IMPACT OF STOCK MARKET ON NIGERIA ECONOMIC GROWTH

EFFECT OF STOCK MARKET ON NIGERIAN ECONOMIC GROWTH

 (1980-2010)

   CHAPTER 1

   INTRODUCTION

1.1    Background to the Study

The financial system in an economy plays a crucial role in the growth and development of an economy; it is among the measures used in measuring the sophistication of the investment “climate” of a country especially in attracting foreign investors. The world has come to a state where money is being sought for and obtained wherever it is available; there are many sources of financing in the economy. However there are two sources of investment which normally standout clearly in any economy. According to Ahmed (1982) money and capital market apart from other factors such as political and social stability, are two markets that determines to a large extent the directions and level of economic growth and development within an economy”.

The stock market is a medium through which funds are mobilized and channeled efficiently, it enables the government and industries to finance new and existing projects expanding and modernizing industrial commercial concern.
Okereke (2006) identified the capital market as the most credible source of long-term funds to any economy and a leading economic indicator in developed economies. The stock market makes the interaction of both savers and investors possible in a country (i.e. in an open market), all the aggregate savings are channeled into most desirable investment for the purpose of economic growth and development.

Stock market and Capital market can be used interchangeably. A well-organized stock market must have regulatory agencies and intermediaries such as dealers, analysts and brokers,the intermediaries get their own pay through the investor they provide service. The institutional frameworks through which the capital market functions in Nigeria include; the Nigerian Securities and Exchange Commission (NSEC), the Nigerian stock exchange (NSE), stock brokers and investors. The stock market is categorized into primary and secondary markets. New securities are issued in the primary market, and companies issuing these securities receive the proceeds for the sale. The secondary market provides a forum for the sale of securities by one investor to another investor. Thus, the efficient functioning of the market paves way for the primary market by making investors more willing to purchase new securities in anticipation of selling such in the secondary market. These securities are the major instrument used to raise funds at the capital market. the types of securities in this market are: equity and debt, equity securities mainly concern ordinary stocks which impose higher liabilities on the holders, while debt securities include federal government development stock (GDS), industrial loans, preference stocks, bonds e.t.c.

A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance. Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injections from the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide.

The stock market has been identified as a market that improves the economic growth and development of developing and advanced countries (either directly or indirectly). Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a long-run relationship between stock market development and economic growth.Ekundayo (2002) argues that a nation requires a lot foreign investment to attain sustainable economic growth and development, the capital market provides means through which that is made possible. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies Tuladhar (1996) states that financial markets are catalyst in the development of economy. The study further added that developed economies have highly sophisticated financial institutions.

The stock market has been concluded to be the barometer of business direction other roles of stock market are diversification of risk; savings mobilization enhances incentives of corporate control. Improving the efficiency and effectiveness of all the functions stated will culminate into an increase in the rate of economic growth. Therefore it is essential to know that the place of capital market as a catalyst to Nigeria economy will remain significant, because it helps to support the growth and development of a nation.

However, several programme and laws have been consciously put together to promote the growth of the market overtime. These include the enterprises promotion decree, the privatization of government enterprises, which were quoted on the Nigerian stock exchange. There was also the banks recapitalization directives of 2004, from the CBN, in which banks were directed to recapitalize to a minimum of N25 billion. For this many banks accessed the capital market (through the primary pubic offers) for their financing needs, the government also introduced the pension reform Act of 2004. This act provides that part of the pension fund should be invested in the capital market by pension fund administrators.

It is therefore against this background that this study is designed to critically examine Nigerian stock exchange development.

1.2  Statement of the Problem

The impact of the capital market on the growth and development of the economy has not been significantly felt (Babalola, 2007) due to low market capitalization, delay in delivery of share certificate, problem of manual call,  slow growth of securities market, double taxation, problem of macro-economic instability among others.

Also, most Nigerians are not aware of the benefit derivable from the market operations, further more; there is a problem of reluctance of Nigerian businessmen to go to the public for fear of losing control of family business.

More so, the Nigerian stock exchange market, over the years has undergone reforms due to the declining effect of global financial crisis. While capital market has the potentials of stimulating economic growth and development through effective resource allocation, the expected high economic growth that comes with capital market development has not been experienced in Nigeria. Equally importantly, the allocation of resources by financial markets has not always been socially optimal because of financial market regulations. As a result of these the capital market has not played it role properly in the growth and development of the economy. It is against this back drop that the researcher is poised to analyze the impact of the capital market on economic growth in Nigeria.

The research questions are:

1.      What has been the trend in Nigeria’s stock market

2.      What is the direction of casualty between stock market development and economic growth? In other word is it the stock market development that brings about economic growth or vice versa

1.3 Objective of the Study

The broad objective of this study is to examine the impact of stock market on economic growth in Nigeria between 1989and 2010.

The specific objectives are to:

(i)                 Examine the trend in Nigeria stock market

(ii)               Analyze the direction of causality between stock market (parameters) and economic growth (unidirectional or bidirectional).

  

1.4Significance of the Study

 The importance of studying the relationship between capital market and real output growth arises from the need to understand the complex link between the two variables.

This research is to justify that the capital market provides a platform for companies and government to raise money either for expansion of operations or for execution of development projects, many banks accessed the capital market (through the primary pubic offers) for their financing needs. The Nigeria stock exchange will increase with the capital output level and this will in turn increase the GDP of the country. A strong capital formation will also ensure the citizens are enlightened on the benefit of stock market through media; this will solve the problem of awareness of stock exchange.

1.5  Research Hypothesis

Hypothesis One

Ho: There is no significant relationship between stock market operations and economic growth.

H1:There is a significant relationship between stock market operations and economic growth.

Hypothesis Two

H0:      There is no causality between capital market development and real output growth in Nigeria.

H1:      There is causality between capital market development and real       output growth in Nigeria.

1.6 Scope of the Study

The center point of this researchshall be the Nigeria stock Exchange commonly known as capital market, because of the nature of the commodities traded there.Its objectives roles and modus operandi and also what it can do as an economic institution in the development process in Nigeria. This research will be between the periods of 1980-2010. It covers the period before and after economic reform (SAP). The study is, however, constrained so as to reduce the biased level that may arise when a short period is researched.

1.7 Plan of the Study

The remainder of the project is organized as follows: In chapter two, we present a discussion on the prior literature review, which include the conceptual issues, theoretical framework and the review of empirical study, chapter three focuses on research methodology, chapter four focuses on the quantitative presentations and interpretations of empirical findings for stock returns and trading volume. Finally, chapter five entails summary, findings, recommendations and conclusions of the study.

1.8 Definition of Terms

Authorized Share Capital: This refers to the number of shares and also the nominal value of a company’s share capital which is stated in its Memorandum and Articles of Association as required by law.

Shares: These are security instruments indicating ownership in a business organization.

A Stock Exchange: This is a place where companies can raise money to make their business bigger, better companies raise their money by selling shares to investors.

A Stock Broker: This is a dealing member of the Stock Exchange. He provides service to anyone (an investor) who wants to buy and sell shares.

Capital Accumulation: Increasing a country’s stock of real capital (net investment in fixed assets).

Asymmetric information: A situation in which one party to a potential transaction (often a buyer, seller, tender or borrower) has more information than another party.

Bonds: These are securities in form of promissory note obligating the issuer to pay the principal amount and a fixed interest rate at specified time and intervals. In Nigeria, state governments are the main promoters of bonds.

New Issues: They are newly created securities of a corporate entity or government offered for a subscription to the public. In other words, it is a means of raising fresh funds for development financing

Securities: These are financial instruments that yield income to the buyer. Such a buyer has a legal claim, which can be inform of debts as in stocks and bonds or in ownerships as in ordinary shares in specified property.

Equity: Also called ordinary shares, it is ownership capital held by individuals, corporate bodies and sometimes governments in a company

Globalization: The increasing integration of national economies into expanding international markets.

Unit Trust: This is an open-ended investment scheme, which pools fund principally from small investors for subsequent investment in securities and other financial instruments.