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THE IMPACT
OF THE CAPITAL MARKET ON THE ECONOMIC GROWTH IN NIGERIA (1988-2011)
CHAPTER ONE
INTRODUCTION
1.1
Background of Study
The capital
market is a highly specialized and organized financial market and indeed
essential agent of economic growth and development because of its ability to
facilitate and mobilize saving and investment. To a great extent, the positive
relationship between capital accumulation and real economic growth has long
been affirmed in economic theories (Anyanwu, 1996). Success in capital
accumulation and mobilization for development varies among nations, but it 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 resource mobilization. It is in realization of this
that consideration is given to measure for the development of capital market as
an institution for the mobilization of finance from the surplus sectors to the
deficit sectors.
The
development of capital market in Nigeria, as in other developing countries, has
been induced and fostered by the government. Though, prior to the establishment
of stock market in Nigeria, there existed some less formal market arrangements
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 the Central Bank could play in the development of local
money and capital market. As a follow-up to this, the government commissioned
and a set up the Barback Committee to study and make recommendations on the
ways and means of establishing a stock market in Nigeria as a formal capital
market. Acting on the recommendation of the committee, the Lagos Stock Exchange
(as it was called then) was set-up in March 1960, and in September 1961, it was
incorporated under Section 2 cap 37, through the collaborative effort of
Central Bank of Nigeria, the Business Community and Industrial Development
Bank.
With the
establishment of the Central Bank of Nigeria in 1959 and the coming into
existence of the Lagos Stock Exchange in 1961 and Subsequently, the Nigeria Stock
Exchange by an Act in 1979, a sound foundation was laid for the operation of
the Nigerian Capital Market for trading in securities of long term nature
needed for the financing of the industrial sector and the economy at large.
After the incorporation of the Lagos Stock Exchange, it was granted further
protection under the law and its activities was placed under some sort of
control by the government, hence the passing of the Lagos Stock Exchange Act.
However, the Lagos Stock Exchange was only operational in Lagos. By the mid
70’s, the need for an efficient financial system for the whole nation was
emphasized, and a review by the government of the operations of the Lagos Stock
Exchange market was advocated. The review was carried out to take care of the
low capital formation, the huge amount of currency in circulation which were
held outside the banking system, the unsatisfactory demarcation between the
operation of Commercial Banks and the emerging class of the Merchant Banks, and
the extremely shallow depth of the capital market.
In response
to the problems mentioned above, the government accepted the principle of
decentralization but opted for a National Stock Exchange, which will have
branches in different parts of the country. On December 2nd 1977, the
memorandum and article of association creating the Lagos Stock Exchange was
transformed into the Nigerian Stock Exchange, with branches in Lagos, Kaduna,
Port-Harcourt and now in Federal Capital Territory (FCT) Abuja some other
cities. The history of Nigeria Capital Market could be traced to 1946 when the
British colonial administration floated a N600,000 local loan stock bearing
interest at 3¼% for the financing of developmental projects under the Ten-Years
Plan Local Ordinance. The loan stock, which had a maturity of 10-15 years, was
oversubscribed by more than N1 million, yet local participation of the issued
was terribly poor.
Undoubtedly,
potential invisible funds abound in Nigeria, but the overriding consideration
in this project will be to examine the role of the capital market in harnessing
and mobilizing these resources (invisible funds) to generate economic growth in
the country and consequently, economic development.
1.2
Statement of the Problem
There is
abundant evidence that most Nigerian businesses lack long-term capital. The
business sector has depended mainly on short-term financing such as overdrafts
to finance even long-term capital. Based on the maturity matching concept, such
financing is risky. All such firms need to raise an appropriate mix of short-
and long-term capital (Demirguc-Kunt and Levine 1996).
Most recent
literatures on the Nigeria capital market have recognised the tremendous
performance the market has recorded in recent times. However, the 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 the Nigerian
economic growth and development. Aside the social and institutional factors
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. As a result, it is necessary to evaluate the Nigerian capital
market.
1.3
Objectives of the Study
The broad
objective of this study is to examine the activities and performance of
Nigerian capital market. The specific objectives of the study are as follows:
1. To
evaluate the performance of the capital market in relation to the economic
growth in Nigeria;
2. To
examine the operations of the Nigerian capital market;
3. To
examine the rate at which new stocks are issued on the capital market.
4. To make
recommendations as to how the operations of the market could be improve to
boost economic growth and development of Nigeria.
1.4 Research
Questions
This
research shall be guided by the following research questions:
1. How does
the capital market impact on the economic growth and development process in
Nigeria?
2. What is
the trend of trading activities on the Capital Market?
3. What is
rate at which new stocks are issued on the Nigerian capital market?
4. How could
the capital market through its crucial role stimulate economic growth in
Nigeria?
1.5 Research
of Hypothesis
The
hypothesis that would be tested in the course of this research is stated below
as:
H0: That the
capital market operations have not contributed to Nigerian economic growth.
H0: That the
capital market operations have contributed to Nigerian economic growth.
1.6 Scope of
the Study
The economy
is a large component with lot of diverse and sometimes complex parts; this
research work will only look at a particular part of the economy (the financial
sector). This work will not cover all the facets that make up the financial
sector, but shall focus only on the capital market and its activities as it
impacts on the Nigerian economic growth. The empirical investigation of the
impact of the capital market on the economic growth in Nigeria shall be
restricted to the period between 1986 and 2011 due to the non-availability of
some important data.
1.7
Significance of the Study
The study
will explore the impact or effectiveness of capital market instruments on
Nigerian economic growth. Though the scope of study will be limited to the
capital market, it is hoped that the exploration of this market will provide a
broad view of the operations of the capital market. It will contribute to
existing literature on the subject matter by investigating empirically the
role, which the capital market plays in the economic growth and development of
the country. The main importance of this study is that it will provide policy
recommendations to policy-makers on ways to improve operations and activities
of the capital market.
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