THE ROLES, OPERATIONS AND STRUCTURE OF NIGERIAN CAPITAL MARKET AND ITS IMPACT ON THE GROWTH OF NIGERIAN ECONOMY

ASTRACT

This study examines the roles, operations and structure of the Nigerian capital market. It also went ahead to examine the relationship between capital market development and economic growth. Time series data obtained from Central Bank of Nigeria (CBN) and Nigeria stock Exchange (NSE) were analyzed using simple regression model. The data set covers annual time series data from 1990-2005. Results showed that capital market development indicators like market size, liquidity and efficiency exert positive influence on Economic growth.

TABLE OF CONTENTS

Title page                                                                        i

Certification                                                            ii

Dedication                                                               iii

Acknowledgement                                                  iv

Abstract                                                                  v

Table of Contents                                                    vi

Chapter One

1.0   Introduction

1.1   Background of the Study                                         1

1.2   Statement of Research problem                       5

1.3   Objective of the study                                      7

1.4   Research Questions                                        8

1.5   Research Hypothesis                                               8

1.6   Scope of the study                                           9

1.7   Significance of the study                                  9

1.8   Limitation of the study                                     10

1.9   Definition of Terms                                          11

        References                                                       12

CHAPTER TWO: LITERATURES REVIEW                             

2.1   The Nigeria Financial System and Capital Market Development 13

2.2   The Concept of Capital Market                        15

2.3   Roles of the Nigerian Capital Market                16

2.4   Capital Market and Economic Growth Channels of Linkage 19

2.5   Nigerian Market measures                               22

2.6   Characteristics of the Nigeria Market               24

2.7   The Role of Government in the Capital Market        24

2.8   Money Market                                                  28

2.9   Capital Market and Fund Raising                    28

2.10 Nigerian Capital Market and It’s Structure       29

2.11 Functions of Capital Market                            31

2.12 Government Policies, Capital Market Development and Economic Growth                        32

2.13 Instruments Employed at the Capital Market 33

2.14 Regulators and Operators of Nigerian Capital Market      30

2.15 Margin Loans, Capital Market Development and Economic Growth  35

2.16 The Effect of Privatization on Capital Market Development             37

2.17 Capital Market Operation                                        41

2.18 Theories of Economic Growth Models              43

2.19 Empirical Review: origin and Development of Capital Market in Nigeria                             45

        References                                                       50

Chapter Three

3.1   Research Methodology                                     54

3.2   Nature and Sources of Data                             54

3.3   Population and Sample                                   55

3.4   Description of Research Variables                   56

3.4.1        Dependent Variable                                                 56

3.4.2        Independent Variable                                      56

3.4.2.1 Stock Market Turnover Ratio                       56

3.4.2.2 Stock Market Capitalization Ratio                       57

3.4.2.3 Total Value of Shares Traded Ratio              57

3.5   Technique for Analysis                                    58

3.6   Specification of Models                                    59

                References                                               62

Chapter Four

4.0   Data presentation and Analysis                       63

4.1   Data presentation                                            63

4.2   Variable Determination                                    68

4.2.1        Gross Domestic Product Per Capita                         68

4.2.2        Stock market Capitalization Ration                        71

4.2.3        Turnover Ration                                              75

4.3   Data Analysis                                                   77

4.4   Regression Analysis                                                 83

        References

CHAPTER FIVE: SUMMARY OF RESEARCH

FINDINGS, RECOMMENDATIONS AND CONCLUSION

5.1   Introduction                                                     89

5.2   Summary of Research Findings                       90

5.3   Conclusion                                                      92

5.2   Recommendations                                           93

        Bibliography                                                    98

LIST OF FIGURES

Figures 1: The structure of the Capital Market in Nigeria          30 

Figure 2: Instruments of the Nigeria Capital Market                34 

Figure 4.1.1: Stock Market Capitalization from 1990 – 2005 66

Figure 4.1.2: Value of Shares Traded from 1990 – 2005 67

Figure 4.1.3: Non-GDP 1990 – 2005                                        68

Figure 4.2.1 Non-Oil GDP Per Capita from 1990 – 2005  71

Figure 4.2.2: Market Capitalization Ratio from 1990–2005 73

Figure 4.2.3: Value of Shares Traded Ration from 1990–2005      75

Figure 4.2.4: Turnover Ratio from 1990-2005                 77

Figure 4.3.1: Stock Market Efficiency                              78

Figure 4.3.2: Stock Market Liquidity and Economic Growth       79

Figure 4.3.3: Capitalization Ratio and Non-DGP Per capita 81

CHAPTER ONE

INTRODUCTION

1.1        BACKGROUND OF THE STUDY

        A major engine of economic growth and development of any nation is its capital market.

        The capital market is a market where equities, shares and bonds are issued and traded either via exchange or over-the-counter market. It impact positively on the economy of any nation by providing financial resources through its intermediation process, for the financing of long-term projects.

The capital market is made up of various institutions (financial) established for the purpose of mobilization and efficient utilization of long-term development of any financial system. This is a market where investors provide long-term funds and are given long-term financial assets (securities) in exchange by the borrowers otherwise known as the issuers. Capital market is very important in any nation that needs to grow economically and otherwise because; it facilitates the provision of fund for new business and already existing business, income for lenders and finally promotes investment in corporate securities.

        In principle, a well-develop capital market should increase savings and efficiently allocate to productive investments, which leads to an increase in the rate of economic growth.  The market contributes to the mobilization of domestic saving by enhancing the set of financial instruments available to savers to diversity their portfolios.

        A well-developed capital market share – ownership provides individuals with a relatively liquid means of sharing risk when investing in promising projects. Capital markets help investors to cope with liquidity risk by allowing those who are hit by a liquidity shock to sell their shares to other investors who do not suffer from a liquidity shocks. The result is that capital is not prematurely removed from firms to meet short-term liquidity needs. Moreover, capital markets play a key role in allocating capital to the corporate sector, which will have a real effect on the economy on aggregate.

        The market is usually organized into primary where new securities are bought and sold and secondary market where outstanding securities are bought and sold. However , the capital markets not really a market in the traditional African sense. It is rather a network of institutions that arranged for long-term financial instruments, like debentures stocks, mortgages, and shares (Okafor, 1983).

        It is a known fact that capital provides the impetus for the effective and efficient combination of factors of production to ensure sustainable economic growth. The capital market which is the major segment of any financial market provides a setting through which medium and long-term funds are provided by saving surplus unit and channeled into production by deficit units.

        Capital market from the monetary growth perspective provides a means for the exercise of monetary policy through the issues and repurchase of government securities in liquidity market. In addition, a well-developed and active market alters the pattern of demand for money, and booming market creates liquidity, and hence spurs economic growth.

        The market has strategic roles it plays it in the financial system of a nation. Levine (1991) listed these roles as: mobilization of saving for investment, corporate governance, creating investment opportunities for small investors, raising capital for business, redistribution of wealth, barometer of the economy, and government capital raising avenue for development projects.

        There is a strong argument amongst economists as it concerns the relationship between capital market and economic growth, some are for while, others are against. Economic growth is an increase in the economy’s ability to produce real output of  goods and services (Baye and Jamsen, 2006). Putting it in a different form, economic growth is the result of abstention from current consumption. There are however two forms of commodities, which are consumption and capital goods, where capital goods are used for the production of other commodities. In practice, household buy consumption goods while firms buy capital goods. Be it as it may , all incomes are not spend and this result to net savings (saving minus borrowing) is positive. For this reason, household abstaining from current consumption for future consumption make resources available for investments in capital goods, which add to the nation’s capital stocks and provides for expanded production, and so an economy grows (Samuelson, 1980).

        The researcher is not ignorant of the fact that , so many empirical studies on capital (stock) market development and economic growth has been carried out by Economist researchers like Demirguckunt and Levine, 1996a, b; singh, 1997;  Rousseau and Wachtel, 1998; Atje and Jovanovic, 1993; Levine and Zervos, 1996; Agarwal, 2000; and a host of other seasoned researchers. However, most of their works are on cross-country basis. It is on this ground, that the researchers thought it worthwhile filling the gap of the relationship between capital (stock) market development and economic growth in a single country, using Nigerian economy as a case study.