ASTRACT
This study examines the roles,
operations and structure of the Nigerian capital market. It also went ahead to
examine the relationship between capital market development and economic
growth. Time series data obtained from Central Bank of Nigeria (CBN) and
Nigeria stock Exchange (NSE) were analyzed using simple regression model. The
data set covers annual time series data from 1990-2005. Results showed that
capital market development indicators like market size, liquidity and
efficiency exert positive influence on Economic growth.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
A
major engine of economic growth and development of any nation is its capital
market.
The
capital market is a market where equities, shares and bonds are issued and
traded either via exchange or over-the-counter market. It impact positively on
the economy of any nation by providing financial resources through its
intermediation process, for the financing of long-term projects. The capital
market is made up of various institutions (financial) established for the
purpose of mobilization and efficient utilization of long-term development of
any financial system. This is a market where investors provide long-term funds
and are given long-term financial assets (securities) in exchange by the
borrowers otherwise known as the issuers. Capital market is very important in
any nation that needs to grow economically and otherwise because; it
facilitates the provision of fund for new business and already existing business,
income for lenders and finally promotes investment in corporate securities.
In
principle, a well-develop capital market should increase savings and
efficiently allocate to productive investments, which leads to an increase in
the rate of economic growth. The market contributes to the mobilization of
domestic saving by enhancing the set of financial instruments available to
savers to diversity their portfolios.
A
well-developed capital market share – ownership provides individuals with a
relatively liquid means of sharing risk when investing in promising projects. Capital
markets help investors to cope with liquidity risk by allowing those who are
hit by a liquidity shock to sell their shares to other investors who do not
suffer from a liquidity shocks. The result is that capital is not prematurely
removed from firms to meet short-term liquidity needs. Moreover, capital
markets play a key role in allocating capital to the corporate sector, which
will have a real effect on the economy on aggregate.
The market is usually organized into primary where new securities are
bought and sold and secondary market where outstanding securities are bought
and sold. However , the capital markets not really a market in the traditional
African sense. It is rather a network of institutions that arranged for
long-term financial instruments, like debentures stocks, mortgages, and shares
(Okafor, 1983).
It
is a known fact that capital provides the impetus for the effective and
efficient combination of factors of production to ensure sustainable economic
growth. The capital market which is the major segment of any financial market
provides a setting through which medium and long-term funds are provided by
saving surplus unit and channeled into production by deficit units.
Capital
market from the monetary growth perspective provides a means for the exercise
of monetary policy through the issues and repurchase of government securities
in liquidity market. In addition, a well-developed and active market alters the
pattern of demand for money, and booming market creates liquidity, and hence
spurs economic growth.
The market has strategic roles it plays it in the financial system of a
nation. Levine (1991) listed these roles as: mobilization of saving for
investment, corporate governance, creating investment opportunities for small
investors, raising capital for business, redistribution of wealth, barometer of
the economy, and government capital raising avenue for development projects.
There
is a strong argument amongst economists as it concerns the relationship between
capital market and economic growth, some are for while, others are against.
Economic growth is an increase in the economy’s ability to produce real output
of goods and services (Baye and Jamsen, 2006). Putting it in a different form,
economic growth is the result of abstention from current consumption. There are
however two forms of commodities, which are consumption and capital goods,
where capital goods are used for the production of other commodities. In
practice, household buy consumption goods while firms buy capital goods. Be it
as it may , all incomes are not spend and this result to net savings (saving
minus borrowing) is positive. For this reason, household
abstaining from current consumption for future consumption make resources
available for investments in capital goods, which add to the nation’s capital
stocks and provides for expanded production, and so an economy grows
(Samuelson, 1980).
The
researcher is not ignorant of the fact that , so many empirical studies on
capital (stock) market development and economic growth has been carried out by
Economist researchers like Demirguckunt and Levine, 1996a, b; singh, 1997;
Rousseau and Wachtel, 1998; Atje and Jovanovic, 1993; Levine and Zervos, 1996;
Agarwal, 2000; and a host of other seasoned researchers. However, most of their
works are on cross-country basis. It is on this ground, that the researchers
thought it worthwhile filling the gap of the relationship between capital
(stock) market development and economic growth in a single country, using
Nigerian economy as a case study.
1.2 STATEMENT OF RESEARCH PROBLEM
Even
though, the Nigerian Capital Market has in no small measure contributed
significantly to the growth and development
of industrial capacities in Nigeria, certain lingering problem such as: Small
size of the market; high cost of raising fund; inadequacy in information
dissemination amongst the market participants; and the unsatisfactory liquidity
state of the market; still constraints it’s optimal operations.
It
is a known fact that, government policies can affect the performance of any
nation’s capital market and consequently determine what happens to the nation’s
economic growth. The frequent intervention in the capital market activities by
the Central Bank of Nigeria (the apex monetary regulatory body) has raised so
much concern to many individuals and organizations that, the stakeholders of
the market are left with no option other than to known how the capital market
development significantly effect economic growth. Some examples of the recent
policies of the Central Bank of Nigeria that have caused significant changes in
the market are: the untimely reversal of the margin trading policy which halted
the fueling of the bull market as well as consequent increased pressure on the
banks a few month from the halt of the banks in
2008, the increase in Monetary Policy Rate (MPR) from 9.50 percent to 10.5
percent in 2008, the increase in Cash Reserved Ratio (CRR) from 2 percent to 4
percent in 2008 and the policy of harmonizing the banks year end......
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Item Type: Postgraduate Material | Attribute: 106 pages | Chapters: 1-5
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