ABSTRACT
This study examines the roles, operations and structure of the Nigerian capital market. It also went ahead to examine the relationship between capital market development and economic growth. Time series data obtained from Central Bank of Nigeria (CBN) and Nigeria stock Exchange (NSE) were analyzed using simple regression model. The data set covers annual time series data from 1990-2005. Results showed that capital market development indicators like market size, liquidity and efficiency exert positive influence on Economic growth.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
A major engine of economic growth and development of any nation is its capital market.
The capital market is a market where equities, shares and bonds are issued and traded either via exchange or over-the-counter market. It impact positively on the economy of any nation by providing financial resources through its intermediation process, for the financing of long-term projects. The capital market is made up of various institutions (financial) established for the purpose of mobilization and efficient utilization of long-term development of any financial system. This is a market where investors provide long-term funds and are given long-term financial assets (securities) in exchange by the borrowers otherwise known as the issuers. Capital market is very important in any nation that needs to grow economically and otherwise because; it facilitates the provision of fund for new business and already existing business, income for lenders and finally promotes investment in corporate securities.
In principle, a well-develop capital market should increase savings and efficiently allocate to productive investments, which leads to an increase in the rate of economic growth. The market contributes to the mobilization of domestic saving by enhancing the set of financial instruments available to savers to diversity their portfolios.
A well-developed capital market share – ownership provides individuals with a relatively liquid means of sharing risk when investing in promising projects. Capital markets help investors to cope with liquidity risk by allowing those who are hit by a liquidity shock to sell their shares to other investors who do not suffer from a liquidity shocks. The result is that capital is not prematurely removed from firms to meet short-term liquidity needs. Moreover, capital markets play a key role in allocating capital to the corporate sector, which will have a real effect on the economy on aggregate.
The market is usually organized into primary where new securities are bought and sold and secondary market where outstanding securities are bought and sold. However , the capital markets not really a market in the traditional African sense. It is rather a network of institutions that arranged for long-term financial instruments, like debentures stocks, mortgages, and shares (Okafor, 1983).
It is a known fact that capital provides the impetus for the effective and efficient combination of factors of production to ensure sustainable economic growth. The capital market which is the major segment of any financial market provides a setting through which medium and long-term funds are provided by saving surplus unit and channeled into production by deficit units.
Capital market from the monetary growth perspective provides a means for the exercise of monetary policy through the issues and repurchase of government securities in liquidity market. In addition, a well-developed and active market alters the pattern of demand for money, and booming market creates liquidity, and hence spurs economic growth.
The market has strategic roles it plays it in the financial system of a nation. Levine (1991) listed these roles as: mobilization of saving for investment, corporate governance, creating investment opportunities for small investors, raising capital for business, redistribution of wealth, barometer of the economy, and government capital raising avenue for development projects.
There is a strong argument amongst economists as it concerns the relationship between capital market and economic growth, some are for while, others are against. Economic growth is an increase in the economy’s ability to produce real output of goods and services (Baye and Jamsen, 2006). Putting it in a different form, economic growth is the result of abstention from current consumption. There are however two forms of commodities, which are consumption and capital goods, where capital goods are used for the production of other commodities. In practice, household buy consumption goods while firms buy capital goods. Be it as it may , all incomes are not spend and this result to net savings (saving minus borrowing) is positive. For this reason, household abstaining from current consumption for future consumption make resources available for investments in capital goods, which add to the nation’s capital stocks and provides for expanded production, and so an economy grows (Samuelson, 1980).
The researcher is not ignorant of the fact that , so many empirical studies on capital (stock) market development and economic growth has been carried out by Economist researchers like Demirguckunt and Levine, 1996a, b; singh, 1997; Rousseau and Wachtel, 1998; Atje and Jovanovic, 1993; Levine and Zervos, 1996; Agarwal, 2000; and a host of other seasoned researchers. However, most of their works are on cross-country basis. It is on this ground, that the researchers thought it worthwhile filling the gap of the relationship between capital (stock) market development and economic growth in a single country, using Nigerian economy as a case study.
1.2 STATEMENT OF RESEARCH PROBLEM
Even though, the Nigerian Capital Market has in no small measure contributed significantly to the growth and development of industrial capacities in Nigeria, certain lingering problem such as: Small size of the market; high cost of raising fund; inadequacy in information dissemination amongst the market participants; and the unsatisfactory liquidity state of the market; still constraints it’s optimal operations.
It is a known fact that, government policies can affect the performance of any nation’s capital market and consequently determine what happens to the nation’s economic growth. The frequent intervention in the capital market activities by the Central Bank of Nigeria (the apex monetary regulatory body) has raised so much concern to many individuals and organizations that, the stakeholders of the market are left with no option other than to known how the capital market development significantly effect economic growth. Some examples of the recent policies of the Central Bank of Nigeria that have caused significant changes in the market are: the untimely reversal of the margin trading policy which halted the fueling of the bull market as well as consequent increased pressure on the banks a few month from the halt of the banks in 2008, the increase in Monetary Policy Rate (MPR) from 9.50 percent to 10.5 percent in 2008, the increase in Cash Reserved Ratio (CRR) from 2 percent to 4 percent in 2008 and the policy of harmonizing the banks year end......
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Item Type: Project Material | Size: 106 pages | Chapters: 1-5
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