IMPACT OF CAPITAL MARKET ON THE ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

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 resources 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 capital market is a highly specialized and organized financial market and indeed an essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation real economic growths has long been affirmed in economic theories (Anyanwu, 1993).

          The capital market has been defined as a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds in the economy. The market affords business firms and governments the opportunity to sell stocks and bonds, to raise long-term funds from the savings of other economic agents (Echekoba, 2013).

          Economic growth on the other hand is defined as  an increase in the standard of living in a nation’s population with sustained growth form a simple, low-income economy to a modern high-income economy (Jhingan, 2010).

          In the last two decades, studies on the capital market have received considerable attention from contemporary finance and economics literature resulting from its role in the provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio and also in the mobilization of resources for national growth. According to Ndako (2010), the capital market is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy comprising households, firms, and government are mobilized, harnessed and made available to various sectors of the economy. For sustainable economic growth, funds must be effectively mobilized and allocated to enable businesses and the economies harness their human, material, and management resources for optimal output. Hence, the capital market is an economic institution, which promotes efficiency in capital formation and allocation.

The capital market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2000; Levine and Servos, 1996; Obadan, 1995; McKinnon, 1973).

          Virtually all aspects of human Endeavors entail the use of money either self- generated or borrowed. Money enhances capital accumulation with tremendous cyclical rebound on economic growth. In capital market, the stock in trade is money which could be raised through various instruments, under well governed rules and regulations, carefully administered and adhered to by different institutions or market operators. The sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).

The capital market, no doubt, is pivotal to the level of growth and development of the economy. Chinwuba and Amos (2011) note that capital market is one of the major institutions that acts in propelling a prostrate economy for growth and development. Nyong (1997), sees it as a complex institution imbued with inherent mechanism through which long-term funds of the surplus sectors of the economy are mobilized, harnessed and made available to deficit sectors of the economy.

Osaze and Anao (1999), assert that capital market is the cornerstone of any financial system since it provides the funds needed for financing, not only business and other economic institutions, but also the programs of government as a whole. Ilaboya and Ibrahim (2004), stress that capital market functions as an economic barometer for galvanizing economic activities.

In Nigeria, capital market effectively started operations on 5th June, 1961 under the provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock Exchange in December 1977 as a result of the review of the Nigerian financial system (CBN, 2007). The Securities and Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from Capital Issues Commission, which was established in 1973. At the commencement of operations, the market started with 0.3 million shares worth N1.5 m in 334 deals and the value continued to grow steadily to N16.6m in 634 deals by 1970 (CBN 2004). According to Nigerian Stock Exchange report (NSE, 2009), in 1995 the Federal Government liberalized the capital market with the abrogation of Laws that prevent foreign investors from participating in the domestic capital market. This includes: The Foreign Exchange; Monitoring and Miscellaneous Provision Decree No: 17, 1995; Nigerian Investment Promotion Commission Decree No: 16, 1995; Companies and Allied Matters Decree of 1990 and Securities and Investment Act (ISA) 45 of 1999. These legislations have accorded Nigerians and foreign investors the same right, privileges and opportunities for investment in securities in the Nigerian capital markets. Other key measures included The Central Security Clearing System (CSCS) which commenced operations in April 1997. It is a central depository for all the share certificates of quoted securities including new issues. With a market size of over 233 listed equities and gradual stability of the market resulting from the aftermath of the volatility induced by global economic crisis, the Nigerian economic growth does not seem to have been influenced a lot positively by the capital market, there is therefore a need to examine theoretical expectations with regard to the effects of Nigerian capital market on economic growth. From evidence in extant literature across different countries, the arguments are quite inconclusive and with mixed results with regard to the effects of capital market on economic growth.

1.2 Statement of the Problem

In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economy. The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities (Obadan, 1998).

Deducing from the extensive studies on the theoretical expectations on the role of capital markets on economic growth which have formed the core of normative economics, the capital market is expected to contribute to economic growth through the transmission mechanisms of savings mobilization, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, and enhanced incentive for corporate control amongst others. However, an x-tray on the path of “positive economics” which is concerned with “what is” rather than “what should be” reveals that the argument in the literature on the growth effects of capital market has not been adequately resolved. The inconclusive nature of these theoretical and empirical studies provides the basis for a further empirical investigation on the role of capital market in economic growth. Hence, this study is needed.

Furthermore, a fundamental weakness of most studies providing evidence from developing economies is that past regression analyses were often run without a thorough examination of the characteristics of time series economic data. It is therefore not surprising that some of them are, in fact “spurious regressions” exhibiting an excellent fit between unrelated variables, especially when levels of the variables themselves are used in the regression. In general, when the regression includes non-stationary variables, the estimation of coefficients and inference from them becomes impossible (Iyoha and Ekanem, 2004).

1.3 Research Questions

This study seeks to provide reliable answers to the following research questions:

1.     What is the impact of capital market on economic growth of Nigeria?

2.     What is the impact of interest rate on the economic growth of Nigeria?

3.     What is the causality relationship between capital market and economic growth of Nigeria?

1.4Objectives of the Study

The broad objective of this study is to determine the impact of capital market on the economic growth of Nigeria. The specific objectives of the study include the following:

1.     To evaluate the impact of capital market on economic growth of Nigeria.

2.     To ascertain the impact of interest rate on economic growth of Nigeria.

3.     To identify the causality relationship between capital market and economic growth in Nigeria.

1.5 Hypotheses of the Study

The following under listed hypotheses shall be subjected to tests to ascertain its reliability:

1.     H0: Capital market has no significant impact on the economic growth of Nigeria.

2.     H0: Interest rate has no significant impact on the economic growth of Nigeria.

3.     H0: No causality relationship exists between capital market and the economic growth of Nigeria.

1.6 Significance of the Study

The findings of this study will be of great importance to the academia, government and its agencies, students and the research.

          The Academia: Members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works.

          Government: This study will expose to the government happenings in the capital market, bringing to their notice ways to alter the existing capital market policies to ensure growth.

          The Investors: This study shall also be valuable to the investors especially those who may have research interest as it shall guide their private investment decisions. The study shall also form reasonable tool for the private sector’s contribution to National debates.

          Students as well as subsequent researchers will find this piece helpful as it will add to the existing knowledge of capital market as well as capital accumulation while upgrading obsolete theories. Researchers will also find this study helpful in the areas of referencing and citations.

          Lastly, this research work is of great importance to the researcher as it is a mandatory requirement for the qualification of Bachelor of Science in the Department of Economics.

1.7 Scope of the Study

The study is aimed at ascertaining the impact of capital market on the economic growth of Nigeria over a period of 36 years ranging from 1981 to 2016.

1.8 Limitations of the Study

The progress of this study has been hinder by certain constraints during its course, some of which includes: technical factors such as power supply which have limited the speed of the researcher is concluding this research work and have subjected the researcher to sourcing power from substitute power supplies such as generator sets and power banks.

          Furthermore, financial constraints which have restricted the researcher from getting a wide range of materials for the study. However, the researcher was able to solve the financial constraint by resulting to borrowings from friends and family members to further the research work.

Also, time constraint was another huddle the researcher encountered; as there was no enough time to carry out this research work