ROLE OF CAPITAL MARKET ON ECONOMIC GROWTH IN NIGERIA 1985-2014.
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ROLE OF CAPITAL MARKET ON ECONOMIC GROWTH IN NIGERIA 1985-2014.
Chapter one
INTRODUCTION
1.1 Background of the Study
The capital market is a highly specialised and organised financial sector that serves as an important agent of economic growth due to its ability to facilitate and mobilise saving and investment. The positive association between capital accumulation and real economic growth has been widely accepted in economic theories (Anyanwu, 2003).
Success in capital accumulation and mobilisation for growth varies by country, but it is primarily determined by domestic savings and international capital inflows.
To mitigate the threat of the current economic crisis, efforts must be directed towards effective resource mobilisation. In light of this, measures are being considered for the growth of the capital market as an institution for mobilising funds from surplus to deficit sectors.
The government has induced the development of capital markets in Nigeria, as well as in other emerging countries. Prior to the foundation of Nigeria’s stock market, there were certain informal market mechanisms for the operation of capital markets.
It was not prominent until 1959, when Mr. J. B. Lobynesion visited on the Federal government’s invitation to advise on the role of the Central Bank in the development of the local money and capital markets.
As a result, the government commissioned and established the Barback Committee to investigate and provide suggestions on how to create Nigeria’s stock market as a formal capital market.
Acting on the committee’s recommendation, the Lagos Stock Exchange (as it was then known) was established in March 1960, and in September 1961, it was incorporated under Section 2 cap 37 by the Central Bank of Nigeria, the Business Community, and the Industrial Development Bank (Alile & Anao, 2000).
The establishment of the Central Bank of Nigeria in 1959, the Lagos Stock Exchange in 1961, and, later, the Nigeria Stock Exchange by an Act in 1979, laid a solid foundation for the operation of the Nigerian Capital Market for trading in long-term securities required for the financing of the industrial sector and the economy as a whole.
Following its establishment, the Lagos Stock Exchange was afforded further legal protection, and its activities were subject to government regulation, resulting in the passage of the Lagos Stock Exchange Act.
However, the Lagos Stock Exchange only operated in Lagos. By the mid-1970s, the necessity for an effective financial system for the entire country had been emphasised, and the government was urged to conduct a review of the functioning of the Lagos Stock Exchange.
The review was conducted to address low capital formation, the large amount of currency in circulation that was held outside the banking system, the unsatisfactory demarcation between Commercial Bank operations and the emerging class of Merchant Banks, and the extremely shallow depth of capital.
To address the issues raised above, the government embraced the notion of decentralisation but chose to establish a National Stock Exchange with branches around the country.
The memorandum and articles of association that established the Lagos Stock Exchange were turned into the Nigerian Stock Exchange on December 2, 1977, with branches in Lagos, Kaduna, Port-Harcourt, Yola, and currently in the Federal Capital Territory (FCT) in Abuja, among other places.
Nigeria’s capital market dates back to 1946, when the British colonial authority issued an N600,000 loan stock with a 3¼% interest rate to fund development 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, although local participation in the issue was extremely low.
Certainly, potential funds exist in Nigeria, but the overarching goal of this study is to investigate the role of the capital market in harnessing and mobilising these resources (funds) to generate economic growth in the country and hence economic progress.
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 businesses must raise a suitable balance of short- and long-term capital (Demirguc-Kunt & Levine 2006).
Most recent writing on the Nigerian capital market has recognised the sector’s outstanding performance in recent years. However, the critical function of the capital market in economic growth and development has not been experimentally studied, resulting in a research void in this field.
This study is being conducted to investigate the role of the capital market in Nigerian economic growth and development. Aside from the social and structural problems impeding Nigeria’s economic progress, the bottleneck caused by a lack of financing to the economy is a significant setback. As a result, it is imperative to assess the Nigerian capital market.
1.3 Objectives of the Study
The broad goal of this study was to investigate the operations and performance of the Nigerian capital market. The study’s precise aims include the following:
1. To investigate the activities of Nigeria’s capital market.
2. Evaluate the capital market’s performance in relation to Nigeria’s economic growth.
3. To investigate the rate at which new stocks are issued in the capital market.
4. Make recommendations on how to strengthen market operations to boost Nigeria’s economic growth and development.
1.4 Research Questions and Hypotheses
This study was guided by the following research questions:
i. How does the Nigerian capital market operate?
ii. How has the capital market performed in regard to Nigeria’s economic growth?
iii. What is the rate at which new stocks are issued in Nigerian capital market?
iv. How can the capital market, with its critical function, promote economic progress in Nigeria?
1. 5 Research Hypotheses
The hypothesis that will be tested in the course of this research is expressed as follows:
H0: The capital market operations have little impact on Nigerian economic growth.
H1: That capital market operations play a role in Nigerian economic progress.
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