CHAPTER ONE
INTRODUCTION
- BACKGROUND OF THE STUDY
In the last two decades, studies on the capital market have received considerable attention from contemporary finance and economics literature resulting from its role in the provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio and also in the mobilization of resources for national growth. According to Ndako (2010), the capital market is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy comprising households, firms, and government are mobilized, harnessed and made available to various sectors of the economy. For sustainable economic growth, funds must be effectively mobilized and allocated to enable businesses and the economies harness their human, material, and management resources for optimal output. Hence, the capital market is an economic institution, which promotes efficiency in capital formation and allocation. The capital market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2012; Levine and Servos, 2012; Obadan, 1995; McKinnon, 2014). The importance of the capital market as an efficient channel of financial intermediation has been well recognized by the researchers, academicians, and policy makers as a primary determinant of the economic growth of a country, both developed and developing. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Underdeveloped or poorly functioning capital markets typically are illiquid and expensive which deters foreign investors.
Furthermore, illiquid and high transactions costs also hinder the capital raising efforts of lager domestic enterprises and may push them to foreign markets (Mishra, et al., 2010). Theoretical literature on financial development and growth identifies three fundamental channels through which capital markets and economic growth may be linked (Pagano, 2015). First, capital market development increases the proportion of savings that is funnelled to investments. Second, capital market development may change the savings rate and hence, affect investments. Third, capital market development increases the efficiency of capital allocation. According to Riman, et al., (2008), the Nigerian capital market has witnessed obvious transformation over the years, evident by the increased level of participation of the private and public investors at the floor of the stock exchange and in various public offers of quoted companies. The emerging market has also attracted and embraced the attention and the interest of international investors, thus increasing capital inflow. For example, the overall market capitalisation had risen from 1,698.1 million naira in 1980 to 7030.8 billion naira in 2009, thus signifying an increase within the period. Transaction at the floor of NSE has risen to a total of 685716.2 million naira in 2009 from a previous value of 16.6m recorded in 1970. The number of deals from all market participants at the floor which recorded a mere 634 deals in 1970 had also witnessed a remarkable increase to 1739365 million naira in 2009. The total number of listed companies had also increased from 91 as was listed in 1980 to 213 listed in 2008 (CBN, 2009). Following from this therefore, efficiently functioning capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu, 1998). Hence, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun, 2014).
1.2 STATEMENT OF PROBLEM
For a country to attain a sustainable economic growth and development, it requires both local and foreign capitals made available by the opportunities provided by the capital market (Ekundayo, 2002). However, non-availability of long-term funds for investment financing has constituted a barrier to the development and growth of most African countries, particularly in many developing countries such as Nigeria, wherein capital has become a major constraint to economic development. Despite the significant financial reforms experienced in the financial sector over the years, there has been an underdevelopment of the real sector as a result of lack of funds from the financial sector (Oluwole, 2014). The Nigeria capital market has grown to being capable of providing facilities both to the private and public sectors to raise long term capital used in executing development programmes as well as finance the expansion and modernization of projects. However, how these reforms have influenced economic growth over the years still remains unexplored by previous studies. Any economy that is financially underdeveloped is usually characterized by under-employment of resources. Zuvekas (1978) puts it that development is a progress towards the reduction of the incidence of poverty, unemployment and income inequalities (cited in Oluwole, 2014) but these incidences are still evident in the Nigerian economy. It is with this backdrop that this research study is undertaken to examine the role of capital market on economic growth in Nigeria.
1.3 AIMS OF THE STUDY
The major purpose of this study is to examine the role of capital market in promoting economic growth in Nigeria. Other general objectives of the study are:
- To examine the operations of the Nigerian capital market.
- To determine to what extent the capital market has contributed to economic growth of Nigeria.
- To examine the impact of capital market on the economic growth of Nigeria.
- To examine the role of capital market on economic growth of Nigeria.
- To examine the relationship between capital market and economic growth of Nigeria.
- To examine whether capital market enhance and promote investment in Nigerian economy.
- To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Nigeria.
1.4 RESEARCH QUESTIONS
- How does the Nigerian capital market operate?
- To what extent has the capital market contributed to economic growth of Nigeria?
- What are the impacts of capital market on the economic growth of Nigeria?
- What are the roles of capital market on economic growth of Nigeria?
- What is the relationship between capital market and economic growth of Nigeria?
- How does the capital market enhance and promote investment in Nigerian economy?
- Can the operations of the market be improved to boost economic growth and development of Nigeria?
1.5 RESEARCH HYPOTHESES
H01: There is no significant impact of capital market on the economic growth of Nigeria.
H02: There is no significant relationship between capital market and economic growth of Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study will explore the impact or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of study will be limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy-makers on ways to improve operations and activities of the capital market.
1.7 SCOPE OF THE STUDY
The study is based on the role of capital market in promoting economic growth in Nigeria, a case study of Nigerian stock Exchange, Benue state.
1.8 LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.8 DEFINITION OF TERMS
Economic Growth: Is the increase in the goods and services produced by an economy, typically a nation, over a long period of time. It is measured as percentage increase in real gross domestic product (GDP) which is gross domestic product (GDP) adjusted for inflation. GDP is the market value of all final goods and services produced in an economy or nation.
Capital Market: Is a market in which long term capital is raised by industry and commerce, the government and local authorities. Simply, it is that part of the financial market that provides facilities for the transfer of medium and long-term funds to various economic units.
Nigerian Stock Exchange: Are a market where securities (bonds, stocks and shares of varying types) are traded openly and where one can purchase or sell any of such securities with relative ease.
Financial Institutions: These are institutions that use their funds chiefly to purchase financial assets, deposits, bonds, loans and so on.
