The impact of capital market on Nigeria economic growth investigates the activities of the capital market in accelerating a stable economic growth in Nigeria. The project work contain chapter one to five for free. It also comes with reference and data for your reference.
1.1 Background to the Study
The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation real economic growths has long been affirmed in economic theories (Anyanwu, 1993).
Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resources mobilization. It is in realization of this that consideration is given to measure for the development of capital market as an institution for the mobilization of finance from the surplus sectors to the deficit sectors.
Virtually all aspects of human endeavour entail the use of money either self- generated or borrowed. Money enhances capital accumulation with tremendous cyclical rebound on economic growth. In capital market, the stock in trade is money which could be raised through various instruments, under well governed rules and regulations, carefully administered and adhered to by different institutions or market operators. It is true that the rate of economic growth of any nation is inextricably linked to the sophistication of its financial market and specifically its capital market efficiency. Virile financial markets assist the nations of the world to muster needed financial resources and skills for growth and development. Equity markets in developing countries until the mid-1980s generally suffered from the classical defects of bank dominated economies that are shortage of equity capital, lack of liquidity, absence of foreign institutional investors, and lack of investor’s confidence in the stock market (Adebiyi, 2005). Financial market and its sub-unit, capital market are constituted whenever participants, with the aid of infrastructures, technology and other devices to facilitate the mobilization and channeling of funds into productive investment. The importance of capital market lies in its financial intermediation capacity to link the deficit sector with the surplus sector of the economy. The absence of such capacity robs the economy of investment and production of goods and services for societal advancement. Funds could thereby be idle at one end, while being sought at the other end in pursuit of socio-economic growth and development (Akinbohungbe, 1996).
The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy (Alile 1997). It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile 1997). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. However, the paucity of long-term capital has posed the greatest predicament to economic development in most African countries including Nigeria. Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment.
The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1993). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005). Okereke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans.
In 1986 Nigeria embraced the International Monetary Fund (IMF)-World Bank Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s.The programme was proposed as an economic package to rapidly and effectively transform the Nigerian economy within two years (Yesufu 1996). However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of government to judiciously implement some of its policy measures (Oyefusi and Mogbolu 2003). The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%, interest deregulation from August 1987, financial market reform and public sector reforms which entails the full or partial privatization and commercialization of about 111 public owned enterprises. The Nigerian Stock Exchange was to play a key role during the offer for sale of the shares of the affected enterprises (Anyanwu 1993; Oyefusi and Mogbolu 2003).The introduction of SAP in Nigeria has resulted in a very significant growth of the country’s stock market as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile1997). Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market yet its impact at the macro economy was negligible. Again the capital market was instrumental to the initial 25 banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005.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 (Nwankwo 1991) .Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various government and corporations in Nigeria. The Nigerian Capital market activities have been growing at a healthy rate in relation to its role in stimulating economic growth. The Volume and Value of traded securities between 2007 and 2010 grew in excess of 6.3% and 3.9% respectively. Securities listed in the exchange rose from 288 in 2005 to 294 in 2010 while the total market capitalization for the period declined by about 11.4%. The fall in Market Capitalization was attributed to the price losses and the global economic crisis. Infact, on annual basis, the market grew by 74% in 2007, dipped by 45% and 33.7% in 2008 and 2009 respectively, grew by 18.9% in 2010, dipped again in 2011 by 16.3% before recovering by an estimated 33% in 2012 (Egene, 2012). The All Share Index also demonstrated a decline of about 29.8% within the period (Central Bank of Nigeria Economic Report, 2010).
1.2 Statement of the Problem
There is abundant evidence that most Nigerian businesses lack long-term capital. The business sector has depended mainly on short-term financing such as overdrafts to finance even long-term capital. Based on the maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of short- and long-term capital. The scantiness of long-term capital has posed the greatest threat to economic development in most African countries including Nigeria. In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economy. The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities.
Deducing from the extensive studies on the theoretical expectations on the role of capital markets on economic growth which have formed the core of normative economics, the capital market is expected to contribute to economic growth through the transmission mechanisms of savings mobilization, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, and enhanced incentive for corporate control amongst others. However, an x-tray on the path of “positive economics” which is concerned with “what is” rather than “what should be” reveals that the argument in the literature on the growth effects of capital market has not been adequately resolved. The inconclusive nature of these theoretical and empirical studies provides the basis for a further empirical investigation on the role of capital market in economic growth. Hence, this study was needed.
1.3 Research Question
In the course of the research the following question will be addressed;
- Does capital market have any significant impact on the economic growth of Nigeria?
- Is there any long-run relationship between capital market and economic growth in Nigeria?
- Is there any causal impact between capital market and economic growth in Nigeria?
1.4 Objective of the Study
The broad objective of this study is to examine the activities and performance of Nigerian capital market. The specific objectives of the study are as follows:
- empirically investigate the impact of capital market on Nigeria’s economic growth.
- evaluate the long-run relationship between capital market and Nigeria’s economic growth.
- examine if there is any causal relationship between capital market and Nigeria’s economic growth.
1.5 Research Hypotheses
The hypotheses to be tested in the course of this research work are:
H0: Capital market does not have significant impact on economic growth in Nigeria.
H0: Capital market does not have significant long-run relationship with economic growth in Nigeria.
H0: Capital market does not have causal impact on economic growth in Nigeria.
1.6 Significance of the Study
The study explored the effectiveness of capital market instruments on Nigerian economic growth. Though the scope of the study was 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. This study will be of benefit;
- The Academia: Members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works.
- Government: This study will expose to the government happenings in the capital market, bringing to their notice ways to alter the existing capital market policies to ensure growth.
- The Investors: This study shall also be valuable to the investors especially those who may have research interest as it shall guide their private investment decisions. The study shall also form reasonable tool for the private sector’s contribution to National debates.
1.7 Scope and Limitation of the Study
The economy is a large component with lot of diverse and sometimes complex parts; this research work only looked at a particular part of the economy (the financial sector). This work did not cover all the facets that make up the financial sector, but focus only on the capital market and its activities as it impacts on the Nigerian economic growth. The empirical investigation of the impact of the capital market on the economic growth in Nigeria was restricted to the period between 1981 and 2015 due to the non-availability of some important data.
The limitations of the study are; data problem, time constraint; as there was no enough time to carry out this research work, and lastly the researcher was handicapped by finance as this limited the consistency needed in the course of the research. In spite of these problems, efforts were put in place to enhance the quality of this study.
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