ROLE OF CAPITAL MARKET ON DEVELOPMENT OF NIGERIA ECONOMY.
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ROLE OF CAPITAL MARKET ON DEVELOPMENT OF NIGERIA ECONOMY.
Chapter one
1.1. Introduction.
It is well known that investments that encourage economic growth and development require long-term funding, which is considerably longer than most people are ready to devote their assets for.
The capital market is a group of financial firms established to provide medium and long-term loans. It is a market for government securities, corporate bonds, and the mobilisation and use of long-term capital for development
– the long-term end of the financial system. In this market, leaders (investors) give long-term cash in exchange for long-term financial assets from borrowers.
This market includes both the new issue (primary) and secondary markets. Such securities could be raised on an organised market, such as the Stock Exchange. In this sense, it includes consortium underwriting, syndicated loans, and project financing.
Thus, it is a mechanism via which economic units seeking to invest surplus cash connect directly or through financial intermediaries with those seeking to raise funds for their enterprises.
In Nigeria, participants include the Nigerian Stock Exchange, Discount Houses, Development Banks, Investment Banks, Building Societies, Stock Broking Firms, Insurance and Pension Organisations, Quoted Companies, the Government, Individuals, and the Nigerian Stock Exchange Commission.
The capital market is thus critical to every economy since it promotes savings and actual investment in a healthy economic environment. The market channels aggregate savings into real investment, increasing the capital stock and, as a result, the country’s economic growth.
Furthermore, the capital market synchronises the divergent preferences of portfolio managers and financial institutions with those of savers by mobilising long-term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market, without disrupting the operation of the firm that their savings had previously financed.
In other words, the secondary market allows the capital market to transform long-term or permanent investment into larger investments, accelerating economic growth.
The progressive development of the Nigerian financial system has been by far the Central Bank of Nigeria’s most significant achievement since its inception on July 1, 1959. The – system is essentially comprised of the money market for short-term lending and borrowing.
The Nigerian Stock Exchange (formerly known as the Lagos Stock Exchange) is the pivot or fulcrum around which the whole capital market revolves.
It is the market for the selling and acquisition of securities, stocks, and shares; a market in which individuals, institutions, and governments with finances that exceed their immediate needs can profitably invest them.
Its primary relevance stems from the fact that it serves as the mechanism for mobilising the country’s resources for economic development. Nigerian investors have had access to a major local investment channel since its inception in 1961.
The stock exchange is extremely essential to investors because it serves as a marketplace where securities (stocks, bonds, and shares) can be purchased and sold publicly and with ease.
The presence of a stock exchange in a capital market contributes to broadening the share ownership base of firms and evenly distributing the nation’s wealth by allowing people in different locations to own shares in a firm in another location by purchasing shares, bonds, or stocks through the simple mechanism of the tyre stock market.
For the government, the stock exchange serves as a platform for transferring capital mobilisation in order to create commodities and services for the satisfaction and well-being of citizens.
The stock exchange is not only necessary, but also fundamental to the entire mobilisation process. This is because it allows for continuous trading in securities.
1.2 Statement of Research Problem
Capital or stock markets are an important part of Western democracies’ economies. They are not present in communist or socialist countries since they have no business there. In western capitalist countries, they are the most important institution for huge capital formation aimed at economic progress.
The complexity of capitalist ideology led to the implementation of controls and measures to restore the economy to equilibrium. Factors such as capital market capitalization rate, government stock rate, and rate of interest imposed on financial instruments, among others, have an impact on the development and expansion of the economy.
Bakare (2000:58) defines the capitalization rate as the discount rate used to calculate the present value of future earnings. It is a significant predictor of the market size of any stock exchange.
The market capitalization and growth rate have a significant impact on economic growth and development. This rate is determined by the factors of supply and demand for securities.
In Nigeria, however, monetary policy targets interest rates as well as monetary aggregates. During the time period considered for this study, interest rates in Nigeria were directly administered by the monetary authority, the Central Bank of Nigeria.
This interest rate regulation was based on 156 International Research Journal of Finance and Economics – Issue 4 (2006) professional advice from financial gurus who believed that the country at the time lacked a well-developed financial market.
Under this regime regulation, the federal government of Nigeria established the deposit and lending rates of financial intermediaries at their current levels. Furthermore, the government regulated lending rates for specific sectors of the economy in order to encourage (or discourage) lending to those areas.
If banks boost the interest rate they pay to depositors, more investors would patronise them, but fewer will participate in the capital market. This will cause a decline in capital investment in the economy.
As a result, economic growth and development will suffer, because capital resource allocation is critical in determining the rate of the nation’s output.
If capital resources are not offered to individuals in industries, or capital is not made available to sectors capable of growing production and productivity, the country’s expansion (growth) rate will be slowed.
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