ABSTRACT
Financial intermediaries play an important role in the rapid development of global economy and extremely important in the development of financial market in both the developed and emerging economies. Financial intermediaries are organizations that mobilize idle capital from savers and then provide funds to those who have capital needs. Financial intermediaries include commercial banks, investment banks, mutual funds, and pension funds. A healthy and vibrant economy needs a financial system to move capital from those with money to those with profitable investment opportunities. Financial intermediaries are entities that receive deposits and make loans indirectly, and at the same time link between entities and investors lending directly. From the point of view of financial system, financial intermediaries and financial markets raise capital together. The findings of the study reveal that money supply has positive impacts on market capitalization. The test of significance shows that this relationship is statistically significant. Another important finding of this study is that financial intermediation has a positive impact on the market capitalization. This result confirms the rejection of null hypothesis 1 in Chapter One. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market and more foreign investors should be encouraged to participate in the market to contribute significantly to the Nigerian economic growth.
Keywords: Financial, Financial Intermediation, Capital Market
TABLE
OF CONTENT
Title
Page i
Certification ii
Dedication iii
Acknowledgement iv
Table of
Content v
Abstract vi
CHAPTER
ONE: INTRODUCTION
1.1 Background
to the study 1
1.2 Statement
of problem 3
1.3 Objective
of the study 3
1.4 Research
Questions 5
1.5 Research
Hypotheses 5
1.6 Significance
of the Study 5
1.7 Scope
of the Study 6
1.8 Plan
of the Study 6
CHAPTER TWO: LITERATURE
REVIEW
2.0
Introduction 8
2.1 Conceptual Literature
Review 8
2.1.2 Financial
Intermediation 8
2.1.3 Financial Intermediaries 9
2.1.4 Forms of Financial Intermediaries 10
2.1.5 Functions of Financial Intermediaries 12
2.1.6 Problems of Financial Intermediaries 15
2.1.7
Capital Market 18
2.1.8
Functions of Capital Market 19
2.1.9 Overview
of the Nigeria Capital Market 21
2.1.10 Roles
of Financial Intermediaries on the Capital Market 22
and
Financial Development
2.2 Theoretical
Review 24
2.2.1 Theory
of Imperfect or Asymmetric Information 24
2.2.2 Theory
of Transaction Cost 25
2.3 Empirical
Review 27
CHAPTER
THREE: Research Methodology
3.0
Introduction 30
3.1 Mathematical Model 30
3.2
Empirical Model 31
3.3 Data Source and Description 31
3.4
Method of Data Analysis 32
CHAPTER
FOUR: DATA ANALYSIS AND INTERPRETATION
4.0 Introduction 33
4.1 Descriptive Analysis 33
4.2 Unit Root
Test 34
4.3 Empirical
Results 35
CHAPTER
FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 37
5.2 Conclusion 37
5.3 Recommendations 38
References 39
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial intermediaries play an important role in the
rapid development of global economy and extremely important in the development
of financial market in both the developed and emerging economies. Financial intermediaries are organizations that mobilize idle capital
from savers and then provide funds to those who have capital needs. Financial
intermediaries include commercial banks, investment banks, mutual funds, and
pension funds. The growing economy, along with the imperfections of the
financial markets, has failed to meet the huge capital needs of the current
economy. Financial intermediaries become an important capital channel for the
economy - an indirect channel of capital. A healthy and vibrant economy needs a
financial system to move capital from those with money to those with profitable
investment opportunities.
Financial intermediaries
are entities that receive deposits and make loans indirectly, and at the same
time link between entities and investors lending directly. This interlinking
shows their complementary development. The development of financial
intermediaries is conducive to the efficiency of financial markets. And the
sustainable development of the financial market will create a favorable
environment for financial institutions to operate. From the point of view of
financial system, financial intermediaries and financial markets raise capital
together.
Financial intermediation
performs important role by increasing the efficiency and preventing unnecessary
liquidation of asset, financing consumption, producing asset and reducing shock
on income (Fulgheiri and Rovelli 1998).
IMF (2003) observed that the financial system contributes to economic
performance through mobilizing savings and allocating them efficiently, hence
mitigating market imperfection and promoting good corporate. Previous studies have emphasized the important role of financial
intermediaries in stimulating capital market growth of countries in Sub Sahara
Africa including Nigeria (Yartey, 2008). Despite the huge presence of various
intermediaries in Nigeria, the Nigerian capital market is not fully developed; however,
the country’s Stock Exchange is increasingly active.
The volume and Value of traded securities in
the Nigeria capital market between 2007 and 2010 grew in excess of 6.3% and
3.9% respectively; listed stocks rose from 288 in 2005 to 294 in 2010 while
total market capitalization for the period declined by about 11.4%. The decline
in market capitalization may be attributed to the price losses and the global
economic crisis. Annually, the capital market grew by 74% in 2007, dipped by
45% and 33.7% in 2008 and 2009 respectively, grew again by 18.9% in 2010,
dipped again in 2011 by 16.3% before recovering by an estimated 33% in 2012
(Egene, 2012).
The All Share Index also demonstrated a
decline of about29.8%within the period (Central Bank of Nigeria Economic
Report, 2010). According to the SandP Dow Jones Indices (2017), the Nigerian
bourse grew by 42% in 2017, making the stock market the third-best performing
capital market in the world after Argentina and Turkey. To complete the top
five stock market for 2017, Hong Kong and the United States capital market
occupied fourth and fifth position respectively. The Argentinian market soared
high by 73%, Turkey also jumped up by 43%, Hong Kong grew by 35% and the United
States stock market improved by 25%. With the global performance, the NSE was
able to close gap in the All-Share index (ASI) from losses suffered in 2015 and
2016, which could be attributed to foreign exchange problem and decline in
global oil price (Ilo, Elumah and Sayanolu 2018). Gurley and Shaw (1960) as
cited in Fulgheiri et al., (1998) posit that one of the main functions of
financial intermediaries is transforming illiquid liabilities issued by the
firms in a more liquid form or instrument which is held by customers.
Although, De Gregorio and Guidotti (1995)
opined that it is the efficiency that influences growth and investment and not
the volume of financial investment in the financial intermediation process,
while Edgeworth (1988) asserted that financial intermediaries efficiently
produce liquid assets due to the diversification in the pool of funds while
Ziorklui, (2001) contends that higher savings and capital accumulation can be
achieved with improved financial intermediation.
Most of these studies are stale and focus on
developed economies. It is against this backdrop that this study examines the
impact of financial intermediaries on Nigeria capital market development. This
paper is significant as it will enlighten the Central Bank on how its various
policy measures are affecting the financial intermediaries and the capital
market at large which will further guide the policy makers in designing and
implementing financial policies as well as expose an inherent weakness in the
monetary policy measures of the Central bank of Nigeria.
1.2 Statement
of the Problem
Numerous theoretical
models show that economic agents may form financial intermediaries to mitigate
the costs of acquiring information and conducting transactions. More
specifically, financial intermediaries emerge to lower the costs of researching
potential investments, exerting corporate control, managing risk, and
mobilizing savings. It is safe to say that, by providing these services to the
economy, financial intermediaries influence savings and allocation decisions in
ways that may alter long-run growth rates. Thus, modern economic theory
provides an intellectual framework or understanding how, ceteris paribus,
countries with ‘better’ financial intermediaries; financial intermediaries that
are better at acquiring information, exerting corporate control, managing risk,
and mobilizing savings, would grow faster than countries with less developed
financial systems. To what extent has the financial sector in Nigeria been able
to perform these roles and promote growth? To what extent has the financial
sector helps in lowering the cost of borrowing and researching for potential
investments in Nigeria?
In Nigeria, the cost of
borrowing has increased in Nigeria over time. In September 2023, the monetary
policy rate (MPR) is 18.75, inter-bank call rate rose from 3.89 in August 2023
to 12.73% in September 2023. The maximum lending rate reduces slightly from
27.59 in August 2023 to 27.24 in September 2023. These indicators of the cost
of borrowing are still on the high side; it has consequences on the
macroeconomic indicators including the capital market. Thus, it is important to
empirically examine the role of financial intermediaries on the capital market
in Nigeria with a view to provide basis for monetary policies that will promote
flexible monetary systems.
1.3 Objective
of the Study
This project provides empirical evidence of the role
of financial intermediation on capital market in Nigeria. The main objective is
to examine empirically the impact of financial intermediation on the capital
market. The specific objectives of the study are:
1. Investigate
the role of commercial banks on the performance of capital market.
2. Evaluate
the impact of non-bank financial institutions on the capital market in Nigeria.
1.4 Research
Questions
To achieve the objectives of this project, the study
attempts to answer the following research questions;
1. What
are the role commercial banks on the performance of capital market?
2. Do
non-bank financial institutions have any impact on the capital market?
1.5 Research
Hypotheses
Consistent with the research questions, the following
research hypotheses were tested:
H0:
There is no significant relationship between Commercial banks and its impact on
the capital market.
H01:
Theirs is a significant relationship between Commercial banks and its impact on
the capital market.
H0:
There is no significant relationship between non-bank financial institutions
and capital bank.
H02:
There is significant relationship between non-bank financial institutions and
capital bank.
1.6 Significant
of the Study
Gurley and Shaw (1960) as cited in Fulgheiri
et al., (1998) posit that one of the main functions of financial intermediaries
is transforming illiquid liabilities issued by the firms in a more liquid form
or instrument which is held by customers. Although, De Gregorio and Guidotti
(1995) opined that it is the efficiency that influences growth and investment
and not the volume of financial investment in the financial intermediation
process, while Edgeworth (1988) asserted that financial intermediaries
efficiently produce liquid assets due to the diversification in the pool of
funds while Ziorklui, (2001) contends that higher savings and capital
accumulation can be achieved with improved financial intermediation.
Most of these studies are stale and focus on
developed economies. It is against this backdrop that this study examines the
impact of financial intermediaries on Nigeria capital market development. This
paper is significant as it will enlighten the Central Bank on how its various
policy measures are affecting the financial intermediaries and the capital
market at large which will further guide the policy makers in designing and
implementing financial policies as well as expose an inherent weakness in the
monetary policy measures of the Central bank of Nigeria. In a nut shell, this
study will be useful to all the policymakers and future researchers as it will
serve as reference materials for them.
1.7 Scope
of the Study
This project is limited to the role of financial
intermediaries on the capital market in Nigeria. The study period is between
1990 and 2022.
1.8 Plan
of the Study
This project consists of five Chapters. Chapter One
contains the background to the study, statement of the problem, objectives of
the study, research questions, research hypotheses, significance of the study,
scope of the study, plan of the study, and definitions of terms. Chapter two
focuses on the literature. In this Chapter, conceptual literature review,
theoretical and empirical literature reviews feature prominently. Chapter three
deals with the methodology of the study. Here, mathematical and empirical
models as well as data sources and descriptions and method of data analysis are
the main themes of the Chapter. In chapter Four, the author dwells on data
analysis, presentation and interpretation. Chapter five consist of the summary,
conclusion and recommendations. Reference conclude the final part of the
project.
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