CAPITAL MARKET AND ECONOMIC GROWTH IN AN EMERGING ECONOMY: EVIDENCE FROM NIGERIA.
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CAPITAL MARKET AND ECONOMIC GROWTH IN AN EMERGING ECONOMY: EVIDENCE FROM NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
Long-term capital plays an extremely important part in a country’s economic development. Most economic managers recognise that in many emerging countries, money has been a key impediment to economic growth.
Over the years, Nigeria’s economy has undergone a number of social, political, and economic policies and reforms. Prior to 1970, the economy was primarily agricultural, and food security was largely achieved by regional administrations.
The necessity to stimulate private money in development was recognised long ago, with the formation of the Nigerian Stock Exchange (NSC), then known as the Lagos Stock Exchange, in 1961 to develop the capital market (Alile and Anao, 1986).
The capital market is a highly specialised and organised financial sector that serves as an important agent of economic development due to its ability to facilitate and mobilise savings and investment.
The capital market provides much-needed liquidity, allowing formal evidence of security ownership to be traded (Sule and Momoh, 2009, p. 67). The positive association between capital accumulation and real economic growth has been widely accepted in economic theories (Anyanwu, 1996).
Success in capital accumulation and mobilisation for growth varies by country, but it is primarily determined by domestic savings and international capital inflows. As a result, in order to accelerate present economic recovery efforts, focus must be on effective resource mobilisation.
In light of this, consideration is being given to measuring the development of the capital market as an institution for mobilising financing from the surplus to the deficit sector.
Undoubtedly, there are numerous potential investable funds in Nigeria, but the primary focus of this project will be on the role of the capital market in harnessing and mobilising these resources to promote economic growth and, as a result, economic development.
1.2 Statement of the Problem
There is plenty of evidence that most Nigerian enterprises lack long-term capital. The business sector has relied heavily on short-term financing, such as overdrafts, to fund even long-term capital. According to the maturity matching approach, such funding is dangerous. All such companies must raise a proper combination of short- and long-term capital (Demirguc-Kunt & Levine, 1996, pp. 223-239).
Most recent writing on the Nigerian capital market has recognised the sector’s outstanding performance in recent years. However, the performance of the capital market, particularly the Nigerian Stock Market, was clouded in 2009 by the global financial and economic crisis, with excessive loan rates putting pressure on the stock market as a result of enormous borrowing in the market.
The Nigeria Stock Market crashed as a result of stock investors’ haste to liquidate their investments in order to repay their loans and avoid the high lending rates.
However, Sere-Ejembi (2008, p.4) contends that the global financial crisis and the speculative subprime mortgage bubbles that burst were not solely responsible for the stock market meltdown; other contributing variables also played a role.
Some of them were margin lending by Deposit Money Banks (DMBs), stock price appreciation that was unrelated to the fundamentals of the quotation firms, and local investors choosing to invest in international capital markets to take advantage of low stock prices.
However, the critical function of the capital market in economic growth and development has not been experimentally studied, resulting in a research gap tool for economic development.
1.3 Research Questions.
This research will be directed by the following research questions.
a. What impact does the capital market have on Nigeria’s economic growth?
a. What are the current trends in the capital market?
c. At what rate are new stocks issued on Nigeria’s capital market?
d. How can the capital market, with its critical function, encourage economic growth in Nigeria?
1.4 Objective of the Study
The primary goal of this study is to investigate the activities and performance of the Nigerian capital market. The study’s particular aims are as follows:
a. Evaluate the capital market’s impact on Nigeria’s economic growth.
b. To investigate the trends associated with capital market operations.
b. Investigate the rate at which new stocks are issued in the capital market.
d. To investigate how the capital market, through its critical function, promotes economic progress in Nigeria.
1.5 Statement of Hypothesis
The hypothesis that will be tested in the course of this research is expressed as follows:
Ho: There is no significant association between capital market operations and Nigeria’s economic growth.
Hi: There is a strong association between capital market operations and Nigerian economic growth.
1.6 Significance of the Study
The study will look into the effectiveness of capital market instruments on Nigerian economic growth. The study’s focus will be limited to the capital market,
i. It is hoped that the research of this market would provide a comprehensive understanding of the capital markets’ activities.
ii. It will add to the existing literature on the issue by empirically examining the function of the capital market in the country’s economic growth and development.
iii. The primary purpose of this study is to provide policymakers with recommendations on how to improve capital market operations and activities.
iv. Researchers: Researchers will find the study useful because it serves as a springboard and adds to existing material.
v. Students: Students will find this research assignment useful because it will aid them with their studies.
vi. Capital regulators will find this effort important since it bridges the gap between what is currently operational and what is expected to be operational.
vii. Investors, stockbrokers, and NSE authorities will find this study useful because it will provide insight into how much a nation stands to gain from effective capital market activity.
1.7 Scope of the Study
The economy is a large component with many different and sometimes complex aspects. The financial industry will be the subject of this investigation. This study will not cover all aspects of the financial sector, but will instead focus on the capital market and its effects on Nigeria’s economic growth.
Due to the lack of availability of some critical data, the empirical analysis of the impact of the capital market on Nigerian economic growth will be limited to the years 2003-2013.
1.8 Limitations of Study
During this research, the following challenges were encountered:
1. Lack of relevant materials pertaining to the subject matter.
2. Because the study is limited to the NSE, if the results are generalised, they may not accurately reflect what is available in other emerging economies due to Nigerian-specific environmental conditions.
3. The bias in respondents’ responses to the questionnaire is a limiting issue.
1.9 Definition of Terms
Equity refers to the residual ownership of a company’s assets. A right that can only be enforced when all other parties (such as creditors) have been paid. It refers exclusively to the ordinary shares of the corporation.
The Stock Exchange Daily Official List publishes closing prices for all listed securities at the conclusion of each day. This list shows the latest price bid for each security at any given time, regardless of when the bid was made.
The Stock Exchange Price Index aggregates the market capitalization of all industrial shares listed on the exchange.
· Market capitalization refers to the entire amount of funds available for investing in the stock market at any given time.
· Financial Intermediation: Financial intermediaries link surplus and deficit units in an economy.
· Gilt-Edge Securities: Government securities that pay interest. They are widely viewed as low-risk investments.
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