Impact of Capital Market on the Economic Growth of Nigeria
Chapter One
OBJECTIVES OF THE STUDY
The broad objective of this study examined the activities and performance of Nigerian capital market. The specific objectives of the study are as follows:
1.To examines the operations of the Nigerian capital market.
- To evaluate the performance of the capital market in relation to the economic growth in Nigeria.
- To examine the rate at which new stocks are issued on the capital market.
- To make recommendations as to how the operations of the market could be improve to boost economic growth and development of Nigeria.
CHAPTER TWO
LITERATURE REVIEW
THEORETICAL AND CONCEPTUAL FRAMEWORK
Capital market is defined as the market where medium to long terms finance can be raised. The capital market is the market for dealing (that is lending and borrowing) in long term loanable funds.
Substantial academic literature and government strategies support the finance-led growth hypothesis, based on an observation first made almost a century ago by Joseph Schumpeter that financial markets significantly boost real economic growth and development. Schumpeter asserted that finance had a positive impact on economic growth as a result of its effects on productivity growth and technological change. As early as 1989 the World Bank also endorsed the view that financial deepening matters for economic growth “by improving the productivity of investment”. (Wikipedia, 2011).
Mbat (2001) described it as a forum through which long term funds are made available by the surplus to deficit economic units. It must however, be noted that although all surplus economic units have access to the capital market, not all the deficit economic units have the same easy access to it. The restriction on the part of the borrowers is meant to enforce the security of the funds provided by the lenders. In order to ensure that lenders are not subjected to undue risks the borrowers in the capital need to satisfy certain basic requirement. It has very profound implication for the socio-economic growth and development of any nation.
REVIEW OF RELATED CONCEPTS
CAPITAL MARKET AND ECONOMIC GROWTH
In principle, the capital (stock) market is expected to accelerate economic growth, by providing a boost to domestic savings and increasing the quantity and the quality of investment. The market is expected to encourage savings by providing individuals with an additional financial instrument that may better meet their risk preferences and liquidity needs. Better savings mobilization may increase the saving rate. The capital market also provides an avenue for growing companies to raise capital at lower cost. In addition, companies in countries with developed stock market are less dependent on bank financing, which can reduce the risk of a credit crunch. The capital market therefore is able to positively influence economic growth through encouraging savings among individuals and providing avenues for firm financing (Charles & Charles, 2007).
Capital market offers access to a variety of financial instruments that enable economic agents to pool, price and exchange. Through assets with attractive yields liquidity and risk characteristics, it encourages savings in financial form. This is very essential for government and other institutions in need of long term funds and for suppliers of long term funds. Companies can finance their operation by raising funds through issuing equity (ownership) or debenture/bond borrowed as securities. Equity have perpetual life while debenture /bond issues are structured to mature in periods of years varying from the medium to long-term of usually between five and twenty five years.( Mbat, 2001).
Based on the performance of capital market in accelerating economic growth, government of most nations tends to have keen interest in its performance. The concern is for sustained confidence in the market and for a strong investor’s protection arrangement. Economic growth is generally agreed to indicate development an economy, because it transforms a country from a five percent saver to a fifteen percent saver. Thus it is argued that for capital market to contribute or impact on the economic growth in Nigeria, it must operate efficiently. Most often, where the market operate efficiently, confidence will be generated in the minds of the public and investors will be willing to part with hard earned funds and invest them in securities with the hope that in future they will recoup their investment.(Ewah et al, 2009)
The theoretical explanation on the nexus between capital market and economic growth is further expanciated using Efficient Market Hypothesis (EMH) developed by Fama in 1965. According to EMH, financial markets are efficient or prices on traded assets that have already reflected all known information and therefore are unbiased because they represent the collective beliefs of all investors about future prospects. Previous test of the EMH have relied on long-range dependence of equity returns. It shows that past information has been found to be useful in improving predictive accuracy. This assertion tends to invalidate the EMH in most developing countries. Equity prices would tend to exhibit long memory or long range dependence, because of the narrowness of their market arising from immature regulatory and institutional arrangement. They noted that, where the market is highly and unreasonably speculative, investors will be discouraged from parting with their funds for fear of incurring financial losses. In situations like the one mentioned above, has detrimental effect on economic growth of any country, meaning investors will refuse to invest in financial assets. The implication is that companies cannot raise additional capital for expansion. Thus, it suffices to say that efficiency of the capital market is a necessary condition for growth in Nigeria.(Nyong, 2003).
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter is specially designed to show the process through the information or data in this study was gathered. It will answer the fundamental questions of how the subject matter under review was evolved and conceived by the researcher and the methodology employed to achieve the objective of the study. This chapter is presented under the following sub-sections:
RESTATEMENT OF RESEARCH QUESTION AND HYPOTHESIS
RESEARCH QUESTIONS
This research work is expected to give answers to the following questions
- Does inventory control in an organization result to minimum cost of materials?
- Does inventory control affect effectiveness and efficiency of production in the organization?
RESEARCH HYPOTHESIS
This research work has the following hypothesis:
H0: Inventory control in an organization does not result to minimum cost of materials.
H1: Inventory control in an organization result to minimum cost of materials.
H0: Inventory control does not affect the effectiveness and efficiency of production in the organization.
H1: Inventory control affects the effectiveness and efficiency of production in the organization.
RESEARCH METHOD AND DESIGN
Just like any other research study in administration science the experimental research design would be employed. This is because the variables under-study are not within the control of the research and not prone to manipulation. The researcher area of study is the administrative zone of GLAXOSMITHKLINE NIG.PLC as it focuses on the inventory control in Nigeria manufacturing Industries in Lagos. In this study, the two methods would be looked into. In the exploration research method, the research went through literary research that involves reviews of relevant literature such as text-book, magazines, professional journals etc. while the application of the conclusive research method involves held survey of relevant question from knowledgeable individual’s ideas through the use of questionnaire.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
This will provide a general description of the response to the questionnaire and how such responses have been analyzed on the formulated hypothesis. It is on these bases that the decision rule as to whether to accept or reject H0 [Null hypothesis] or H1 [alternative hypothesis] is tested and arrived at a valid reliable result. For the purpose of this study, thirty questionnaires were distributed to the staff of GlaxoSmithKline Nigeria Plc, only twenty-Eight were properly filled and returned, and it is on this inference that the study is drawn.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
SUMMARY
The study examined the impact of capital market on economic growth of Nigeria between 1980 to 2009. The findings of the study reveal the following
v The regression result confirms that there exists positive relationship between the capital market and economic growth. The relationship is statistically significance. This is in essence means that the impact of the capital market on economic growth is strong and significant.
v Another major outcome of the study is that a unit increase in total listing of equity and government stock (TLS) result in an increase in GDP. The implication of this is that the economy responds favourable to measures taken to increase TLS in Nigeria Stock Exchange.
v The positive result of the total listing of equity and government stock implies that funds raised by the industries and governments in the capital market are spent on productive sector which enhance economic growth.
v The result of the value of transaction in the capital market means that the simplicity in buying and selling of securities has potential to influence economic growth positively.
These findings agree with Ewah, et al (2009) who found that capital market in Nigeria has potentials for growth inducing but has not contributed meaningfully to the economic growth of Nigeria due to low market capitalization etc.
CONCLUSION
The study reveals that the capital market impact on economic growth via market capitalization, value of transaction and total listing of equity and government stock. As it was observed market capitalization, government stock and value of transaction are important capital market variables that are capable of influencing economic growth. Hence the capital market remain one of the mainstream in every economy that has the power to influence or impact economic growth therefore the organized private sector is to invest in it. The market capitalization have not impact significantly on the GDP while volume of transaction and total listed equities and Government stock have significant impact on the GDP. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market and moreforeign investors should be encouraged to participate in the market for improvement in the declining market capitalization so that it could contribute significantly to the Nigerian economic growth.
RECOMMENDATIONS
In order for the Nigeria capital market to be pivotal force in Nigeria economic growth and development, the following suggestion or recommendation are put forward.
v First improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology like automated trading and settlement practice, electronic fund clearance and eliminate physical transfer of shares.
v There is also need to restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transaction and dealing in the stock exchange. It must also address the reported case of abuse and sharp practices by some companies in the market.
v Since the total listing is significant at 1% level of significance but still far cry compare to other exchange like South African and Egypt. Therefore, these should be increase in the total member listed companies to ensure stable macroeconomic environment in order to encourage foreign multinational companies (MNCs) or their subsidiaries to be listed on the Nigerian stock exchange, relax the listing requirements to the first tier market and ensure tax rationalization in the capital market to encourage quotation and public interest in shareholdings.
v Lastly, to boost the value of transactions in the Nigerian capital market, there is need for availability of more investment instruments such as derivatives, convertibles, future, and swaps options in the market.
v Given the present political dispensation, all the tiers of government should be encourage to fund their realistic developmental programme through the capital market. This will served as a leeway to freeing the resources that may be used in other sphere of the economy.
REFERENCES
- Adam, J. A. & Sanni, I. (2005). Stock Market Development and Nigeria’s Economic Growth.Journal of Economics and Allied Fields, 2 (2), 116-132.
- Afees, A.S & Kazeem, B.A (2010). The Stock Market and Economic Growth in Nigeria: An Empirical Investigation, Journal of Economic Theory, 4, 65 – 70.
- Al-faki, M. (2007). Understanding the Nigeria Capital Market: Best Investment Practices & Regulatory Compliance, Nigeria Security and Exchange Commission.Abuja.
- Alile, H.I & Richard, A. Anao (1990). The Nigerian Stock Exchange in Operation Lagos. Academy Press.
- Anyanwu, J.C (1993). Monetary Economic Theory, Policy and Institutions Hybrid Publishers Limited. 247-274.
- Ariyo,A. & Adelegan, O. (2005). Assessing the Impact of Capital Market Reforms in Nigeria: An Incremental Approach. Paper Presented at 46th Annual Conference of the Nigeria Economic Society in Lagos in August2005.
- Central Bank of Nigeria (CBN) Statistical Bulletins of 2005, 2006, 2008 and 2009. Abuja: Central Bank of Nigeria publication.
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