CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND TO THE STUDY

The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. 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 (Alile 1984).

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). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. However, the paucity of long-term capital has posed the greatest predicament to economic development in most African countries including Nigeria.

Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long-term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment.

The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005). Okereke-Onyiuke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans.

In 1986 Nigeria embraced the International Monetary Fund (IMF)-World Bank Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s.The programme was proposed as an economic package to rapidly and effectively transformed the Nigerian economy within two years (Yesufu 1996). However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of government to judiciously implement some of its policy measures Oyefusi and Mogbolu 2003). The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%,interest deregulation from August 1987, financial market reform and public sector reforms which entails the full or partial privatization and commercialization of about 111 public owned enterprises. The Nigerian Stock Exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank 1994; Anyanwu 1993; Anyanwu et al. 1997; Oyefusi and Mogbolu 2003).

The introduction of SAP in Nigeria has resulted in a very significant growth of the country’s stock market as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile1996;Soyode 1990). Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market yet its impact at the macro-economy was negligible. Again the capital market was instrumental to the initial 25 banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005.The stock market has helped government and corporate entities to raise long-term capital for financing new projects, and expanding and modernizing industrial/commercial concerns (Nwankwo 1991).

Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various government and corporations in Nigeria.

The major focus of this research is to empirically assess with the contribution of capital market to economic growth in Nigeria.

1.2      STATEMENT OF THE PROBLEM

The capital market is one of the main avenues investors invest their hard earned currency in anticipation of good returns or yield. But since the inception of the global economic crunch in addition to a number of causing factors the impact of the capital market has remained rather docile. The federal government effort at revamping it has still not yielded enough result.

In the light of this, the following statement of research questions are being raised.

1.           Does the capital market enhance the growth of the Nigerian economy?

2.           Does the capital market enhance and promote investment in Nigerian economy?

3.           Does the capital market help to increase value of transactions (government and industrial securities)?

1.3      RESEARCH OBJECTIVES

This research work seeks to achieve the following objectives.

1.           To ascertain whether the capital market enhance the growth of the Nigerian economy.

2.           To critically examine whether capital market enhance and promote investment in Nigerian economy.

3.           To verify whether the capital market help to increase value of transactions (government and industrial securities).

1.4      SCOPE OF THE STUDY

This study is undertaken to evaluate the impact of Nigerian Capital Market as an Instrument in mobilization of investment capital. As such, this study is restricted to all companies quoted on the floor of the Nigerian Stock Exchange market. Temporally or in term of time series, a period of twenty seven years is used i.e. 1981 to 2008 using some market indicators as means of assessing the impact of the capital market in mobilizing investment in Nigeria. It is hoped that this will help to achieve the stated objective of the study.

1.5      RESEARCH HYPOTHESIS

The following hypothesis will be tested

Hypothesis I

Ho:   The capital market does not enhance the growth of the Nigerian economy

H1:   The capital market still enhance the growth of the Nigerian economy

Hypothesis II

Ho:   The capital market does not enhance and promote investment on the Nigerian economy.

H1:   The capital market still enhances and promotes investment on the Nigerian economy.

Hypothesis III

Ho:   Capital market does not help to increase value of transactions (government and industrial securities) in Nigeria.

H1:   Capital market helps to increase value of transactions (government and industrial securities) in Nigeria.

1.6      SIGNIFICANCE OF STUDY

This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs.

Beneficiaries

-              Stakeholders: This study will be important and beneficial to stakeholders of an organization to know the role of the Nigerian capital market in mobilizing investment in Nigeria economy.

-              The Government: It will acquaint the government of the importance of Nigerian Capital Market and how it should be properly managed.

-              The public: This study will help to restore the lost confidence of the public as regard the Nigerian capital market and investment mobilization in Nigeria economy.

-              Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.  

1.7      LIMITATIONS OF THE STUDY

A study of this nature is undoubtedly not without some limitations.

The researcher was face with a lot of constraints and difficulties in getting all the needed information from the source documents. The data used in the study are based on available information on capital market from the secondary sources.

However, these limitations will and do not undermine or dampen the benefits of the study and the conclusions reached in the study by the researcher.

1.8      DEFINITION OF TERMS

        This subsection arises because of the need to make clear some technical terms that will be used in this study which are capable of having more than one meaning or interpretation.

Market Capitalization

        This is the overall market value of all listed securities on the exchange. It is calculated by multiplying the share price with the total number of shares in issue.

Turnover Ratio

        This is the volume of activities undertaken by a company. It is the total number of shares traded at a given period.

Listed Securities

        These are long term securities such as bonds, preference shares and ordinary shares which are traded on a recognized stock exchange.

New Issues

        These are newly created securities of corporate entities or government offered for subscription to the public.

Trading Floor

        This is s specific area of a stock exchange where listed securities are bought and sold.

Clearing System

        Procedure put in place by a security exchange to compare trading details between stock brokers before settlement take place.

Issue

        Securities of a company or government sold by way of public offering or private placement at a given point in time.

Right Issue

A new issue of securities of a company offered to its existing shareholders in proportion to their holding.

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