CHAPTER ONE

INTRODUCTION

1.1         The Background of the Study

Currently, Nigeria is tagged a developing nation even though she is blessed with numerous natural resources. The problem of Nigeria can be resolved if resources are properly mobilized, resulting in efficiency in all sectors and aid proper development. As the case is today in Nigeria, various sectors remain undeveloped, and for economic progress there must be development in various sectors of the economy, including the capital market.

The development of the capital market, and apparently the stock market, provides opportunities for greater funds mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal (Inanga and Emenuga, 1997). Stock market promotes efficiency in capital information and allocation. It enables individuals and government to finance new projects which are capable of increasing productive capacity of a nation (Ohiomu and Enabulu, 2011). Adamopoulos (2009) stock market has contributed to the mobilization of domestic savings by enhancing the set of financial instrument available to savers to diversify their portfolios and provide an important source of investment capital at a reduced cost. The role of stock market has been very significant. According to Mala and White (2006) stock market is an important component of any financial sector of any economy. It is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy such as households, firms, and government are mobilized, harnessed and made available to various sectors of the economy (Nyong, 1997). The stock market plays an intermediation function. Riman, Esso and Eyo (2008) provide evidence of the relationship between stock market development and economic growth. Large, liquid and efficient capital market can ease savings mobilization and by mobilizing savings, capital markets enlarge the set of feasible investments projects. Since

1

worthy projects require large capital injection and some enjoy economies of scale, capital markets that ease resource mobilization can boost economic efficiency and accelerate long run economic growth (Idowu and Babatunde, 2011).

Investment remains the major catalyst to economic growth, while resource mobilization and allocation forms a vital pre-requisite to investment, the role of financial intermediary like stock exchange market in securing liquidity for long term investors cannot be undermined. These assist profitable investors in expanding their portfolio investment. However despite the performance of Nigerian stock market, there has been a large downturn in economic activity particularly in the real sector. Most productive activity will prefer long term borrowing relative to short term and the major objective of stock exchange market is to buy and sell securities by harnessing surplus public and private savings from actors and this is further invested optimally in real sector to facilitate economic growth.

The Nigerian Stock Exchange was incorporated on 5 September 1960 as the then Lagos Stock Exchange, under the Lagos Act of 1961, but operation fully took-off on 5 July 1961. The establishment of Lagos Stock Exchange was because of the Barback committee which was set up in 1958 by the Federal Government mainly to consider the ways and means of promoting stocks, bonds and shares in Nigeria. It is a non-profit making organization. To be able to meet the aspiration of its services, the Lagos Stock Exchange was transformed into Nigerian Stock Exchange on 2 December 1977 and governed by the Memorandum of Association.

While the Capital Market in Nigeria was informally started as far back as 1946, the basic institutional framework for the operation of the capital market (Issue of Share etc.) did not begin any operation until the establishment of the Lagos Stock Exchange. The major function of the market is dealings (i.e. lending and borrowing) in long-term loanable funds I.e. periods

2

ranging over 3 years. It is an institutional market for transferring funds from surplus economic units to deficit economic units.

In Nigeria, one major problem business enterprises face is the problem of financing their activities unlike what we observe in developed worlds. Through the stock exchange market, funds for long-term projects can be provided, but the commercial banks cannot provide such funds.

The Nigerian Stock Exchange (NSE) is the center point of the Nigerian Capital Market. The NSE provides a mechanism for mobilizing private and public savings, and makes such funds available for productive purposes. The Exchange also provides a means for trading existing securities. It also encourages large-scale enterprises to gain access to public listing. The NSE operates the main exchange for relatively large enterprises, the Second tier Securities Market) where listing requirement are less stringent for small and medium scale enterprises.

The Capital Market is the long-term end for financial market. It is made up of market and institutions, which facilitate the issuance and secondary trading of long-term financial instruments. Unlike the Money Market, which functions basically to provide short term funds, the Capital Market provides funds to industries and governments to meet their long-term capital requirements, such as financing for fixed investments - buildings, plants, bridges, etc.

The Nigerian Capital Market (NCM) is made up of the Nigerian Stock Exchange and a host of other institutions. The NSE being a part of the NCM would have some role to play in the development of the NCM, which would have an impact on the economy.

3

1.2         Statement of the Problem

There is abundant evidence that most Nigerian business lack long term capital. The business sector has depended mainly on some short term financing such as overdrafts to finance even long term capital. Based on maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of long and short term capital (Demirgue-Kunt & Levine 1996). Most recent literature on the NCM has recognized the tremendous performance the market has recorded in recent times. However the vital role of capital market in economic growth has not been empirically investigated thereby creating a research gap in this area. This study is to examine the contribution of the capital market in the Nigerian economic growth and development. Also there are some misconceptions on the NSE (Nigerian Stock Market), some think it is the same as the NCM (Nigerian Capital Market) and this study intends to make it clear that they are different.

1.3         Objectives of the Study

a)           To evaluate the performance of the NCM in relation to economic development and growth in Nigeria.

b)           To make recommendations as to how the operation of the market could be improve to boost economic growth and development in Nigeria.

1.4         Research Questions

This study intends to provide answers to the following questions:

a)      Is there any relationship between the Nigerian Capital Market and the Nigerian economy?

b)     Does Nigerian Capital Market perform to expectation?

4

1.5         Hypothesis of the Study