AN ANALYSIS OF THE IMPACT OF NIGERIAN CAPITAL MARKET (STOCK MARKET) ON NIGERIAN ECONOMIC GROWTH FROM 1961-2014.

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Abstract

The purpose of the study is to criti¬cally examine and evaluate the impact of the Nigeria Capital Market on the Nigerian economy, ef¬forts would be made to identify and appraise the strengths and weaknesses of the capital Market and attempts made to remedy such. This would be examined from the past, pres¬ent and forecast into the future. Hence this research work is set to examine the impact of the capital market on the Nigerian econo¬my.

CHAPTER ONE

 

1.0 INTRODUCTION

  According to the Microsoft Encarta dictionary; Capital Market is a financial market involving institutions that deal with securities with a life of more than one year. In other words Capital market is a collection of financial institutions set up for the granting medium and long term loans. In this market, lenders (investors) provide long term funds in exchange for long term financial assets offered by borrowers. The market encompasses both new issues (primary) market and secondary market. Such securities might be raised in an organized market such as the Nigerian Stock Exchange.

The Nigerian Stock Exchange was estab­lished in 1960 as the Lagos Stock Exchange. In 1977 it became The Nigerian Stock Exchange, with branches established in some of the major commercial cities of the country with Lagos as the head office of the Nigerian Exchange and an office in Abuja. The Exchange started operations in 1961 with 19 securities listed for trading. Presently, there are 201 listed equities while the all-share index and market capitalization stands at 40,819.72 basis points and 13.478 trillion respectively as at September 26, 2014.

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 (Akingbohungbe, 1996).

The market has in place a tested network of Stockbrokerage Firms, Issuing Houses (Merchant Banks), practicing corporate law firms and over 50 quality firms of auditors and reporting accountants (most with inter­national links). The Stock Exchange and most of the nation’s stock broking firms and issu­ing houses are staffed with creative financial analyst that can compete anywhere in the World. Therefore, the market has in place a network of intermediating organizations that can effectively and creditably meet the challenges and growing needs of investors in Nigeria. Integrity is the watchword of The Stock Exchange. Market operators subscribe to the code “Our word is our bond”. Thus, public trust in the Nigerian stock market has grown tremendously, with over five mil­lion individual investors and hundreds of institutional investors including foreign­ quoted com­panies using the facilities of The Exchange. However, the global financial meltdown in 2008 affected the confidence level of investors immensely.

The call over trading system being replaced with the Automated Trading System (ATS), with bids and offers now matched by stockbrokers on the Trading Floors of The Stock Exchange through a net­work of computers, making transactions fast and easily accessible. This is done every busi­ness day from 11.00 a.m. till all bids and offers have been executed (about 1.30 p.m. on the average). This time period has been extended by 2 hours recently as a strategic approach to enhanced efficiency in the market. Prices of new issues are determined by issuing houses/stockbrokers; while on the secondary market prices are made by stockbrokers only. The market/quote prices, along with the All- Share Index, are published daily in The Stock Exchange Daily Official List, The Nigerian Stock Exchange CAPNET (an intranet facil­ity), The Nigerian Stock Exchange website, newspapers and on the stock market page of the Reuters Electronic Contributor System. Pricing and other direct controls gave way to indirect controls by the regulatory bodies (Securities and Exchange Commission and The Stock Exchange) following the dereg­ulation of the market in 1993. Deregulation has improved the competitiveness of the mar­ket, in addition to making it more investor-friendly. The All-Share Index: The Exchange maintains an All-Share Index formulated in January 1984 (January 3, 1984 = 100). Only common stocks (ordinary shares) are includ­ed in the computation of the index. The in­dex is value-relative and is computed daily. Clearing, Delivery and Settlement: Clearing, Settlement and Delivery of transactions on The Exchange are done electronically by the Central Securities Clearing System Limited (CSCS), a subsidiary of The Stock Exchange. The CSCS Limited (“the Clearing House”) was incorporated in 1992 as part of the ef­fort to make the Nigerian stock market more efficient and investor-friendly. Apart from clearing, settlement and delivery, the CSCS Limited offers custodian services. (See the write-up on the Central Securities Clearing System Limited for more about clearing, de­livery and settlement on The Exchange.)

 

1.1 BACKGROUND OF STUDY.

The Nigerian Capital Market of Nigerian Stock Exchange is a major player in the market for long-term funds. The in­struments or securities traded in the capital market are known as capital market instru­ments. However, the capital market has both securities based segment (i.e. the stock ex­change) and non-Securities based segment (market for long term loans). Capital market instruments can be categorized into 3 major groups of securities: preference shares, or­dinary shares and debt instruments. Some of the other principal and active market op­erators in the Nigerian Stock Market include Stockbrokers, Investment Advisers, Issuing houses, Registrars, Fund Managers, Financial Advisers et cetera.

The Nigerian Stock exchange is the cen­ter point of the Nigerian Capital Market. It provides a mechanism to mobilize private and public savings as well as making such funds available for productive purposes. The Nigerian Stock Exchange also assists in the allocation of the nation’s capital resources amongst numerous competitive alternatives. The stock exchange can also be a mechanism, which can measure and detect the symptoms of an impending economic boom or decline long before the predicted prosperity or de­cline actually occurs provided the market is either in the semi-strong or strong form of efficiency level. It is good to distinguish the capital market from the Stock Exchange in the sense that the capital market is much wider and bigger than the Stock Exchange. The Stock Exchange is just a participating in­stitution in the capital market albeit it is the most active of all the participants. The activ­ity of the Stock Exchange in the capital mar­ket is reflected by the Stock Exchange, which measures the activities on the capital market.

 

The main objectives of the Nigerian Stock Exchange as enunciated in the Memorandum of Association of the company is to create an appropriate mechanism for capital formation and provide efficient allocation of resources among competing alternatives. It is also ex­pected to provide special financing strategies for projects with long term gestation periods. In addition, it helps to maintain discipline in the capital market as far as the participants and the investors are concerned and as such, assists to broaden the share ownership in the market by providing the enabling envi­ronment and to provide and maintain fair prices for securities. The overriding objec­tive of any financial system is the provision of a conducive atmosphere for the transfer of funds from the surplus sector of the econo­my to the deficit sector. The Capital Market, in the process of carrying out its function is faced with many challenges such as the effect of economic trends, financial restructuring and reforms by government, industrializa­tion, and technology etc. the Capital Market is thereby required to adapt to the constantly changing trends in the economy.

The market in Nigeria has been de­scribed as being shallow; this is due mainly to the market float that is very small and is measured by the ratio of securities in the market to the total listed securities outstand­ing. The challenge that lies ahead is to be able to increase and retain as many of our domes­tic individual and institutional investors as possible and simultaneously attract foreign ones to the Nigerian Capital Market. This can be achieved by being dynamic, innovative, and having an open mind so that new ideas can be absorbed and put productively in use. The market must be in a position to provide a spectrum of investment alternatives, new trading instruments with which investors can hedge their risk, as well as an environ­ment which is honest, has sufficient struc­tures and where policies are flexible enough to accommodate different investment needs.

 

The Capital market has also been char­acterized by a number of market failures, one of which is asymmetric information, a situation in which one party to a transac­tion has less information than the other par­ty. The pervasiveness of this phenomenon greatly undermines the efficiency of finan­cial markets as mechanisms for allocating resources. Because geography and cultural distance complicate the acquisition informa­tion, asymmetric information is particularly prevalent globally. While the revolu­tion in information asymmetric are lessened but not eliminated, therefore they are prone to the sharp investor reactions, unpredict­able market movements and financial crisis that can occur when information is incom­plete and financial markets behave errati­cally (Eichengreen and Musa 1998). Thus, in the absence of complete information, inves­tors tend to rush in and out of the markets on rumor.