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
abilityto 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?
1.4 Objectives
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
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