EFFICIENCY OF CAPITAL MARKET IN THE ECONOMIC DEVELOPMENT OF NIGERIA
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EFFICIENCY OF CAPITAL MARKET IN THE ECONOMIC DEVELOPMENT OF NIGERIA
1.1 Background of the Study
Credit institutions have exited the country (Nigeria) over the years, even during times of barter, when products were supplied in exchange for a promise of repayment at a later date and other assets were unavailable or unacceptable as security.
Children were frequently utilised with the arrival of Europeans and the introduction of currency, and credit grew more organised with the emergence of local money lenders and agricultural cooperatives, whose surpluses were distributed as loans.
A formal capital market did not emerge in Nigeria until the eve of independence because the British colonial authority’s economic strategy in the country was focused towards the interests of the imperial government in England.
The genuine concept of the capital market, as we know it today, was brought into Nigeria in 1946, when the ten-year plan local legislation was passed. This allowed for the launching of local loans of N300,000,000 (three hundred million naira).
The units were multiples of 10 (ten pounds), with an interest rate of 3½% and a maturity period of 10-15 years. In fact, there was an oversubscription of over 500,000, although not surprisingly, the majority of the response came from the United Kingdom (UK) rather than within the country.
A local development fund was established in 1951 to finance four commercial firms, marking yet another attempt at capital accumulation in the public sector. Between 1946 and 1956, revenue payments were made to the fund, and soft loans with easy payback terms were extended to these corporations.
The British government was reported to have implemented an open door policy, which was defined as the first purposeful effort by the British to provide investment opportunities in Nigeria, revolutionising the capital market. Despite this, expansion was limited in the capital market and industrial sector since it would have reduced the market for British goods.
In general, the Federal Minister of Commerce and Industry financed a research in 1958 under Prof. Barback to investigate the methods of nurturing a share market in Nigeria.
The encouraging report of the Barback committee resulted in the founding of the Lagos Stock Exchange in 1960, which was incorporated the same year thanks to the efforts of the Central Bank of Nigeria (CBN). Formal operations, however, did not begin until June 1961, with securities totaling N80 million.
DEFINITION OF CAPITAL MARKET/ECONOMY
A capital market is a market for long-term funds used in the financing of businesses and governments. Financial intermediaries such as savings and loan associations collect funds from insurance companies, stock brokers, and investment companies, and channel them to users. Long-term fund lenders accept claims in the form of stocks, bonds, mortgages, savings accounts, and insurance policies.
The capital market is an important component of the financial sector, supporting economic growth and development. This is accomplished, among other things, by directing society’s savings towards higher investment returns, hence improving resource allocation.
The development capital market aids in the mobilisation and allocation of savings among competing users, which were crucial to determining the growth and efficiency of the economy.
For example, the capital market has served to create a platform for the government and the general public to raise long-term cash for investment purposes.
This market is used by state and municipal governments, as well as parastatals, to raise funding for development initiatives. Funds for their developmental efforts.
According to the Longman dictionary of contemporary English, the economy is the system that produces and uses a country’s money and goods.
Structure of the Capital Market
The capital market can be separated into broad submarkets and commodity markets, as shown in the diagram.
Stock market commodity market
The stock market is a segment of the capital market where stocks, bonds, funds, and derivatives are traded.
Stock Market Segments
When it is developed, the stock market has been segmented as shown in the diagram below:
• Primary Stock Market
· Primary & Secondary Stock Market
• Secondary Stock Market
The primary stock market is where money are raised by issuing new securities (equity/debt funds), with the proceeds going to the corporate issuer. Both the Securities and Exchange Commission and the Nigerian Stock Exchange are participating in primary market activity. The issuing houses and stockbrokers also play an important role.
Secondary Stock Market: The secondary stock market is the section in which securities holders sell their holdings, with the proceeds going to the individual rather than the corporate issuers. It is a securities stock exchange market where the offender (seller) trades his stock or asset for money.
Primary Secondary Stock Market: This section includes secondary market transactions that take place off the floor of a security exchange using the primary market infrastructure of flow-chart. During the government’s privatisation programme, an excellent example of primary secondary operation was demonstrated.
1.2 Scope of the Study
The scope of this study is as follows. To begin, is the primary instrument utilised for raising cash in the capital market.
a. Equity flotation
This is typically accomplished through the use of ordinary shares or common stock, which refers to the capital of the company’s shareholders. They broadly grant the bearer residual ownership of a company’s assets and earnings.
This share confers on the owner the right to receive notices of Annual General Meetings (AGM) and vote at such meetings. Their returns are often paid in the form of dividends, bonus issues, or right issues, as applicable.
And these returns are projected to rise over time, both in terms of income and capital, providing ordinary shareholders with some security against depreciation in the value of money.
Equity is the value of a firm’s asset after deducting all obligations; securities are perpetuities since they remain indefinitely unless the holder decides to sell or the company goes bankrupt. As a result, they are seen as a source of permanent capital that requires no contractual payment from the firm.
One intriguing aspect of equity financing is that the corporation is not under any obligation to repay the funds. Shareholders. It simply has to declare a dividend on earnings after taking into account cash flow requirements and sources of financing, especially in a period of variable interest rates.
b. Debt Conversion into Equity
The federal government initiated the debt conversion programme to lower the country’s external debt commitment. Under this plan, interested investors can purchase Nigerian offshore debt and convert it into naira for equity participation in qualifying Nigerian projects. The capital market, via regulatory organisations, continues to serve as the mechanism via which this transaction is carried out.
C. Mergers and Acquisitions
Most Nigerian companies now rely heavily on mergers and acquisitions as survival strategies. A merger is often defined as the legal combining of two or more firms, with the survivor company continuing to function under its original name. However, each combining firm will transfer its assets and liabilities to the new company, and the old companies’ books will be closed.
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