impact of money and capital market on the growth of Nigeria economy
CHAPTER ONE
BACKGROUND TO THE STUDY
Just as yeast is a
catalyst for improving the size of bread, so is finance a catalyst for economic
growth and development. No nation no matter how economic independent it is can
survive this modern day society without finance. The volume of finance in its
coffer determines if it can be well recognised as power nation. Finance can
therefore be seen as that stock of capital required to achieve certain set
goals technologically, politically, economically and otherwise.
The financial system
of any given society is therefore the framework within which capital formation
takes place. It is the framework within the savings of the surplus sectors of
the economy are made available to the deficit sectors for productive investment.
This process is made possible by the intermediation of financial institutions,
which are basically the money and capital market. The rapid industrialization
and modernization of an economy depends among other things, chiefly on ready
access to adequate financial resources. The desire of the government to develop
capital market in Nigeria
is therefore intrinsically connected with the objective of accelerated
industrial and agricultural development of the economy (Okoye, Nwisienyi and Eze, 2013).
The money and capital market has been identified as an
institution that contributes to the socio-economic growth and development of
emerging and developed economies (Donwa
and Odia, 2010). This is made possible through some of the vital roles
played such as channeling resources, promoting reforms to modernize the
financial sectors, financial intermediation capacity to link deficit to the
surplus sector of the economy ,and a veritable tool in the mobilization and
allocation of savings among competitive uses which are critical to the growth
and efficiency of the economy. It helps to channel capital or long-term
resources to firms with relatively high and increasing productivity thus
enhancing economic expansion and growth (Alile 1997).
In the Nigerian
context, participant includes Nigerian Stock Exchange, Discount Houses,
Development Blanks, Investment Banks, Building Societies, Stock Broking Firms,
Insurance and Pension Organizations, Quoted Companies, the government,
individuals and the Nigerian Stock Exchange Commission (NSEC). The capital market is therefore very
important to any economy because, it encourages savings and real investment in
any healthy economic environment.
Through the market, aggregate savings are channeled into real investment
that increases the capital stock and therefore economic growth of the country.
Over the years, many
corporate concerns have gone public in Nigeria. It represents a conscious
effort to access greater quantum and diversified funds for investment in
various sectors of the Nigerian economy. The capital market has continued to
grow as evidenced by the entry of substantial new investors. Also, various
business combinations involving corporate mergers and acquisitions have
occurred. Further, the second tier market has also developed to accommodate
quotation of less capitalized firms on less stringent terms and conditions. It
is evident that some firms have listed additional securities in order to
achieve diversified funding necessary to achieve lower cost of funds. As
business opportunities continue to expand in modern day free enterprise
economy, identification and implementation of varied investment programmes will
continue to grow and deepen in various sectors of the Nigerian economy
(Nwakanma and Nnamdi, 2012).
Okoye, Nwisienyi and Eze
(2013) posit that as a result of the
desire of the federal government to ensure a rapid growth in the industrial
sector, the SEC decree No 71 of 1979 was promulgated which established the SEC
to regulate the activities of the Nigerian capital market with the activities
of SEC the Nigerian capital market has grown considerably over the years,
market capitalization has grown from 1.6 billion in 1980 1.3 trillion in 2003,
5.1 trillion 2006 and currently 6.9 trillion. The Nigerian stock market has continued
to play great role in mobilizing capital to the borrowers who are mostly quoted
industries. The second-tier market and
over the counter market have also been established to cater for the need of
smaller companies and industries which cannot meet with the huge capital and
other requirements of the main stock market.
The success or failure
of any economic is hinged on the viability of the financial system which
invariably and undoubtedly depend main
on the structure of the capital market of such economy in which the Nigerian
stock exchange (NSE) occupy the central position of the financial system. It
plays a very vital role in the general performance of the economy.
Currently, majority of
Africa economic including Nigeria
suffer from financial regression and financial under-development. These
maladies combines with economy dualism have continued to aggregated Nigerian
development problems Faki 2006.
Since the performance of
financial sector impinges on the state of the economy, Nigeria, as every other nation is
consistently in search of a viable financial sector in the process of doing the
quite a reforms and restructuring have been carried out in the financial sector
such as the deregulation and liberalisation of financial sector. The revolution
of the colonial era in 1946 when the colonial government issued the first Nigeria
registered stock (FURS) in (1956-1961). The origin of the Nigeria stock exchange date back to
the 1950’s when there were discussions
and academic crisis about the formulation of stock market in May 1958. Then,
the ministry of commerce and industry appointed the bar stock committee to
advice the government on ways and means of fostering a share capital market in Nigeria.
On the 15th September 1960,
the Lagos stock
exchange was incorporated as non profit
making organisation. The Lagos
stock exchange was allowed to disperse with word “LIMITED”. Although it was a
company listed by a guarantee.
The Lagos
stock exchange act enacted in 1961 strengthened the Lagos
exchange; it was change to Nigeria
stock exchange (NSE) by the indigenization decree 1977 on second of December
1977 with branches initially in Lagos, Kaduna, and Port-Harcourt.
The stock exchange is the
very hub of the capital market. It does for the economy what the money market
does at the short end of the spectrum. Those who are desirous of long-term fund
goes to the capital market for .(the excess liquidity of other (Nwankwo, 1987).
A lot of works has
been done regarding the concept of discourse (i.e. small and medium scale
enterprise and capital market) but for the purpose of this research work, we
shall have a review of some of the literature which will help our course in
trying to know what is obtainable in their definitions, functions and
objectives.
The need for industrialisation
is of paramount important. Nigeria,
like most other under-developed countries is a primary producer. This is
functional in the sense that she is endowed with many of the natural resources
which the foreigners in the past tapped to act as resources for their
industrial development. This resource was later used for the production of
primary product on which the country depended for export hence foreign exchange
earnings. The past experience from the country over the years show that for a
singled source of foreign exchange earning the country is not of advantage in
view of the fluctuation in the world market and in the prices of primary
products (Usifoh, 1992).
From the foregoing, (Lewis,
2005) observed that economic development
does not curtain increased in absolute consumption alone, but essentially in
the varieties of commodities available for consumers to choose from, apart from
increasing varieties of goods and services, industries are also important in
ensuring regular supply of products to domestic market. This regularity of
industries on technological enterprises depends on technological growth of the
industrial sector which is responsible for manpower development.
In reorganisation of the
crucial role of small and medium scale enterprises in the over all industrial
development of the country. The ( NSE) introduced second-tier security market
(SSM) of the Nigeria
stock exchange was established to cater for the capital market requirement of
small and medium scale enterprises. It essentially diluted listing requirement
of this category of companies to encourage them to see quotation and thereby
further broaden and deepen the market (Osazee, 2000).
In 1987, the Nigeria
enterprises promote decree 34 (issue of non-voting equity shares) was promulgated
permitting public companies quoted in the Nigeria stock- exchange to issue
through the exchange, non-voting paid up share for the subscription of persons
whether citizen of Nigeria or not and
whether or not resided in Nigeria .
In 1988, the function of
the securities and exchange commission were further expanded by decree 29 of
1988 to include the review and approval of all mergers, acquisition and
combination between among companies, and 1988 also, the privatisation and
commercialisation decree 25 was promulgated. This decree provide for the
privatization of some enterprises in the federal government of Nigeria
had equity interest and the commercialisation of some federal government.
Wholly owned enterprises. The exercise that ensures from this decree brought
more companies to the Nigerian’s stock exchange whose shares were thus listed.
Similarity in 1988 debt
conversion was officially adopted by the central bank of Nigeria and a guideline on the debt
conversion programme published.
In 1989, the central bank
and clearing system (CSCS) which is an online automated securities trading
system was introduced by the Nigeria stock exchange (NSE) to facilitate
electronic settlement of deals between stocks brokers and customers through the
in house clearing system (IHCS) and the exchange central computer vis-a-vis
communication network. On
the 1st 7 March 2000, the Nigeria
stock exchange also launched and commenced operation on its trade guarantee
fund (TGF) scheme aimed at arresting a risk of failure that may arise from the
inability of a stock brokers to cover his or her purchase. On may 2nd 2001, a
second stock exchange, the Abuja
stock exchange (ASE) opened is floor for business having been incorporated June
17th 1998 as a public limited company August 9th 2001.
The capital market is
one of those interestingly from work evolved by the western civilisation to
combined ideal with resources even though they belong to different people, so
as that those who have ideals but no money but one too busy to think out ideals
on how to get their money to work.
According to (Nwonkwo,
1991) the capital market offers access to a variety of financial instrument
that enables economic agent to pool price and exchange risk.
Through assets with
attractive yield, liquidity and list characteristics market is thus important
to both government and institutions in need of funds who because of the nature
of their inabilities undertake to maintain part of their assets in a relative
liquid form.
Tawiah (1989:330) defines a
capital market as the market for long-term loans and investments. It suppliers
trade (i.e. commerce) industry and the government with medium term, long term
and permanent loans as required by each. The financial institutions, according
to Tawiah serves as intermediaries between suppliers of long-term capital
investment trusts savings banks finance houses merchants banks and building
societies.
The capital market is also
the section of the financial system which represents medium to long term funds
for investment needs for business and government. Raising of funds in the
capital market makes possible amongst others, the construction of factories,
office building, high ways, bridges and acquisition of machines. This
opportunities that the capital market offers is a major factor facilitating
capital mobilisation and allocation of such capital fund among several
competing activities.
The awareness of this
credible alternative source of supporting long term investment financing must
have given rise to the decision at the Abuja summit of O.A.U. Heads of state in
1991 that each country in Africa should set up a stock exchange as a way of
promoting a balanced financial system and also as a relevant of the purposed
African Economic Community (AEC).
Nigeria, like many countries, has a formal capital market
symbolised by the existence of stock exchange and an active new issues market.
Also, led in most capital markets, Nigeria has a securities and
exchange commission to represent government interest in regulation and
development of the market as well as protecting their interest of the investing
public. The Nigeria
stocks exchange (NSE) and the Securities and Exchange Commission are very
important institutions of the capital market where the former is the form or
market place where the securities are traded and the later
serves as the apex
regulating body. In summary the above, i.e. Nigeria stock exchange and security
and exchange commission are our major concern in Nigerian context.
The capital market is a highly specialized and organized
financial market and indeed 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 affirmed in economic theories (Anyanwu, 1993).
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
development of capital market in Nigeria, as in other developing
countries has been induced by the government. Though prior to the establishment
of stock market in Nigeria,
there existed some less formal market arrangements for the operation of capital
market. It was not prominent until the visit of Mr. J. B. Lobynesion in 1959,
on the invitation of the Federal government, to advice on the role the Central
Bank could play in the development of local money and capital market. As a
follow-up to this, the
government
commissioned and a set up the Barback Committee to study and make
recommendations on the ways and means of establishing a stock market in Nigeria
as a formal capital market. Acting on the recommendation of the committee, the
Lagos Stock Exchange (as it was called then) was set-up in March 1960, and in
September 1961, it was incorporated under Section 2 cap 37, through the
collaborative effort of Central Bank of Nigeria, the Business Community and
Industrial Development Bank (Alile &Anao, 1990). With the establishment of
the Central Bank of Nigeria in 1959 and the coming into existence of the Lagos
Stock Exchange in 1961 and Subsequently, the Nigeria Stock Exchange by an Act
in 1979, a sound foundation was laid for the operation of the Nigerian Capital
Market for trading in securities of long term nature needed for the financing
of the industrial sector and the economy at large. After the incorporation of
the Lagos Stock Exchange, it was granted further protection under the law and
its activities was placed under some sort of control by the government, hence
the passing of the Lagos Stock Exchange Act. However, the Lagos Stock Exchange
was only operational in Lagos.
By the mid 70’s, the need for an efficient financial system for the whole
nation was emphasized, and a review by the government of the operations of the
Lagos Stock Exchange market was advocated. The review was carried out to take
care of the low capital formation, the huge amount of currency in circulation which
was held outside the banking system, the unsatisfactory demarcation between the
operation of Commercial Banks and the emerging class of the Merchant
Banks,
and the extremely shallow depth of the capital. In response to the problems
mentioned above, the government accepted the principle of decentralization but
opted for a National Stock Exchange, which will have branches in different
parts of the country. On December 2nd 1977, the memorandum and article of
association creating the Lagos Stock Exchange was transformed into the Nigerian
Stock Exchange, with branches in Lagos, Kaduna, Port-Harcourt, Yola and now in Federal Capital
Territory (FCT) Abuja
and some other cities. The history of Nigeria Capital Market could be traced to
1946 when the British colonial administration floated a N600, 000 local loan
stock bearing interest at 3¼% for the financing of developmental 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, yet local
participation of the issued was terribly poor. Certainly, potential fund abound
in Nigeria,
but the overriding consideration in this project is to examine the impact of
the capital market in harnessing and mobilizing these resources (fund) to
generate economic growth in the country and consequently economic development.
According to Riman, et al.,
(2008), the Nigerian capital market has witnessed obvious transformation over
the years, evident by the increased level of participation of the private and
public investors at the floor of the stock exchange and in various public
offers of quoted companies. The emerging market has also attracted and embraced
the attention and the interest of international investors, thus increasing
capital inflow. For example, the overall market capitalisation had risen from
1,698.1 million naira in 1980 to 7030.8 billion naira in 2009, thus signifying
an increase within the period. Transaction at the floor of NSE has risen to a
total of 685716.2 million naira in 2009 from a previous value of 16.6m recorded
in 1970. The number of deals from all market participants at the floor which
recorded a mere 634 deals in 1970 had also witnessed a remarkable increase to 1739365
million naira in 2009. The total number of listed companies had also increased
from 91 as was listed in 1980 to 213 listed in 2008 (CBN, 2009).
Following
from this therefore, efficiently functioning capital market affects liquidity, acquisition of information
about firms, risk diversification, savings mobilization and corporate control
(Anyanwu, 2008). Hence, by altering the quality of these services, the
functioning of stock markets can alter the rate of economic growth (Equakun,
2005).It is with this backdrop that this research study is undertaken to
examine the impact of capital market on economic growth in Nigeria.
Statement of the Problem
There
is abundant evidence that most Nigerian businesses lack long-term capital. The
business sector has depended mainly on short-term financing such as overdrafts
to finance even long-term capital. Based on the maturity matching concept, such financing is risky. All such firms need to
raise an appropriate mix of short- and long-term capital (Demirguc-Kunt&
Levine 1996). Most recent literatures on the Nigeria capital market have
recognized the tremendous performance the market has recorded in recent times.
However, the vital role of the capital market in economic growth and
development has not been empirically investigated thereby creating a research
gap in this area. This study is undertaken to examine the contribution of the
capital market in the Nigerian economic growth and development. Aside the
social and institutional factors inhibiting the process of economic development
in Nigeria,
the bottleneck created by the dearth of finance to the economy constitutes a
major setback to its development. As a result, it is necessary to evaluate the
Nigerian capital market.
Emerging economies like Nigeria have grown rapidly over the
last two decades, driven principally by the expansion of international trade
and foreign direct investment. The stock
market plays a significant role in mobilizing capital to the various industries
that desire and are quoted at any tier in the market. The recognition of this role in driving the
growth of industries has necessitated the government to embark on reform
policies to make the market more effective and efficient as a vehicle for
investment and economic growth. Despite these laudable reform policies, little
has been achieved as the level of industrial growth in Nigeria is still below expectation.
This raises the question on if the market has actually witnessed improved
performance as a result of these policies.
Recent developments such as the global financial crisis, share price manipulation
and unethical practices at the market have contributed to the problems of the
market and efficient role in capital mobility. Based on the above-identified
problems, this study will therefore bring to fore the extent of the performance
of the Nigerian capital and money market.
Objective of the study
The
main objective of this study is to examine the impact of money and capital
market on the growth of Nigeria
economy.
However,
the specific objectives include:
1.
To evaluate the performance of the capital and money market in relation to the
economic growth in Nigeria.
2.
To make recommendations as to how the operations of the market could be improve
to boost economic growth and development of Nigeria.
3.
To examine the rate at which new stocks
are used on the capital market
RESEARCH QUESTION
This
research was guided by the following research questions:
i.
What is the performance of the capital and money market in relation to economic
growth in Nigeria?
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