ABSTRACT
The study investigated the impact of Nigerian Stock
Exchange on economic development in Nigeria. The descriptive survey design was
used in the study. The target population comprised employees in the employment
of financial institutions in Lagos metropolis. A sample of 200 senior
management employees was randomly selected from ten financial institutions in
the metropolis. A 20-item self-developed questionnaire with Likert
scale was used in the study. Pearson product moment correlation co-efficient
statistical method was used to test hypotheses, and the results of the analysis
revealed that:
1.There is a significant relationship between Nigerian
Stock
Exchange and economic growth in Nigeria.
2.Activities in the Nigerian Stock Exchange have
a significant impact on economic growth in Nigeria.
3.The performance of the stock market has a
significant impetus for economic growth and development.
From the findings of this study, it can be concluded
that the stock market promotes economic growth is not in doubt. Hence, there is
the need to restore confidence to the market by regulatory authorities’
activities that portray transparency, fair trading transactions and dealings in
the stock exchange.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Nigerian
Stock Exchange is an engine of economic growth and 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 N600, 000 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 by more than N1 million, yet local participation of the issued
was terribly poor. An as result of poor local participation federal government
established several economic programmes with hope to foster economic and
financial development, such Structural Adjustment Programme (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 the level of growth and development of
the economy. Chinwuba and Amos (2011) note that Nigerian Stock Exchange is one
of the major institutions that acts in propelling a prostrate economy for
growth and 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 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 economy 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 channelled 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
There
is argument amongst researchers and economists as to the relevance of the
financial system in economic growth and development. The literature is awash
with the views of many influential economists like Robinson (1952), Meier and
Seers (1984), Lucas (1988), and Stern (1989) who believed that finance plays an
in consequential (if any) role in economic growth and development of nations.
A
contrary view is however held by another group of researchers and economists to
the effect that financial system of a country plays an important role in
economic growth. Those that have demonstrated this line of thinking in their
research work included Schumpeter (1932), Bagehot (1962), Cameron (1967),
Goldsmith (1969), Mckinnon (1973), Shaw (1973) and Ojo (1984).
Building
on this line of thinking, Gelb (1989), Ghani (1992), King and Levine (1993a,
1993b) and De Grogorio and Guidotti (1995) demonstrated how measures of banking
development are strongly correlated with economic growth in a cross section of
countries. Besides evaluating the general importance of the financial system in
economic development, other researchers had stressed empirically the specific
role of Nigerian Stock Exchange (stock and bond markets) in economic growth.
Despite
the popular belief that democracy promotes economic activities which in turn
engenders economic growth, the growth of the Nigerian Stock Exchange in Nigeria
is still very small in relation to the size of the economy. CBN (2007) has it
that a comparative analysis of equity market capitalization of the Nigerian
Stock Exchange with some countries in North and South America, Asia, Europe and
Africa shows that the Nigerian market is relatively very small. Worse still are
the attendant ugly consequences of the Nigerian Stock Exchange meltdown,
characterized by the crash of the market capitalization from a high record of
N13.5 trillion in early 2008 to less than N4.5 trillion in the corresponding
period of 2009. This development necessitated an investigation by the House of
Representatives, through its committee on Nigerian capital market, of the
circumstances surrounding the 2009 crash of the Nigerian capital market, and
this investigation is otherwise known as the Nigerian Stock Exchange probes.
However,
given these scenario, one begin to wonder if the Nigerian Stock Exchange has
really fared well in terms of its impact on the growth of the Nigerian economy
since the return to civilian administration in Nigeria. Suffice it to re-state
here that no past focused on this very important period (beginning from 1999),
which this study intend to cover. What is seen in other related works is a
combination, in varying degrees, of periods of military and civilian rule.
Given these conflicting views, it is left to empirical investigation to
determine whether or not stock market (financial system) development
accelerates economic growth, particularly in Nigeria.
Therefore, there has been a concern by
individuals and even corporate bodies alike as to whether the Nigerian Stock
Exchange is actually achieving this laudable goal of capital
market-led-development. To this end, the following research problems were
poised:
1. What is the impact of Nigerian Stock Exchange
on economic development in Nigeria?
2. What is the direction of causality
between Nigerian Stock Exchange performance and economic development in
Nigeria?
3. What is the transmission mechanism between
Nigerian Stock Exchange performance and economic development in Nigeria?
1.3 Objectives of the Study
The
broad objective of this study is to assess the impact of Nigerian Stock
Exchange on economic growth in Nigeria. To achieve this, the specific objectives
of this study are to:
1. Investigate the relationship between
Nigerian Stock Exchange and economic growth in Nigeria.
2. Examine whether the activities in the
Nigerian Stock Exchange impact positively on the economy.
3. Determine if the performance of the stock
market is an impetus for economic growth and development.
1.4 Research Questions
1. Is there any relationship between
Nigerian Stock Exchange and economic growth in Nigeria?
2. Do the activities in the Nigerian Stock
Exchange impact positively on the economy?
3. Do the performance of the stock market is
an impetus for economic growth and development?
1.5 Research Hypotheses
1. There is no significant relationship
between Nigerian Stock Exchange and economic growth in Nigeria.
2. Activities in the Nigerian Stock Exchange
have no significant impact on economic growth in Nigeria.
3. The performance of the stock market has
no significant impetus for economic growth and development.
1.6 Significance of the Study
The
study will be useful to scholars of financial discipline, the government of
this nation, participants or operators in the Nigerian Stock Exchange and other
stakeholders as it will provide policy recommendations on the basis of its findings.
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.
The
outcome of this study is significant in that it is intended to contribute to
the growing body of literature on quality of project financing management in
both public and private sectors in general, and at the same time contribute to
the conceptual treatment of market capital applications to development
processes in project finance specifically. Second, there is a potential for
other public agencies to benefit from this study. Additionally, this study will
focus on the departments/groups which are sub-units of organizations,
illuminating how departments/groups can benefit from components of project
financing.
1.7 Scope of the Study
The
researcher intends to review the structure and relevant aspects of operations
and developments in the Nigerian capital market, with main focus on the
determination of the impact of Nigerian Stock Exchange on economic development
in Nigeria. Therefore, the study is not to compare the Nigerian capital with
those of other countries, because theoretically and practically, Nigerian Stock
Exchange are basically the same but may differ in their levels of developments.
The
study will be restricted to a period of twenty four years from 2000 to 2012.
The choice of the timeframe is predicated by the fact that the Nigerian Stock
Exchange witnessed a lot of changes with the introduction of the 1986 SAP and
its obvious implication. The major limitation in this study is that it will
rely only on secondary data generated from the publications of Nigerian Stock
Exchange (NSE), Securities and Exchange Commission (SEC), Central Bank of
Nigeria (CBN) and National Bureau of Statistics (NBS) as well as other
materials relevant to the study as access to these materials is difficult.
1.8 Definition of Terms
The
operational definition of terms used in the study is as follows:
Capital
Market: It is defined as a collection of financial institutions set up for the
granting of medium and long - term loans. It is a market for government
securities, for corporate bonds, for the mobilization and utilization of long
term funds for development; the long term end of the financial system.
Commercialization:
This is defined as the reorganization of enterprises wholly or partly owned by
the federal government in which such commercial enterprises shall operate as
profit making commercial ventures without any intervention from the federal
government.
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.
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