EFFECTS OF MONETARY POLICY ON NIGERIAN CAPITAL MARKET

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The financial system of any given society is the framework within which capital formation takes place. It is the framework within the savings of the surplus sectors of the economy are made available to the deficit sectors for productive investment. This process is made possible by the intermediation of financial institutions, which are basically the money and capital market. The rapid industrialization and modernization of an economy depends among other things, chiefly on ready access to adequate financial resources. The desire of the government to develop capital market in Nigeria is therefore intrinsically connected with the objective of accelerated industrial and agricultural development of the economy (Okoye, Nwisienyi and Eze, 2013). The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies (Donwa and Odia, 2010). This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy ,and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile, 1997). According to Ogbulu (2009), the capital market is a network of special institutions that in various ways bring together suppliers and users of capital.  The capital market is therefore, the long-term end of financial market, which is made up of market, and institutions, which facilitate the issuance, and secondary trading of long-term financial instruments. Capital market is also seen as a collection of financial institutions set up for the granting of medium and long term loans and 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 (Ologunde, Elumilade and Asaolu, 2006). Donwa and Odia (2010) assert that the Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu, 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun, 2005).