Accounting Project Topics

The Role of Capital Market in Economic Development in Nigeria

The Role of Capital Market in Economic Development in Nigeria

The Role of Capital Market in Economic Development in Nigeria

Chapter One


The broad objective of this study examine the activities and performance of the Nigerian capital market. The specific objectives of the study are as follows:

  • To examine the operations of the Nigerian capital market.
  • To evaluate the performance of the capital market about the economic development 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 improved to boost the economic development and development of Nigeria.



An Overview of the Nigerian Capital Market

According to Anyanwu (1993) the key players on the Nigerian capital market include the Securities and Exchange Commission (SEC), which is the overall supervisory and regulatory body for the market, the Nigerian Stock Exchange (NSE), issuing houses, stock-brokers, unit trusts as well as company registrars. As the apex institution in the financial system, CBN closely monitors activities development in the capital market. The SEC was established in 1979 to replace the Capital Issues Commission (established 1973) with the overall objective of promoting an orderly, active and transparent capital market. Its major functions include:

  1. i) registering all security dealers and approving security issues;
  2. ii) maintaining surveillance over the securities market to prevent fraudulent and unfair trade practices;
  3. iii) ensuring protection for the investing public; and
  4. iv) regulating mergers and acquisitions and authorizing the establishment of unit

The instruments traded in the capital market are;

  1. Debt securities
  2. 2. Equity shares

Debt securities are debentures or bonds that may have specified maturity or may be redeemed on a series of dates. There are even some without any fixed redemption dates while some may be redeemed by pre arranged sinking fund or by lottery. These securities usually attract interest since they are strictly speaking loans. Most have fixed interest rates but the current trend is to make it attract floating rates of interest. (Anyanwu 1993).

Equity on the other hands is securities method by which companies raise funds by issuing share. Hence the buyer becomes part owner of the firm.

Alile (1985) provided the definition of several concept which include;

  1. The Primary Market – where company shares are issued for the first time before being quoted on the stock
  2. The Secondary Market – this is for trading in existing

Shares can be; ordinary shares or preference shares. The later are shares of companies on which contractually fixed dividends must be paid before those on other shares. There are convertible shares, participating preference shares and redeemable preference shares. Other instruments include the federal government development loan stock and state government bonds.

Operators or participants in the capital market include:-

  • Provider of fund (investors – individual, unit trust and other corporate bodies)
  • User of funds (companies and government)
  • Intermediary facilitators like Stockbrokers firm, Issuing houses and Registrars
  • Regulators (SEC & the NSE)

As could be seen, while the providers of funds essentially comprise individual and companies the use of funds (Issues of Securities) include company and government. In other words, individuals are not able to raise money from the capital market as they do in money market.

In this network of relationship the Stock Exchange plays a central and indispensable role for which it has been variously described as the „hallmark‟ or „heart‟ of the capital market (Alile 1985). In its strict definition, the Stock Exchange is a market for trading on outstanding  issues. Yet opportunity which it offers for subsequent trading in existing securities has made  it a decisive factors in the success or otherwise of many corporate issues and, by extension, the efficiency of capital formation in the economy. Thus the availability of a secondary market engenders capital formation and socio-economic development.

The market for government‟s long term debt securities is referred to as Gilts edged Securities. This is so because Gilt‟s are often considered risk free investment since it is highly unlikely that the government would ever default on the payment of its debt when they fall due.




Research design

Research design denotes the structuring of a study, and strategy of investigation concerned so as to obtain answers to research questions and to control variance (Etuk, 2003). Put another way a research design is the structuring of a study aimed at identifying variables and their relationship to one another. This is used for the purpose of obtaining data to enable the researcher test hypotheses or answer research questions (Asika, 1991).

Arising from the above statements, the study adopts exploratory survey of the performance of the Nigerian Capital market between 1986 and 2005 covering a period of 20years.

Sources of data and method of collection

Data for the study were generated from secondary sources. The bulk of the data were extracted from the Nigeria Stock Exchange Annual Reports. Daily Nigerian Business Investment lists, list of current capital market operators central Bank of Nigeria Annual Reports, and publications from Security and Exchange Commission Annual Reports and Publications, Federa\ Office of Statistics. Collation of data from the internet on Discuss and share ideas with selected investment companies in Nigeria and fact book.



Data presentation

In this chapter, data collection with respect to the performance of the Nigerian stock market are presented, analyzed and interpreted in order to have informed judgment about the level of performance in the stock exchange.

The data relevant to the study are presented in tables. They are mainly secondary data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin Nigerian Stock Exchange Annual Reports and publications others are from securities and exchange commission annual reports and publications, Federal office of statistics reports and publication, World Bank publications, Federal Ministry of Finance panel on Review of the Nigerian capital market covering a period of twenty (20) years (1986 2005). The data generated are presented in the following tables a review of the performance of the Nigerian Capital market statistically reveals in Table 4.1 shows the relationship between market capitalization and various stocks performances in the market. The market capitalization was increasing progressively for the twenty years under review. 1986 to 1987 recorded an increase of 25.02% while 1988 to 1999 stood at 35.84 Ok. From 2001 to 2006 the market capitalization recorded a percentage increase of 10.194, 8.67757, 12.3315, 2.71891, and 7.2353 respectively. Government stocks recorded a decrease from 1986 to 1998 picked up from 1999 to 2000, then fall again in 2001 and maintained an increase in 2000 to 2005 with a percentage change which stood at 11.12195, 66.1716, 1.38696, 53.8227, 7.6512, and 0.06596 respectively. Industrial stocks had a noticeable increases of 1.96078,  8.10811,  15.2672,  7.74648,  7.18954,  12.069,  1.69492,  2.20994,  1.0929,0.549451, 2.15054, 5.10204, 0.51282, 0.75441, 0.51282, 68.53, 3.15 4.31, 1.48 and 0.515464 respectively.



Summary of Findings

The study examined the role of capital market on economic growth in Nigeria using alternative sets of Capital market development indicators. The findings of the study reveal the following:

The main objective of this research was to examine the role of the Nigerian capital market in the development of the Nigerian economy from 1986 to 2005. Data collected and analyzed indicated that:

The listed securities in the capital market maintained a steady increase as was observed from 2000 to 2005 respectively which also shows that the price changes in the Nigerian stock market are more systematic than random in movement overtime.

The Nigerian capital market operations was efficient with the context of the performance of the capital market hypothesis which implies that each time stocks and equities increased there will be a corresponding increase in the development of the economy(GDP).

The introduction of new shares in the capital market has brought growth and development of the Nigerian capital market. This development has gingered the utilization of the Nigerian capital markets functions by Nigerian companies as well as individual investors.

From the study it has been established that the Nigerian capital market through the stock exchange established in the states has fulfilled its functions of providing facilities for dealing in listed securities, overseeing the trading of those securities and ensuring four pricing of securities, establish rules regulating transfer of shares and initiating measures of encourage savings and issuance of securities by government and other organizations.


In conclusion, the capital market specifically provides funds to industries and governments to meet their long term capital requirements for fixed investments like buildings, plants and machinery and other public infrastructures.

Empirical research however, indicates that the role of the Nigerian capital is limited. This is shown by its low contribution to the level of capital mobilization and investment as evidenced by the low market capitalization over the sphere in review. Although the federal government had complemented the role of the Nigerian stock exchange through the establishment of some key development finances institutions to provide specialized longoterm capital for sectoral growth and development the impact has not been fully felt.

With the recent reforms in the economy, particularly in the banking sector, there is need for the capital market to develop the required resilience towards evolving a financial infrastructure that would engender economic growth and transformation in the economy.

Finally, there is an obvious challenge to urgently develop a vibrant bond market to allow the private sector access to a larger number of best instruments in order to enhance the management of their liabilities.

However, in real world conditions for maximum efficiency in performances are unlikely to exist. Yet even though this conditions may not be fulfilled, in practice with the reforms and globalization performances will be enhanced and realizable if sufficient participants have equal access to adequate stock information.

Given the position the Nigerian capital market cannot be said to have perform excellently as  the need for further review becomes apparent when compared to other countries of the world.


In the study an attempt has been made to provide a theoretical and empirical analysis of the performance of the Nigerian capital market. Results indicate that performance of the Nigerian capital market to a large extent has contributed to the development of the Nigerian economy and has provided the opportunity for a given class of investors to finance and expand their business. This feat recommendations:

There is need to evolve comprehensive measures to strengthen, broaden and deepen the market to enhance its intermediary role in financing economic activities. The accelerated upgrade of systems need to be sustained while the regulatory and prudential framework should continuously be reviewed to facilitate better disclosure standards and transparency for transactions.

There is need to open up the capital market and promote free flow of information in its operations as it is the case in other countries: firms listed on the stock exchange should be published quarterly and halfoyearly reports in addition to annual reports on their operations with detailed explanations on the drivers of theperformances.

The challenges of low awareness about the operations and benefits of the capital market in the economy should be looked into. The level of awareness of the populace about the capital market and the opportunities available in it would enhance the level of their participation in the market.

The capital market should be at the forefront of ensuring financial integrity in order to minimize the potential effects of the risk of contagion as well as reduce systemic risks. Thus, there is the compelling need to strengthen the enforcement of the corporate governance code among listed companies which is essential for promotinginvestor confidence and inducing sustained longoterm growth of the capital market. In this regard, the proactive stance of the management of the Nigerian stock exchange and the Securities and Exchange Commission in their respective efforts at raising the standards of capital market operators should be sustained.

There is need to take the capital market window to more towns and cities in Nigeria for greater width and enhanced growth. Improvement in the availability of social infrastructure such as electricity and media equipment in homes would boost nationwide information dissemination.

There is need to canvass for self o regulation in the institutions of the capital markets as well as the cooperation and full commitment of operators towards a high level of professionalism and high ethical standards. In this regard, the imposition and enforcement by the regulatory authorities would be a welcome development. The years ahead would be increasingly demanding and competitive, and only the adoption of good corporate governance by institutions, market participants and intermediaries can guarantee sustainability.

The issue of investors’ perception is very important. The decision to invest in a financial instrument or indeed in the securities market or a particular company is usually influenced by perception. A good perception of a company, a country or region attracts investment into it, while poor perception would undoubtedly impact negatively on the level of investment. International perception of a country’s political and economic environments is often a strong influence on the response of foreign investors to its security offering. With the return of democratic rule and the reforms in the economy, particularly in the banking sector, coupled with the establishment of the Economic and Financial Crimes Commission (EFCC) and the Independent Corrupt Practices Commission (ICPC), the confidence of both local and foreign investors in the economy is gradually returning. There is therefore a compelling need to sustain these reforms.

There is need to review the regulatory framework in line with international best practices to entrench market rules and principles that would enhance good corporate governance in system. The existence of such market rules attracts public confidence for the market.

The regulators of the capital market should encourage more derived financial products such as pension funds and mutual funds, which could serve as vehicles for mobilizing funds for investments on the stock market.


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