- 1 CHAPTER ONE
1.1 Background of the Study
The financial system in any modern economy consists basically of two markets via:
- The money market
- The capital market
The money market provides short term finances for project execution, while the capital market perform all the long term functions of buying, selling and borrowing of long term funds. The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation and economic growth has long been affirmed in economic theories (Anganwu 1993).
Success in capital accumulation and mobilization for development varies among nations, but is largely dependent on domestic savings and inflows of foreign capital therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resources mobilization. It is in realization of this, consideration is given to the measure for the development of capital market as an institution for the mobilization of finance from the surplus sector to the deficit sector. The development in the capital market in Nigeria, as in other developing countries has been induced by the government though prior to establishment of stock.
Market in Nigeria, there existed some less formal market arrangement 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. Central bank could play in the development of local money and capital market. As a follow up to this, the government commissioned and set up makes recommendation on the ways and means of establishing a stock market in Nigeria as a formal capital market. Acting on the recommendation Lagos stock exchange was established on March 1960, it was incorporated under section 2 cap 37 in September 1961.
With the establishment of central bank of Nigeria in 1959 and establishment of Lagos stock exchange in 1961 the Nigeria stock exchange was established in 1979 by an act in 1979. A review was carried out to take care of the low capital formation, the huge amount of currency in circulation which has held outside the banking system, the unsatisfactory demarcation between commercial banks and emerging merchant banks, and the extremely shallow depth of the capital.
Response to the problem mentioned above the government decentralized the stock exchange on the 2nd of December 1977 the memorandum and article of association of the Lagos stock exchange, with branches in Lagos, Kaduna, Port-Harcourt, Yola and now in the Federal capital territories and some other cities.
1.2 Statement of the Problem
There is abundant evidence that more Nigeria business lack long term capita. The business sector has mainly dependent on short term capital likes, overdraft to finance businesses that require long term capital based on the maturity matching concept such financing is risky. All such firms require appropriate mix of short and long term capital (Demirguckunt and Levine 1996).
Most recent literature on Nigerian capital market have recognized the tremendous performance, the market has recorded in recent times. However, vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in Nigeria economic and development.
Aside the social institutional factor 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.
At the Nigeria Stock Exchange (NSE) buyers and seller are the same people so the market is no more than a manipulative institution, where corruption and lack of transparency has brought misery to investors. Or how could one describe a situation where market crashed in 2008 with capitalization collapsing from fifteen million to six trillion without anybody lifting a finger? (Etubong 2008). Because of this known deficiency, corruption has permeated the system, there is price fixing and overvaluation of shares. Initial public offers (IPOs) are manipulated. Most executive and council members of the exchange stooped so low to collaborate with stock brokers by leaking information thereby manipulating price of shares. As a result, it is necessary to evaluate the Nigerian capital market following these affirmation problems.
1.3 Objective of the Study
The broad objective of this study is to examine the activities and performance of the Nigerian capital market. The objective is to appraise the role of the capital market to economic growth and economic development of the Nigerian capital market.
The special objectives of this study are as follows:
- To examine the operations of the capital market.
- To evaluate the performance of the capital market in relation to the economic growth in Nigeria.
- To examine the rate at which new stocks are issued on the capital market.
- It is also of interest to appraise the rational for making the exchange a self regulatory organization.
- To improve recommendations as how the operations of the market could be improved to boost economic growth and economic development of Nigeria.
1.4 Research Questions
To achieve the above objectives, the following research questions were raised:
- What the achievements and challenges of the Nigerian stock exchange in developing the capital market and economic growth and development?
- What is the performance of the capital market in relation to economic growth in Nigeria?
- How is the operation of Nigeria capital market?
- What is the rate at which new stocks are issued on the Nigerian market?
- How could the capital market through its crucial role, stimulate economic growth in Nigeria?
1.5 Research Hypothesis
H0: Capital market operations have no impact on Nigerian economic growth
H1: Capital market operations have impact on Nigerian economic growth.
H0: There is no significant relationship between global economic meltdown and the crisis in the capital market.
H1: There is significant relationship between global economic meltdown and the crisis in the capital market.
H0: The crisis in the capital market has not affected the Nigerian economy in any way.
H1: The crisis in the capital market has affected the Nigerian economy in any way.
1.6 The Scope of Study
The study covers the Nigerian capital market as a whole and the Nigerian Economy. This work does not cover all the facts that make up the financial sector but it is focused on the capital market and its activities as its impact on the Nigerian economic growth. The empirical investigation of the impact of the capital market on the economic growth in Nigeria was restricted to the period between 1987 and 2011 due to the non-availability of some important data.
The Nigerian Stock Exchange is taking holistically but with the Onitsha branch as a contact point. It covers all the information of relevant issues pertaining to the Nigerian capital market vis-à-vis the Nigerian economy. It also take into account the role of SEC in managing the crisis in the exchange and the role played by C.B.N. Ultimately, the study elicited investor‟s response and positions as it regards the exchange in the capital market. To achieve this, investors in Enugu metropolis were elected.
In the case of the study, so many problems were encountered in which in one way or the order challenge the easy floe of this work these include:
a. Distance: In the course of the study, the research was faced which challenge of actually traveling to Nigerian stock exchange in Onitsha, C.B.N branch in Enugu, stock broking firm in Enugu and Anambra.
b. Time: there was not enough time to meet up the time available was managed effectively and efficiently.
c. Finance: At a time, it was difficult and almost impossible to continue because of lack of finance.
d. Hoarding of information: some authority responsible for approving the release of information necessary for this study were not willing to approve the release of some of relevant information.
1.7 Significant of the Study
It is a noted fact that for any meaningful economic transformation of a country to take place, her capital market must be effectively active. It has also been an identified fact that economic strength of any nation is measured according to how active or effective her capital is in performing its supposed functions.
This study will be of significant interest to government and the central bank of Nigeria as they are aware of the problems facing the capital market and remedies to tackle the problems. The capital market plays important roles in economic growth so with the evaluation of the capital market, the efficiency of the capital evaluated and increased, hereby enhancing the rate of economic growth in Nigeria. The study will be significant to institutional operators of the market especially the Nigerian Securities and Exchange Commission and the future researchers who may want to share this experience.
This study will be of interest to investors who have been at the receiving and of the crisis in the in the exchange. They will be able to know the real cause of the problems, response of SEC and efforts being made to protect their investment. The significance of this study will provide foreign business with the facilities to offer their shores and give the Nigerian public an opportunity to invest and participate in the share and ownership or foreign business.
1.8 Organization of the Study
The study is divided into five chapters and organized as follows. Chapter one form the introduction part, this is where the main theme of the research is given. It comprise of the statement if the problem, objectives of the study, research questions and hypothesis, significance of the study and organization of the study. Chapter two is the literature review of the impact of capital market of the economic growth of Nigeria. Chapter three forms the research methodology which includes sources of data method of data analysis and model specifications. Chapter four is the data analysis. Chapter five includes the summary, conclusion and recommendation.
1.9 Definition of Terms
For the purpose of this research, the under listed terms are defined thus:
1. Stockbrokers: These are agents that buy and sell securities on a stock exchange on behalf of clients and receive remuneration for this service in form of a commission.
2. Stock Exchange: A market for the sale and purchase of securities, in which the price are controlled by the law of supply and demand. Nigeria stock exchange started in 1960 but commence operation in 1961.
3. Stock Holder: individuals, businesses and groups owning stock in a corporation.
4. Capital Market: A market in which long term capital is raised by industry and commence, the government and local authorities. The money comes from private investors, insurance companies‟ pension funds and banks, and it is usually arranged by issuing houses and merchant banks.
5. Financial Instrument: A contract involving a financial obligation. Example includes stocks, bonds, loans and derivatives.
6. Shares: A share confers on its owner a legal right to have part of the company profits and to exercise any voting rights attached to that share.
7. Securities and Exchange Commission (SEC): SEC is the regulation arm of the Nigeria Capital Market.
8. Arbitrage Pricing Theory: A model proposed by Stephen Ross in 1976 for calculating returns in securities. It assumes a number of different systematic risk factor without however, definitely identifying various types of risks.
9. Financial Institutions: These are institutions that use its funds chiefly to purchase financial assets, deposits, bonds, loans and so on.
Alite H.V (1984): The Nigerian Stock Exchange Historical Operations and contribution to Economic Developments Bullion of Central Bank of Nigeria.
Lead Capital (2010): Stock Watch a Guardian Publication.
Ndi Okereke J. Onyiuke (2011) Overview of Nigerian Capital Market.
Okigbo P.C (1981), The Nigerian Financial System Longman Esset. Oxford Dictionary of Accounting third edition.