CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The capital market is a common feature of every modern economy and is reputed, amongst other things, to perform critical capital allocation functions which promote economic growth and stimulate orderly industrial development. Usman, Ahmed and Yahaya (2014) posited that the capital market is a common feature of every modern economy and is reputed, amongst other things, to perform critical capital allocation functions which promote economic growth and stimulate orderly industrial development. In many advanced countries where capital markets correlate directly with the economy, the capital market is viewed as the primary gauge for the economy’s performance. More so, capital markets with adequate depth play an essential role in economic development since they are the principal platform through which low cost funds to finance medium to long term projects on infrastructure and other important projects that transform economies are mobilized. Such markets are characterized by high investor confidence, market integrity, efficient processes, adequate product offerings, sound regulatory framework, strong and transparent disclosure and accountability regime and good corporate governance. Markets with these attributes are classified as world class capital markets (Securities and Exchange Commission, 2012).
Nigeria has the capacity to evolve into such a market. It is our strong conviction that a world class capital market is a necessity if indeed we aspire to better leverage our national wealth in terms of natural and human resources. In essence, the capital market can foster diversification of the country’s economic base which is largely oil dependent and assist economic agents to pool, price and exchange risk thereby encouraging savings and investments and ultimately creating wealth. This conviction informed our vision “to build a world class capital market” as catalyst for the realization of the country’s full potential even as our leaders strive to address our socio-economic challenges (Securities and Exchange Commission, 2012).
The apex regulator of the capital market therefore, this singular vision, the vision to evolve a world class capital market, a market that is complemented by necessary structures to attract world class institutions, one that is an efficient enabler of socioeconomic development; which fosters meritocracy, good corporate governance, innovation and entrepreneurship and harnesses the entrepreneurial zeal of many hard working Nigerians to work towards industrialization of the country. It is in lieu with the above that Joshua (2014) asserts that the capital market of every economy is setup for the attainment of specific objectives which includes economic growth and stability. Hence, industrial development can take place if the capital market achieves the above stated objectives.
Industrialization is the backbone for economic advancement in any nation, be it capitalist, socialist or a mixed economy. This is so because it is through the establishment of industries, both small and large that a nation could produce most of the goods and services its people require. Economists from different schools of thought have been unanimous that one of the parameters used to measure levels of development of any nation is the extent to which the nation can provide its citizens with the basic goods and services required to maintain a good life in the society (Okoye, Nwisienyi & Eze, 2013).
Developing countries such as ours are today in dare need to industrialize because they want to attain economic self-sufficiency. The only way to go about this is through the establishment of small, medium and large scale industries which the capital market had a major role to play. Industries in developing countries can strive successfully among other things, if enough funds are available for the take-off and expansion. Many experts share the view that industrialization is a prerequisite for the economic take-off or economic developments of any country. It is believed that it is only industrial development that can break vicious circle of poverty and underdevelopment. However, just like they say industrialization is a prerequisite for economic development, availability of capital stands as a sure guarantee for effective industrialization and that is also where the capital market comes in.
According to Okoye et al., (2013) the capital market forms the major source of capital for industries in developing economies like Nigeria. They opined that it is pertinent to note that substantial capital is required either to develop or import technological know-how which is needed for industrial development. It is the capital market that has the capacity to provide such huge sums of long term, non-debt capital through the issuance of equity securities which enables new industrial establishments survive the relative long gestation periods in most capital investment projects. As a result of the desire of the federal government to ensure a rapid growth in the industrial sector, the Securities and Exchange Commission decree No 71 of 1979 was promulgated which established the Securities and Exchange Commission 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.
1.2 Statement of the Problem
The effect of capital market on the development of an economy cannot be over-emphasized. The Nigerian capital market has been inefficient due to its inability to provide sufficient funding to aid industrial growth in Nigeria and the inequitable price mechanism of the Stock Exchange causing the fluctuation in the price of securities and the fortunes of firms listed on the exchange. This inefficiency has made it difficult for a lot of corporations and industries to go to the capital market to raise funds and be enlisted on the stock exchange floor for various reasons which hinders the industrial and most importantly the economic growth of the nation. Hence, among the reasons given for this discrepancy is the low depth of exploitation of the capital market by both users and owners of funds coupled with the global financial crises resulting almost to the verge of collapse of the market and leading to decrease in price of stocks and shares. Unfortunately, even though there exists opportunities in the capital market, only a few Nigerians care to take advantage of the promising goldmine. Therefore, this poses a problem to the researcher and consequently brings about the needed window and desire to conduct this research. Thus, this study among others would review the performance of the capital market in Nigeria, also carry out a trend analysis of the market with a view of making necessary suggestions for its improvement.
1.3 Research Questions
Based on the problems stated above, the following research questions were raised:
i. Is there any relationship between the performance of the manufacturing industry and the performance of the Nigeria Capital Market?
ii. Is there any relationship between the performance of the mining industry and the performance of the Nigeria Capital Market?
iii. What is the effect of the Nigeria Capital Market on the performance of the utilities sector?
1.4 Objectives of the Study
The main objective of the study is to examine the capital market on the performance of Nigeria industrial sector. However, the following specific objectives were raised.
i. Determine the relationship between the manufacturing industry and the performance of the Nigerian Capital Market.
ii. Examine the relationship that exists between the mining industry and the performance of the Nigeria capital market.
iii. Investigate the impact of the Nigeria capital market on the performance of the utilities sector.
1.5 Hypotheses of the Study
Based on the research questions and the objectives, the following null hypotheses were formulated
H01: There is no significant relationship between the performance of the manufacturing industry and the performance of Nigeria Capital Market.
H02: There is no significant relationship between the performance of the mining industry and the Nigeria Capital Market.
H¬03: The Nigeria Capital Market has no significant impact on the performance of the utilities sector.
1.6 Justification of the Study
Impact of capital market on industrial sector development in Nigeria is not a strange topic as quite a number of researches have been carried out in relation to this issue. Unfortunately, many of the studies earlier conducted in have not utilised extended period and modern estimation methods as employed in this study. For instance, Udegbunam (2002) in his study has examined the effect of openness, stock market development and industrial growth in Nigeria, utilizing annual time series data covering the period from 1970 to 1997 and employing Ordinary Least squares (OLS) as estimation technique. In another study, Oke (2012) has examined the effect of capital market activities on the development of the Nigerian oil industries, utilizing annual time series data covering the period from 1999 to 2009 under the framework of cointegration technique and error correction mechanism. Meanwhile, Victor, Kenechukwu and Richard (2013) have undertook analysis into the effect of capital market on Nigeria’s industrial sector development, using data from 1980 to 2008 employing descriptive statistic methods. This study contributes to the current debate but differs from the previous studies by using a fairly large period of time as well as using current data in analysing the impact of capital market on industrial sector development in Nigeria.
1.7 Scope of the Study
Due to factors such as time, financial and academic constrains of the researcher, this study will not be able to take the full Nigerian industry under an umbrella. Hence, the study will only study sub-sectors of the industrial sector, mining sector and manufacturing sector to be precise for the last 15 years (2001-2015).
1.8 Definition of Terms
Nigerian Capital Market
Industry
Stock Price Index
Market Capitalization: This refers to the total market value of the equity in publicity traded entity. It also refers to the value of all listed securities based on their market prices.
1.9 Plan of the Study
The research report of this study is divided into 5 chapters. Chapter one consist of introduction to the study and it is sub-divided into 9 headings which are background of the study, statement of problem, research questions etc. Chapter two is the literature review which comprise of the conceptual, empirical and theoretical framework. Chapter three is the research methodology which mainly concerns itself about the design of the study, the method of data collection, sample size, sampling technique, method of data analysis and the decision rule. The second to the last chapter, chapter four comprise of the research data presentation and analysis and the last chapter, chapter five is the summary, conclusion and recommendation of the research.
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