EFFECT OF NIGERIA STOCK EXCHANGE ON INDUSTRIAL DEVELOPMENT USING KADUNA STATE AS A CASE STUDY

EFFECT OF NIGERIA STOCK EXCHANGE ON INDUSTRIAL DEVELOPMENT USING KADUNA STATE AS A CASE STUDY

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CHAPTER ONE

INTRODUCTION

1.0              INTRODUCTION

Industrial growth forms the basis for industrial development is not only needed for its ability to improve living standards. It also acts as a weapon for building national strength and prestige. Therefore industrial development implies the increase of industrial expansion of quality and quantity of output and the institutionalization of industrial growth process. It also involves technical activities of a routine nature that concerned with translating research findings or after with translating research findings or offer scientific knowledge into product process (Nyong 2003).

The stock market plays a major role as an economic institution which enhances the efficiency in capital formation and allocation. It enables both industries and the government to raise long-term capital which enables them to finance new projects and expand other operations. In this manner, “Alile” (1984) observed that the performance of the economy is boosted when capital is supplied to productive economic units. Furthermore, as economics continue to develop, additional funds are therefore needed to meet the rapid expansion and the stock market therefore serves as an appropriate tool in the mobilization and allocation of funds among competing users which are critical to the growth and efficiency of the economy. It is in this light that the stock exchange market acts as a barometer for economic and industrial performance in the sense that it assists to allocate the necessary capital needed for the consistent growth and development for both industrial and the economy (Alile, 1984).

Alile (1987) further argued that the determination of the overall growth of an economy depends on how efficiently the stock market performs in its locative functions of capital. When the stock market mobilizes savings, it simultaneously allocates a larger portion of the same to firms with relatively high prospects as indicated by their returns and level of risk. The significance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity thus enhancing economic expansion and growth.

Stock markets are a vital component for economic development as they provide listed companies with a platform to raise long-term capital and also provide investors with a forum for investing their surplus funds. Stock markets therefore encourage investors with surplus funds to invest them in additional financial instrument that matches their liquidity preferences and risk appetite. Better savings mobilization is critical to the growth and efficiency of the economy stock market liquidity again helps to reduce the downside risk and cost of investing in projects that do not pay-off for a long-term. With a liquid market the initial investors do not lose access to their savings for the durations of their investment project because they can quickly and easily sell their stake in a company as noted by (Bencivenga and Smith, 1991).

The stock market being a major component in the financial sector of most developing economics such as Nigeria serves a pivotal role in contributing towards economic growth through diversification, mobilizing and pooling of savings from difference investors and availing them to companies for optimal utilization. As much as the stock markets are important in facilitating privatization channels and diversification of the financial sector services, they also offer the investors alternative investments to put their fund in. however, they face serious constraints if not properly monitored and adequate measures taken to curb any externalities. Most stock market especially those in the developing countries face constraints which result in serious implications such as liquidity issues, absence of activities and absence of well developed investors’ base.

1.1       BACKGROUND OF THE STUDY

Nigerian Stock Exchange is an engine of industrial development globally; Nigeria inclusive is made up of markets and institutions which facilitate the issuance and secondary trading of long-term financial instrument. The history of Nigerian Stock Exchange could be traced to 1946 when the British colonial administration floated a local loan stock bearing interest at 3% 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; yet local participation of the issued was terribly poor. An as result of poor local participation federal government established several economic programs with hope to foster economic and financial development, such Structural Adjustment Program (SAP) 1986, Vision 2010, Vision 2020, Millennium Development Goal (MDGs), National Economic Empowerment Development Strategy (NEEDS), State Economic Empowerment Development Strategy (SEEDS), and other development plans.

Recently, Nigerian Stock Exchange has experienced unprecedented growth which was attributed to the banking sector reform of 2004-2005. (Nwankwo, 1991) says that Nigerian Stock Exchange has helped government and corporate entities to raise long term capital for financing new projects, and expanding and modernizing industrial and commercial concerns. Pedro and Erwan (2004) assert that financial market development raises output by increasing the capital used in production and by ensuring that capital is put into best uses. Beckaert et al (2005) analyze that Nigerian Stock Exchange development would lead to financial liberalization, which will lead to a 1% increase in annual real economic growth.

Studying the link between domestic stock market development and internationalization, Laessens et al., (2006) using a panel data technique concluded that domestic stock market development as well as stock market internationalization are positively influenced by the log of GDP per capita, the stock market liberalization, the capital account liberalization and the country growth opportunities and negatively influenced by the government deficit/GDP ratio. Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The Nigerian Stock Exchange provides a means through which this is made possible. It is on the premises that this research paper wishes to examine the impact of the Nigerian Stock Exchange on Economic Growth and Development from 1990 to 2011.

The Nigerian Stock Exchange is 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 finds from the savings of other economic agents. The Nigerian Stock Exchange 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. The sourcing of long-term finance through the Nigerian Stock Exchange is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).

The Nigerian Stock Exchange effectively started operations in Nigeria 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. Since then, various forms of financial instruments have been issued in the Nigerian Stock Exchange by new and existing business to finance product development, new projects or general business expansion.

The capital market, no doubt, is pivotal to industrial development. Chinwuba and Amos (2011) note that Nigerian Stock Exchange is one of the major institutions that acts in propelling a prostrate industrial 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 Nigerian Stock Exchange 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 Nigerian Stock Exchange functions as an economic barometer for galvanizing economic activities.

The journey to the present democratic experience in Nigeria commenced on May 29,1999, when the military government returned power to civilian administration. The agitation for the exit of the military was embarked upon because of the popular belief among the stakeholders in the economy that, democracy, among other things, promotes economic growth. Supporters of democracy also argue that the motivation of citizens to work and invest, the effective allocation of resources in the market place, and profit-maximizing private activity can all be maintained in a climate of liberty, free-flowing information and secured control of property (North, 1990). In the light of the above background, the question that would readily come to mind is whether or not Nigerian Stock Exchange has significantly impacted on the growth of the Nigerian economy, given the enabling environment provided by the supportive democratic structure. Indeed, this is one question that past related empirical work have failed to answer. This study is therefore undertaken to satisfy this “curiosity” and hence fill the existing gap.

Saving, capital formation and economic growth have been central to the economic development debate for several decades. The links between these issues, on the one hand and direction of causality on the other, still remain subject to further analysis across countries. Accepting that the relationship is unidirectional (i.e. moving from savings to investment and hence to economic growth) may be misleading. (Ben, 1999), stressed that Nigerian Stock Exchange provides arrangement through which households, firms, and government that intend to invest more than they can bid for the funds of other spending unit who have surplus funds, and this is necessary for economic growth. Capital markets are the complex of institutions and mechanisms through which long –term funds with maturity of 5years and above are pooled and made available to business, governments, individual, and instruments already outstanding are transferred. As in the case of the money market, the capital markets are local, regional, and national in scope, (Bekaert, 1993).

Mobilization of resources for national development has long been the central focus of development economists. As a result of this, the centrality of savings and the investment in economic growth has been given considerable attention in the literature Rostow (1960), Malinvaud (1997), Soyode (1990), Aigbokan (1995), Samuel (1996), Demirguc-Kunt and Roos (1996), for sustainable growth and development, funds must be effectively mobilized and allocated to enable business and the economy harnessed their human, material, and management resources for optimal output.

The existing literature clearly shows that developed economies had explored the two channels through which resources mobilization affects economic growth, and development – money and Nigerian Stock Exchange (Demirguc-Kunt and Roos, 1996; Samuel, 1996). This is however, not the case in developing economies where emphasis was placed on money market with little consideration for Nigerian Stock Exchange (Nyong, 1997),

Since the introduction of structural adjustment programme (SAP) in Nigeria the stock market has grown very significantly. Alile (1996), Soyode (1990). This is as a result of deregulation of the financial sector and privatization exercise which exposed investors and companies to the significance of the stock market. Equity financing became one of the cheapest and flexible sources of finance from the Nigerian Stock Exchange and remain a critical element in the sustainable development of industrial sector of the economy (Okereke, 2000).  The line between the stock market performance and economic growth has often generated strong controversy among analysts based on their study of developed and emerging markets Samuel (1996); Demirguc-Kunt and Roos (1996); Akinifesi (1987); Levine and Sara (1996); Obadan (1998); Onosode (1998); Emenuga (1998); Osinubi (1998); According to Nyong (1997) the financial structure of a firm, that is, the mix of debt and equity financing, changes as economies develop, the tilt is however, more towards equity financing through the stock market.

As economies develop, more funds are needed to meet the rapid expansion. The stock market serves as a veritable tool in the mobilization and allocation of savings among competing users, which are critical to the growth and efficiency of the economy (Alile, 1984).

The determination of the overall growth of an industry depends on how efficiently the stock market performs its allocative functions of capital. As the stock market mobilizes savings, concurrently it allocates a larger proportion of it to the firms with relatively high prospects as indicated by its rate of returns and level of risk. The importance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity, thus enhancing economic expansion and growth (Alile, 1997).

The role of the financial system in promoting economic growth (and development) cannot be over emphasized. The financial system comprises of the central bank, commercial banks, mutual funds, brokerage firms, discount houses, and stock exchange, to mention just few. These institutions trade in financial instruments such as domestic currency, foreign currency, stocks, bonds, derivatives and so on, and in the process mobilize funds from surplus unit (savers) to deficit unit (investors). This helps business corporations to increase investment and expand production, and ultimately accelerate economic growth.

The controversies surrounding the role of financial system in the economy started with Schumpeter (1912) who argued that in a well functioning financial system, banks help to facilitate economic growth by enhancing technological innovation through identification and funding of entrepreneurs with the best chance of successfully implementing innovative products as well as production process. Supporting this view, Bagehot (1873) and Hicks (1969) asserted that the development of the financial sector helped to trigger industrialization in England by increasing the access of the people to funds, which in turn they used to finance and execute capital projects. Recently, Levine (1991) argued that developed stock market reduces both liquidity shock and productivity shock of businesses. Similarly, Levine and Zervos (1998), and Khan and Senhadji (2000) stressed that the establishment of stock market has played a significant role in the development of banking institutions, particularly in emerging market economies. Thus, the authors believe that the development of the financial sector (and stock market) contribute meaningfully to economic growth. Contrary to the views of Bagehot, Schumpeter and Hicks, some scholars argue that financial system does not really matter in the growth of the economy. For instance, Nobel laureates like Gerald Meier and Dudley Seers (1984) and Stern (1989) did not accord any role to finance (or financial system) in their discussion of development. Moreover, Stiglitz (1993) argued that stock market liquidity does not provide incentives for acquiring information concerning firms or improving corporate governance. Besides, Shliefer and Summers (1988) asserted that stock market development may hinder economic growth by promoting counter-productive corporate takeovers. Furthermore, Singh (1997) argued that stock market may not be important in attaining higher economic growth.

1.2       STATEMENT OF THE PROBLEM

Coupled with the existing institutions one can claim that the entire spectrum of the Nigeria stock market has not been sufficiently managed when compared with the capital units of similar or laser aged units in the developing countries. They noted that, where the market is highly and unreasonably speculative, investors will be discouraged from parting with their funds for fear of incurring financial losses. In situations like the one mentioned above, has detrimental effect on economic growth of any country, meaning investors will refuse to invest in financial assets. The implication is that companies cannot raise additional capital for expansion. Thus, it suffices to say that efficiency of the capital market is a necessary condition for growth in Nigeria (Nyong, 2003).

The factors responsible for this are identified to include

1.      High cost of transaction

2.      Lack of transparency

3.      Poor economic performance

4.      Corruption

5.      There is price fixing and over valuation of shares.

This study intends to evaluate the performance of the effect of Nigerian stock exchange in terms of its trading activities and determines the extent to which its contributes to the capital formation process of the economy if at all there is between them.

1.3       PURPOSE OF THE STUDY

In general the study hopes to take a close look at the effect of Nigerian stock exchange in industrial development, below are some of the reason this research work is embarked upon.

1.      Find out the extent to which Nigerian stock exchange has helped in the growth and development

2.      Find out whether Nigerian stock exchange has contributed to the industrial development.

3.      Find out if Nigerian stock exchange is facing problem of delay in delivery and settlement in stock transaction.

4.      Find out whether Nigerian stock exchange are having financial problem in transaction.

1.4       RESEARCH QUESTIONS

1.      Why Nigerian stock exchange has not helped in the growth and development in industrial sector?

2.      Why Nigerian stock exchange has not contributed in industrial development?

3.      Why Nigerian stock exchange markets are facing problem of delay in delivery and settlement of stock transaction?

4.      Why Nigerian stock exchange is having financial problems in transaction?

1.5       RESEARCH HYPOTHESIS

Hi: Nigerian stock exchange has not helped in the growth and development of industrial sector.

Ho: Nigerian stock exchange has helped in the growth and development of industrial sector.

Hi: There is no contribution made in Nigerian stock exchange in industrial development.

Ho: There are contributions made in Nigerian stock exchange of industrial development.

Hi: There is no problem of delay I delivery in Nigerian stock exchange in industrial development

Ho: There are some problems of delay in delivery in Nigerian stock exchange.

Hi: There is no financial problem facing Nigerian stock exchange in transaction.

Ho: There are financial problems facing Nigerian stock exchange transaction

1.6       SIGNIFICANCEOFTHE STUDY

The role of stock exchange and a catalyst in the development of the economy has not been a question of debtor. The stock exchange exists as sources of fund to the industrial development and also for the channeling of personal savings stock into industrial place for trading company’s stock. It also creates room for capital widening stock rather than deeping it. The benefit of stock exchange quotation is the result of lower cost of capital when raising fund through the market as stock exchange helps to allocate funds between industries and also makes funds available to the most productive industries which hence develop the nation.

1.7       SCOPE OF THE STUDY

The scope of this study covers Nigeria stock exchange and is geared towards finding the effect of Nigeria stock exchange on industrial development, as a marketing floor for quoted share and stock thereby providing liquidity for the shares and stock helps in the moping of units of inevitable funds which on the aggregate down large enough capital.

1.8       LIMITATIONS OF STUDY

This study is based on the analysis of both primary and secondary data that will collected by administering questionnaire, interviews, journal to respondents.

Time spam for the project work and financing are major problem encounter in the process of this research work. The result and conclusion of this study might not be accurate due to reliability of the data & limitation on the variables selected & the time span considered.

Limitation of this research work is the lack of adequate information from the staff of Nigerian stock exchange considering the information as top secret. In ability to have access to vital materials considering such materials are confidential.

1.9       DEFINITION OF TERMS

Industrial development: the increase of industrial expansion of quality and quantity of output in industrial growth process.

Stock: the ability to mop-up financial capital for investment purpose.

Liquidity of a Stock Market: This relates to the degree ofaccess, which investors have in buying, and selling of stocks in such a market. The more liquid a stock market is, the more investors will be interested in trading in the market.

Investor: a person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit.

Shareholders: An individual, group, or organization that owns one or more shares in a company, and in whose name the share certificate is issued.

Stock exchange: General term for the organized trading of stocks through exchanges and over-the-counter.




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