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Impact Assessment of Capital Market to Economic Growth: A Study of the Nigerian Stock Exchange

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This project work assessed the impact of capital market to economic growth: A case study of the NSE from 1995-2009. Employing the ordinary least square multiple regression model, the hypothesis formulated were tested in order to ascertain the nature of the relationship between the capital market, NSE and Nigeria’s economic growth. While economic growth as the dependent variable was denoted by Gross Domestic Product (GDP), the capital market performance indicator, being the explanatory variable, were given as number of listed securities, volume of shares traded, market turnover etc. The result from the analysis and test of hypothesis at 5% significant level showed that over the period considered, there exists a high level of relationship between GDP and the capital market predictor variables as a whole. On the strength of these findings, the study recommends among others, that the relevant authorities should create an enabling environment of political and macroeconomic stability for the influx of foreign and local investment into the capital market for its growth and consequently the growth of the economy.

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Chapter One

Background of the Study

The capital market is the aspect of the financial system which mobilizes and channels long-term funds for economic development. The capital market embraces trading in both new issues (primary) and old issues of stocks (secondary). Securities are primarily of two types: debt and equity. The types of debt securities available on the Nigerian Stock Exchange (NSE) include Federal Government Development Stock (GDS), Industrial Loans, Preference, Stocks, Bonds etc, while equity securities mainly concern ordinary stocks which impose higher liabilities on the holders. Portfolio investment in the capital market deals with an institutional arrangement involving Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the operators and the investors.

Effective developments of the capital market are necessary for the following reasons.

The mobilization of savings from surplus economic units for channeling into national economic growth and development, the broadening of the ownership base of assets and thus, the creation of a healthy private sector through the empowerment of asset ownership. The promotion of rapid capital formation and real investment culture as against hot, short-term portfolio adjustments, the encouragement of a more efficient allocation of tangible wealth through changes in ownership and composition.

It is a widely accepted truth that the level of investment necessary to achieve economic growth and development requires huge capital outlay over a long period of time, perhaps, for longer than the period for which most surplus units are willing to stake their capital. This has been the bane of most developing countries of the world. Substantial capital is required to stimulate economic growth and thus enhance output and real sector growth of the economy. But the bitter truth is that this capital is not harnessed properly in the third-world countries either because of weak capital markets or poor financial infrastructure.

According to Charles (2002) asserts that the attainment of national development targets heavily relies on the integrity of the institutions set up to support macroeconomic policies targeted at poverty reduction. Central to the attainment of this objective is the modernization of the financial system through which money and capital markets could be developed in order to provide the much-needed capital formation necessary to propel economic development to desirable heights. Also, the capital for corporate investment can be made available through various sources like banks and non-bank financial institutions (insurance companies) mortgage, finance companies and individual alike.

An efficient capital market plays the role of capital mobilization but the pertinent question at this juncture is thus: how efficient is the Nigerian capital market with respect to generating enough capital formation for economic development? Some of the past studies in this area include Onwumere and Modebe (2007), Akujuobi and Akujuobi and Feldman and Kumar (1995) on the local scene, both studies by Onwumere and Modebe (2007) and Akujuobi and Akujuobi (2008) were unanimous in their conclusions that the Nigerian capital market is far from being developed, especially in terms of the attributes that define a well functional and efficient capital market; low capitalization, low liquidity, small number of securities and high concentration.

However, our worry with both studies is that while no empirical test appears to have been carried out by Owumere and Modebe, Akujuobi and Akujuobi employed the total market capitalization as the only measure of capital market performance.

The CBN (2006) recognizes such other performance indicators beside the total market capitalization to include market turnover, all share index, volume and value of shares as well as number of listed securities. At the international level, the study as carried out by Feldman and Kumar equally fell short of expectation in that it only related the total market capitalization to percentage of the GDP.


The Nigerian Stock Exchange (NSE)

Capital market activities in Nigeria commenced with the establishment of the Lagos State Exchange in 1960, which was backed by law in 1961.

The Lagos Stock Exchange was renamed the Nigerian Stock Exchange (NSE) in 1977, it began with nine (9) trading floors, located in Lagos established in 1961; Kaduna (1978); Port Harcourt (1980); Onitsha (1990); Ibadan (1990); Abuja (1999); Yola (2002) and Benin (2005). The Exchange started operations in Lagos in 1961 with 19 securities listed for trading. The NSE currently has 27b listed Securities Comprising 17 Government Stock, 50 Industrial Loans (Debentures/Preference) Stocks and 209 Equity/Ordinary Shares of Companies, with a total market capitalization of N2.23 trillion.



1.2     Statement of the Problem

The Nigerian capital market has grown tremendously since the establishment of the Nigerian Stock Exchange (formerly the Lagos Stock Exchange) in 1961.

The market capitalization of the Nigerian Stock Exchange (NSE) fell from N15.3 trillion in the first quarter of 2008 to N13.0 trillion in the third quarter, while the All-Share Index declined from 63,147.04 in the first quarter to 48,738.14 in the third quarter. The volume and value of traded securities also declined from 68.6 billion shares and N990.40 billion in the first quarter to 48.1 billion shares and N494.8 billion, respectively. The development was attributed to wrong expectations of price movement which led to panic dumping of shares and assets switching particularly into real estate and money market security investments. Speculations and perceived uncertainties were some of the key factors that led to divestment by many foreign portfolio investors from the country, as the global financial crunch continued to deepen.

Worried by the sustained recession that beset the capital market, the Federal Government on August 26, 2008 announced some short and long-term measures to boost the market, including the following: that the CBN would take appropriate measures to ensure adequate liquidity in the market that banks would restructure the existing facilities being extended to licensed stock brokers, that institutional and individual investors would allow for longer repayment periods.

On August 27, 2008, it was further announced that the new temporary limits would curtail negative price movements to a 1.0 percent fall from  the previous 5.0 percent. Prior to this announcement, the market had recorded a decline in its All-Share Index to 43, 199.47 on August 26, 2008, representing a 34.9 percent full from 49,263.87 in March. Following the announcement and the subsequent implementation of some of these measures, the markets initial reaction was quite positive as the NSE All-Share Index rose by 15.5 percent to 49,897.86 on September 2, 2008. However, the index later continued its slide and eventually dropped by 45.8 percent to close at 31,450.78 at end of December 2008. Also market capitalization fell from N13.3 trillion as at end – December 2007 to N9.5 trillion as at end – December 2008, reflecting the divestment of many foreign. Portfolio investors from the country, as a result of the global financial crunch and the quest to meet up with obligations in their home countries. These developments have, however, been attributed by market watchers to the underlying factor of “market correction” as many of the stocks were perceived to have been highly overvalued, given the excess demand that followed the market at the conclusion of the consolidation exercise.

Another impediment to integration of the Nigerian capital market with the global financial system was the issue of transfer of dividends and capital by the foreign investor. This issue has been tackled by the promulgation of the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree No. 17 of 1995. In particular, the decree guaranteed as unconditional transferability of funds through an authorized dealer in freely convertible currencies in respect of dividends or profit (net-taxes) attributable to the investment payment in respect of loan serving where a foreign loan has been obtained and the remittance of proceeds (net of all taxes) and other obligations in the event of a sale or liquidation of the enterprise or any interest attributable to the investment.



1.3     Objectives of the Study

This study is designed to achieve the following major objectives:

  1. Examine the effect of the activities/operations of the Nigerian Stock Exchange on the Nigerian economy.
  2. Highlight the roles of stock markets in economic development.

iii.      Determination of the collective effect of the Nigerian capital market performance indicators on economic growth.


The specific objectives include:

  1. To determine the options for effective capital market development.
  2. To explore the Nigerian capital market and its institutions.

iii.      Assessment of the effect of the individual Nigerian capital market performance indicators on economic growth.

1.4     Research Questions

The questions which this research seeks to find answers to are as follows:

  1. In what ways can government monetary and fiscal policy help in the development and growth of the Nigerian capital market?
  2. What are the causes of the financial distress on the capital market?
  3. What are the impact of the Nigeria Stock Exchange on the growth of the Nigerian financial sector?


1.5     Significance of the Study

The findings and recommendations of this study will be of great contribution to academic works as it is a contribution to the body of knowledge on the issue of capital market development in Nigeria, it would also aid other researchers the opportunity to carry out more research work on areas not covered by this study; this study will also help the government in the formulation of policy that will enhance the operation or activities of the Nigerian capital market, the study will equally be useful to organization and the society at large in the sense that knowledge about capital market development will continue to spread all over. Finally, the research will help the Nigerian capital market put in place measures that will help improve on the activities of the NSE.


1.6     Hypothesis

The hypotheses is stated as follows:

Hypothesis One

Null Hypothesis

H0:     Capital market does not have impact on the Nigeria economy.

Alternate Hypothesis

H1:     Capital market has significant impact on the Nigeria economy.


Hypothesis Two

Null Hypothesis

H0:        There is no significant relationship between the activities of the Nigerian stock exchange and the operation of the Nigerian capital market.

Alternate Hypothesis

H1:     There is a significant relationship between the activities of the Nigerian stock exchange and the operation of the Nigerian capital market.

1.7     Scope of the Study

This research work focused on the impact of the Nigerian capital market on the economy with a case study of the NSE. The research work will basically look at the analysis of the subject in question with regards to different scholars, experts and professionals in the capital market. It will also review some of the reform policies by the Nigerian capital market.

This study will take available data from 1995-2009. The choice of the time frame was due to the non-availability of some of the relevant data in the recent years and the desire to capture the vital issues on the Nigeria capital market.


1.8     Limitation of the Study

The major constraint of this research was sourcing relevant information from financial institutions and Nigeria capital market in relation to the subject matter.

Most of the Nigerian financial institutions were unable to release such information considered as critical to their survival and maintaining shareholders and public confidence. Another constraint was inadequate financial resources which affected the sourcing and collection of all relevant information needed for this study.

Finally, time was also a constraint as there was no adequate time to carry out an extensive research on such important study as regards capital market.

1.9     Organization of the Study

The research work is divided into five chapters. Chapter one, contains the general introduction. Chapter two reviews the related literature. Chapter three contains the methodology of the study. Chapter four, analyze and interpret the data. Chapter five summarizes, concludes and makes necessary recommendation.

Table of Contents




Table of Contents



1.1     Background of the Study                                                              1

1.2     Statement of the Problem                                                            4

1.3     Objectives of the Study                                                               6

1.4     Research Questions                                                                     6

1.5     Significance of the Study                                                             6

1.6     Hypothesis                                                                                 7

1.7     Scope of the Study                                                                      8

1.8     Limitation of the Study                                                               8

1.9     Organization of the Study                                                            8



2.1     Literature Review                                                                       9

2.2     Capital Market and Nigeria’s Economic Development                       10

2.3     Evolution of the Nigerian Capital Market                                        12

2.3.1  The Functions of the Nigerian Capital Market                                  14

2.3.2  Benefits of the Capital Market                                                       15

2.3.3  The Structure and Organization of the

Nigerian Capital Market                                                               15

2.3.4  Securities and Exchange Commission (SEC)                                    15

2.3.5  Functions and Responsibilities of SEC                                           16

2.4     The Nigerian Stock Exchange                                                        16

2.4.1  The Primary Market                                                                     18

2.4.2  The Secondary Market                                                                 19

2.4.3  Major Players in the Nigerian Stock Exchange                                 20

2.4.4  Functions of the Stock Exchange                                                   21

2.4.5  Benefits of the Nigerian Stock Exchange (NSE)                               23

2.6     Advantages of Nigerian Stock Market to the

Nigerian Economy                                                                       25

2.7     Market Infrastructure Development and Innovations                       25

2.7.1  The Automated Trading System                                                    25

2.7.2  The Central Securities Clearing System (CSCS)                               25

2.7.3  On-Line Trading                                                                         26

2.7.4  Code of Conduct for Capital Market Operators                                26

2.7.5  The Trade Alert                                                                          26

2.8     Theoretical Framework                                                                27



3.1     Introduction                                                                               29

3.2     Sources of Data                                                                          30

3.2.1  Method of Data Collection                                                           30

3.3     Model Specification                                                                      30

3.4     Estimation/Technique                                                                  31

3.4.1  Apriori Expectation                                                                     31

3.4.2  Statistical Criteria                                                                       32


4.1     Introduction                                                                               34

4.2     Presentation of Data                                                                   34

4.2.1  Data Analysis (Output of Multiple Regression Analysis)                    35

4.3     Interpretation of Results                                                              35

4.3.1  The Coefficient of Determination (R2)                                            36

4.3.2  F-Statistic                                                                                  36

4.3.3  Durbin-Watson (d) Statistics                                                       37

4.3.4  Standard Error                                                                           37

4.3.5  Akaike Info Criterion and Schwarz Criterion                                   38


5.1     Introduction                                                                               39

5.2     Summary                                                                                   39

5.3     Conclusion                                                                                 40

5.4     Recommendations                                                                       41

Bibliography                                                                               43

Appendix I                                                                                 46

Appendix II                                                                               46


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