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ABSTRACT
This study was carried out to determine the effect of stock market on capital formation in Nigeria. The variables included in the model were, Gross Fixed Capital Formation, value of share traded, interest rate, inflation rate, commercial bank investment indicator, and Stock Market Capital. Data were sourced from CBN statistical bulletin (2011). The study employed OLS technique to determine the effect of stock market on capital formation. The empirical finding shows that stock market capital, commercial bank investment indicator, inflation rate, interest rate, value of share traded and Gross Fixed Capital Formation. Based on the findings, the following recommendations were made. The total liberalization of the financial sector and encouragement of Nigerians to take advantage of the stock exchange.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Almost all the economist laid emphasis on capital formation as the major
determinant of economic growth. The meaning of capital formation is
that society does not apply the whole of it’s current productive
activity to the needs and immediate desire of consumption, but directs
some part of it to the creation of capital goods, tools and instruments,
machines and transport facilities, plants and equipments all the
various forms of real capital that can so greatly increase the
efficiency of productive effort. The essence of capital formation is to
divert a portion of society’s currently available resources for the
purpose of increasing the stock of capital goods so as to make possible
for an expansion of consumable output in the future.
The research focuses it’s attention on Nigerian Stock Exchange which as
the most visible mirror of the formal capital market in the country. The
Nigerian Stock Exchange is one of the institutions on the capital
market, which specializes in all forms of marketing trading securities.
It is a network of individual institution and instrument. The market
plays a central and dispensable role for which is has been variously
described as the “hall mark” or the heart of the capital market.
The rapid economic development of any economy depends, among other
things, on ready access of adequate financial resources (Alile and Anao,
1990). The desire to develop financial market in an economy is
intimately connected with the objective of accelerating industrial and
agricultural development. Among this financial market is the stock
exchange, which deals with the mobilization of bank medium and long term
capital funds (Sule and Momoh, 2009). The mechanism of stock exchange
came into existence to enable investment, which were inherently illiquid
to become liquid through reconversion into cast at the decision of the
investor without inconveniency the company (Olowe, 1997). Today, words
like globalization have become familiar in economic and finance parlance
and past growing intern dependence of economics and financial markets
cannot be ignored.
The development of the capital market in Nigeria dates back to 1946,
when the first government securities was floated; the institutional
facilities for the operation was however absent and did not commence
until fifteen years later, when the Nigerian Stock Exchange (now the
Nigerian Stock Exchange) was established in 1961.
Consequently, in 1953, the Federal Government set up a committee under
Professor R.H. Barback to advise on ways and means to fostering a shares
market in Nigeria. The report of the committee was published in 1959
and it recommended among other things:
(1) The creation of facilities for dealing in shares
(2) The establishment of rules regulating transfer and;
(3) Measures to encourage saving and issue of government and other organizations.
As follow up to this report, the then Lagos Stock Exchange now Nigerian
Stock Exchange was incorporated on 15th September, 1960 through the
collective encouragement of the business community, the Nigerian
Industrial Development Bank Limited (NIDB) and the Central Bank of
Nigeria.
Conclusively, the availability of a secondary market endangers capital
formation and socio-economic development. The allocative function as
critical in determining the overall growth of the economy ie, the
financial sector. Therefore, the role of the Nigerian Stock Exchange in
the economy is an engine for capital formation saddles with the private
sector in general to achieve economic development program.
1.2 STATEMENT OF THE PROBLEM
The Nigerian Stock Exchange market is faced with numerous problems which
comprises of decreased trading activities where by persistent rise in
the demand for securities without a corresponding increase in its
supply. In this case, investments are not easily found for purchase.
Given the number of years since the Nigerian Stock Exchange has been
established and the substantial financial resources available in the
country, coupled with the existing institutions one can claim that the
entire spectrum of the capital market has not been sufficiently active,
especially when compared with the capital unit of similar or lesser aged
units in other developing countries. The factors responsible for this
could be identified to include:
(1) High Cost of transaction
(2) Lack of transparency and
(3) Poor economic performance etc.
The spinal effect of the global economic crisis on the Nigerian Stock
Exchange continued in 2009 with the exorbitant lending rate mounting
pressure on the stock market as a result of massive borrowed fund in the
market. The rush by stock investors to liquidate their investment to
repay their loans in order to avoid the excessive lending rate caused
the Nigerian Stock Market to crash. (Sere Ejembi, 2008) noted that it is
not the global financial crisis and the speculative sub prime mortgage
bubbles and bust alone that is responsible for the crash of the stock
market, other contributory factors lent support. Some of these, namely;
margin lending by the deposit money banks (DMBs), stock price
appreciation that had no correlation with the fundamentals in the
quoting companies and local investors opting to invest in foreign
capital markets to take advantage of the low stock price.
This study intends to evaluate the performance of the Nigerian Stock
Exchange interms of its trading activities and determine the extent to
which it’s contributes to the capital formation process of the economy
of at all there is causation between them.
1.3 RESEARCH QUESTION
The study will examine the following questions,
1. How does the Nigerian Stock Exchange influence capital formation in Nigeria?
2. What factors influence capital formation in the Nigerian economy?
3. What is the role of Stock Exchange on capital formation in Nigeria
1.4 RESEARCH OBJECTIVES
This study is primarily aimed at examining critically, the activities
and performance of the Nigerian Stock Exchange especially, the study
aims to;
1. To determine the impact of the Nigerian Stock Exchange on capital formation.
2. To evaluate the performance and growth of the Nigerian Stock Exchange.
3. To determine how the exchange could stimulate investment.
4. To quantify the relative importance of the Stock Exchange in determining the capital formation for national development.
1.5 RESEARCH HYPOTHESIS
The hypothesis that could be tested in this study is stated below:
(1) H0: The Nigerian Stock Exchange has no significant impact on capital formation.
(2) H1: The Nigerian Stock Exchange has significant impact on capital formation.
1.6 SIGNIFICANCE OF THE STUDY
The significant of this research is to examine the usefulness of the
Nigerian Stock Exchange as a vehicle for capital market shows that
Nigerian Stock Exchange contributes positively to the national
development because it portrays the capabilities to raise funds from the
surplus to the deficit for investment purpose.
Therefore, the design of an optimal capital structure, which ensures
adequate and sustainable growth for national development; this is the
responsibility of the Nigerian Stock Exchange. The beneficiaries of this
research work are the government, industries and individuals would
benefit from the capital market role on capital formation.
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