person owes to another
i.
Deficit: An amount by which a sum of money
j.
Equity: A trade union for the British acting
profession
k.
Elicited: Drawn out (information etc)
l.
Evolves:
Develop gradually
m.
Floated:
A sum of money set aside for giving change
n.
Funds:
A sum of money for a special purpose
o.
Harrowest: Distressing
p.
Implicitly: Unquestioning or sureness
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