Banking and Finance Project Topics

The Impact of the Nigerian Stock Exchange on the Development of Nigerian Economy

The Impact of the Nigerian Stock Exchange on the Development of Nigerian Economy

The Impact of the Nigerian Stock Exchange on the Development of Nigerian Economy

Chapter One

Objectives of study

The main objective of this work is to examine the impact of the capital market on the Nigerian economy.

The specific objectives are to assess the role of capital market in economic development and to ascertain the success achieved through a viable working model for the Nigerian economy,



Empirical Review

In some prior studies, diverse authors established relationship that exists between stock market development and economic growth. Nyong (1997) developed an aggregate index of capital market development and used it to determine its relationship with long-run development of Nigerian economy. The study employed a time series data from 1970 to 1994. Four measures of capital market development-ratio of market capitalization to GDP (in %), ratio of total value of transactions on the main stock exchange to GDP (in %), the value of equities transactions relative to GDP and listing were used. Demiurgic-Kunt and Maksimovic (1998) cited in Henry (2000) found a relationship between economic growth and the stock market activity in the field of transmission of security (secondary market) more than in funds channeling (primary market).

Again, Demiurgic-Kunt and Maksimovic (1998) have shown and re-emphasized the complementary role of the stock market and banks that they were not rival or alternative institutions using 30 countries from 1980 to 1991. Levine and Zervos (1998) used pooled cross-country time series regression of 47 countries from 1976 to 1993 to evaluate whether stock market liquidity is related to growth, capital accumulation and productivity. They towed the line of Demiurgic- Kunt and Levine (1996) by conglomerating measures such as stock market size, liquidity and integration with world market, into index of stock market development. The rate of Gross Domestic Product (GDP) per capita was regressed on a variety of variables designed to control for initial conditions, political instability, investment in human capital and macro-economic condition and then, included the conglomerated index of stock market development. They found empirically that the measures of stock market liquidity were strongly related to growth, capital accumulation and productivity while stock market size does not seems to correlate to economic growth.

The possession of industrial capabilities by an economy is considered important for improved economic growth and development. Indeed one of the distinguishing factors between developed and developing economies is the acquisitions of industrial know – how.  The benefits of appropriate industrial base for an economy lies in its combination of sustainable technology, management techniques and other resources in order to move the economy from a traditional and low level of production to a more automated and efficient system of mass processing and manufacture of goods and services. This explains why every economy seeks to acquire appropriate industrial base or to expand it if the economy is already industrialized.  Acquisition of industrial capabilities requires the blending of diverse resources of which financial resources constitute a critical factor.  Since the availability of such resources is a major influence on developing industrial or other capabilities, every economy seeks avenue to acquire them.  One of such avenues is the use of capital market to raise fund.  In Nigeria, serious effort is the sources of raising fund for development started in the 1960s and has progressed over the years.

Every economy seeks to promote an effective capital market with the primary objective of mobilizing long-term funds from surplus economic units for the use of the deficit units for investment purposes.  They facilitate an efficient allocation of financial resources; the use of capital market reduces over-reliance on the money market, assists in promoting a solvent and competitive financial sector as well as fostering a healthy stock market culture. Finance is the link between the capital market and industrial development.  As already noted, the relevance of the capital market to industrial growth of any nation can be seen in the role which capital market plays in the mobilization of funds and their eventual transfer to businesses, the government and individuals that need those funds for investment.  Therefore, the need for an effective capital market stern from the realization that through it, saving can be mobilized and channeled for production investment.  Apart from that, the ability to mobilize funds easily and cheaply on the capital market has also been found to be an incentive for enterprises to expand their operations and diversify into large-scale enterprises.

The capital market has demonstrated its ability to provide financial resources, through equity and debt securities, to private sector enterprises (both large and small) and in the process has contributed to the development of the industrial sector.  Also, its ability to provide debt financing for various public sector projects, especial infrastructure, has provided a fillip to industrial growth and development.




Secondary data collected from Nigerian Stock Exchange (NSE), Security and exchange commission (SEC) market bulletin and Central Bank of Nigeria (CBN) statistical bulletins from 2015 to 2020 were used in this study. The data for the stock market indicators was obtained from the NSE/SEC bulletin while the data for real gross domestic product for the relevant years was obtained from the CBN statistical bulletin.

Key variables for the study are grouped into the dependent (or endogenous) variable, the independent variables, and the controlled variables. While the major dependent variable is the real GDP, the independent variables are stock market capitalization (defined in terms of the ratio of stock market capitalization to GDP) and the Turnover ratio (measured by Total value of traded shares derived as the stock market liquidity (Total value of traded shares /GDP), while the controlled variables for this study were Labour and Capital. The inclusion of the independent variables is motivated by the methodologies of previous researchers.

The multiple regression analysis was used to test whether the stock market indices (Market Capitalization, turnover ratio) have impacted on the economic growth of Nigeria, proxy by (Real Gross Domestic Product (RGDP).

 Definition of Variables

Stock Market Capitalization: The stock market capitalization is the total value of tradable shares of public companies.  

Turnover Ratio (TR): This ratio equals the value of total shares traded divided by market capitalization.



Empirical Result

Unit Root Test

This study commenced its empirical analysis by first testing the properties of the time series, used for analysis. This is important because most macroeconomic time series data exhibit non-stationary behaviour in their level form, which often poses a serious problem to econometric analysis, leading to spurious result if appropriate measures are not taken. To guard against spurious result, it is necessary to perform a pre-test to ensure that there is a stationary co-integrating relationship among variables. This study took caution by checking the properties of the variables via the Augmented Dickey-Fuller (ADF) and Phillips perron (PP) test.




An attempt has been made to examine the relationship between stock market development and development of Nigerian economy, by employing the relevant methods. It was shown that economic growth contributes positively to stock market development (market capitalization). The increasing importance of financial markets has reinforced the need to study the impact of stock market development on economic growth. The present study is an attempt to investigate the impact of stock market development and economic growth by taking size and liquidity as independent variables along with labour and capital as controlled variables in Nigeria.

The impact of stock market development is empirically tested on real GDP as a dependent variable of economic growth for the period of 2015 to 2020 using least squares methodology. As such, the results reported the expected positive signs except for the variables though some were statistically significant at some level of significance while others were not.


The stock market degree of capitalization has always been used as a benchmark to evaluate the performance of the Nigerian Stock Market towards economic growth. It is a major performance indicator used in determining the worth of the market and a parameter that cannot be ignored by operators and dealers in capital market. Therefore, this study concluded that stock market capitalization and turnover ratio had a positive influence on economic growth as confirmed using the Error correction method.  Since stock market development (captured by market capitalization-GDP ratio) has statistical positive influence on economic growth, it implies that higher stock market capitalization increases the ability of firms to raise capital. Thus, they (firms) will be able to increase investment spending and expand production of goods and services which translate to higher growth rate overtime.

This findings agree with Ewah et al (2009) who found that the stock market in Nigeria has the potentials for growth inducing but has not contributed meaningfully to the economic growth of Nigeria due to low market capitalization, small market size, few listed companies, low volume of transactions, illiquidity etc. Furthermore, the result also supports Harris (1997) who found no hard evidence and strong positive relationship between stock market and economic growth and is contrary to the literatures that there is positive relationship between stock market and economic growth.

From the research conducted, the study examined whether stock market promotes development of Nigerian economy or not from the period 2015 – 2020.  In this regard, this exercise has demonstrated that there is a positive relationship between the stock market and economic growth.  Though the stock market has been greatly criticized, this study has helped promote a greater depth to the workings of, and need for an efficient capital market.  Specifically, the study attempted to establish empirically, the link between the Nigerian stock market and economic development.  That the stock market promotes economic growth is not in doubt. It serves as an important mechanism for effective and efficient mobilization and allocation of savings, a crucial function, for an economy desirous of growth. This study attempted to place this role in the Nigerian context between the period of 2015 and 2020. By the use of some notable stock market development indicators, the relationship between stock market development and economic growth was found to be positive. This suggests that for a significant growth the focus of policy should be on measures to promote growth in the stock market.

The Nigerian stock market has a bright prospect given the recent policy direction especially the abrogation of all laws that hitherto hamper its effective and efficient functioning. Also, the internationalization, the improvement in the infrastructural facilities in the market in line with what obtains in the developed market and also the present democratic dispensation will all work individually and jointly to ginger the prospect of the stock market.


The results obtained in this study have a number of policy implications for both the monetary authorities and the national governments. In all stages of development of Nigerian economy, great reliance has been placed on the stock market as the medium of interaction which facilitates the exchange of the long-term funds within the nation‟s economic units to achieve an optimal financial flow so as to optimize investment and growth. For the stock market to achieve this objective, it is recommended that policy makers should ensure improvement in the market capitalization, by encouraging foreign direct investment participation in the market. Moreover, there is a need to invigorate and strengthen the financial market; more companies should be encouraged to get listed on the floor of the market. Small and medium entrepreneurs should be allowed to access the market for investible funds given their close affinity with the grass root funds mobilization ability.

The stock market operates in a macroeconomic environment, it is therefore necessary that the environment must be an enabling one in order to realize its full potentials.  With the existence of a long run relationship between stock market development and economic growth, it is pertinent to recommend that there should be sustained effort to stimulate productivity in both the public and private sectors.

  1. The Nigerian Stock Exchange regulators should work at ensuring that the market capitalization is stable so as to have a resultant positive effect on economic growth.
  2. Based on the theory of stock market efficiency integration of the Stock Exchange with other exchanges in Africa will further drive economic growth.
  3. The turnover ratio in the NSE as a matter of necessity be high being an indication of low transaction costs. Since a large but inactive market would have a large market capitalization ratio but a small turnover, it is pertinent that the turnover ratio is high so that transaction cost would be low resulting in a favourable liquidity rating and market capitalization ratio.  This in turn would improve the economic condition of the nation.
  4. The Nigerian Capital Market should strive as well, to build its investors confidence by enforcing integrity, as well as providing them with more products in the market which will aid in diversification of their portfolio investments, in case a certain product fails to perform they will still have another product to fall back on.
  5. The findings from this study raise some policy issues and recommendations, which will reinforce the link between the stock market and development of Nigerian economy.
  6. Given that the stock market operate in a macroeconomic environment, it is therefore necessary that the environment must be an enabling one in order to realize its full potentials.
  7. The demand for the services of the stock market is a derived demand. With the existence of a positive relationship between stock market development and economic growth, it is pertinent to recommend that there should be sustained effort to stimulate productivity in both the public and private sectors.
  8. The determination of stock prices should be deregulated. Market forces should be allowed to operate without any hindrance. Interference in security pricing is inimical to the growth of the market.
  9. The stock market is known as a relatively cheap source of funds when, compared to the money market and other sources. The cost of raising funds in the Nigerian market is however regarded to be relatively high. However, the authorities concerned have been responsive towards a systematic downward review. This should ensure enhance its competitiveness and improve the attractiveness as a major source of raising funds.
  10. Considering the benefits being enjoyed by the stock market through the internationalization of its operations, there should be not only policy turn-around, but a sincere pursuit of an enhanced policy.
  11. Though the recent legislations on the stock market have been hailed in many quarters, one of the best things to happen to the stock market in recent times, there are still some gray areas.
  12. Given the present political dispensation, all the tiers of government should be encouraged to fund their realistic developmental programmes through the stock market. This will serve as a leeway to free the resources relevant for use in other spheres of the economy.


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