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CAPITAL MARKET DEVELOPMENT AND ITS CONTRIBUTION TO FINANCIAL SECTOR DEVELOPMENT IN NIGERIA AN EMPIRICAL ANALYSIS.
- Background Information
Over the years, Economists have been emphasizing the need for effective mobilization of resources as a catalyst for national development in any economy, which can only be achieved through the effectiveness in the mobilization and allocation of funds to different sectors of the economy, so as to allow them manage their human or material resources which will result in optimal output for a sustainable growth and development in any economy, (Oke, 2012).
One of the significant areas of underdevelopment in financial management in developing countries is domestic capital market issues. In most developed countries the domestic capital market is regarded as an important source of funding by the state and has many advantages over the use of foreign sources of debt financing. All over the world, the capital market has played significant roles in financial development and hence economic growth. One intermediary in the market that operates as a rallying point for the overall activities is the stock exchange. It is a common postulation that without a functional stock market, the capital market may be very illiquid and unable to attract investment, (Akingunola, Adekunle and Ojodu, 2012). Essentially, the stock market provides liquidity (Ezeoha, et al 2009), contributes to capital formation, and investment risk reduction by offering opportunities for portfolio diversification (Levine, 1991).
The capital market is very vital to the growth, development and strength of any country because it supports government and corporate initiatives, finances the exploitation of new ideas and facilitates the management of financial risk. The rate of financial development has been inexonerably linked to the sophistication of capital market efficiency. The capital market facilitate the mobilization and channelling of funds into productive constituents and ensures that the funds are used for the pursuit of socio-economic growth and development without being idle (Akinbohungbe, 1996)
Since 1960, efforts have been made by market operators, regulators, and governments, to strengthen the capital market in Nigeria. According to Esosa (2007), several such reforms were formulated to boost the sector and some of the highlighted are; the securities and exchange decree was promulgated on April 1, 1978, to replace the capital issues commission and expand the scope of its activities, while the second-tier securities market (SSM) of the Nigerian Stock Exchange was established on April 5, 1985. In 1989, the companies and Allied Matters act was enacted to regulate the incorporation, corporations and activities of all bodies in Nigeria. The central bank of Nigeria decree of 1991 was also promulgated; to expand the functions of the central bank granting it greater autonomy in monetary policy. Then, in 1995, the Nigerian Investment Promotion Act No. 16 of 1995 was enacted to guarantee the ease of transfer of funds through authorised dealers. The 1995 act was meant to enhance ease of transfers hence increasing the performance of the Nigerian capital market.
The question as to where we are today is a function of the strength and effectiveness of the regulatory framework on which the capital market is supposed to ride, (Adenuga, 2010). As the Nigerian economy continues its rapid integration with the global market place, it is inevitable that in parallel with the ongoing public sector reforms that have been behind its increasing competitiveness, the nation will need to source significant amounts of funding and develop deep, efficient, and highly liquid capital markets in order to move the economy to the next growth phase (Onasanya, 2012).
Since the boom days, however, the capital market witnessed a steep decline in trading volumes and overall market capitalisation, with the value index dropping from 33,358.3 points in 2006 to 20,730.6 points in 2011, and the value of approved new issues dropping precipitously to N2.03billion in 2011 from N1,410trillion in 2006. With 201 listed equities, 48 listed bonds (including one exchange traded fund), and an average daily turnover this year of US$17million, the market capitalisation of equities on the NSE currently stands at N6.54trn, while that of bonds is slightly lower at N3.74trillion, (NSE, 2011).
However, domestic output growth has shown mixed developments between 1981 and2010. During this period, the economy registered declines in the real GDP (at 1990constant basic prices) in five years (1982, 1983, 1984, 1987 and 1991) ranging from-7.1 per cent in 1983 to -0.6 per cent in 1987. For the rest of the period, the annualreal GDP growth was positive. The economy witnessed high growth rates of 10.2and 10.5 per cent in 2003 and 2004 before declining to 6.0 per cent in 2008,followed by a mild recovery to 6.7 per cent in 2009, (Adenuga 2010). He stressed that a key factor responsible forthe negative growth rates of the 1982-84 periods was the low performance of theoil sector in 1981-83 owing to the glut in the international oil market.
Prior to 1991 when the Nigerian capital market was deregulated, the market was seen by analysts, observers and researchers as underdeveloped (Idowu and Babatunde, 2012). According to Demirguc-Kunt and Levine (1996), the most developed stock markets in the world are in Japan, the United States, and United Kingdom and the most underdeveloped markets are in Columbia, Venezuela, Nigeria and Zimbabwe. Between 1986 and 1993, market capitalization ratio to Gross Domestic Topic (GDP) in Nigeria stood at 0.04%, number of companies listed on the stock exchange was 127, while turnover ratio (i.e. total value of shares traded divided by market capitalization) stood at 0.01 (Demirguc-Kunt and Levine, 1996)
1.2 Statement of Problem
The Nigerian Stock Exchange holds the ace for the transformation of some sectors of the Nigerian economy, according to the Chief Executive Officer of the capital market. He said that the Nigerian Stock Exchange is the right platform to raise capital towards the growth and expansion of the agricultural sector (Onyema, 2012).The major significance of the financial system in any economy is its ability to mobilize savings and to efficiently intermediate in financial service delivery so as to create liquidity in the economy, minimize information cost, and create a bridge in assets diversification (Babalola, 2008).Futhermore,Nwankwo (2007) states that a developed local securitiesmarket will stabilize the financial sector, entrench competitive spirit within the sector, and effectively complement the banking sector.The Nigerian capital market is a veritable instrument for promoting limitless wealth accumulation through investment (Adepetun, 2008).
The existing economic problem is that the multiplicative effect of the Nigerian capital market on investments and then to the financial sector has been limited. The general consensus that a functioning capital market should enhance resource transfers from surplus spending unit to deficit spending unit implies that inequality and poverty should be reducing while welfare generally improves. Nevertheless, Nigeria still records high inequality rates and poverty rates, despite the reported output growth. In fact NBS posits that poverty increased from 51.6% in 2004 to 61.2% in 2010 based on the comprehensive house hold surveys, while inequality worsened from 0.43 to 0.49 between 2004 and 2009. This implies that a huge proportion of deficit spenders have not been able to efficiently exploit the savings of surplus spenders for investment. This therefore reiterates the raison d’etre of this study which is to identify the factors that affect capital markets in Nigeria as well as the extent to which the Nigerian capital market performance influences investments and then affects financial sector development.
Moreover, as asserted by Ariyo and Adelegan, (2005) part of the difficulty with attracting investments into the sectors of the economy is the diverse risks for which would-be investors require a premium on expected returns. The proximate risk in this regard is inflation. Despite the best efforts of the monetary authorities, this has remained in the lower double digit range for some time now. Adjusted for changes in the movement of domestic prices (and with inflation averaging 11% in the ten years to end-2011) the 6.00% average growth rate in GDP turns out to be negative and not as attractive as it appears at first.
In addition, there is a strong case to be made against the public sector’s growing borrowing requirement. As the Federal Government has borrowed more it has seen an increase in the yield on its borrowing instruments. These rate rises, in turn, have increased the attraction of government debt instruments, pushed the private sector out of the business of issuing bonds, and diverted domestic savings away from the capital market to the money market, (Oteh, 2010).Now, if the softness or absence of effective capital market could leave most productive projects from various sectors of the economy which carry developmental agenda unexploited, then there is a very strong case for rejuvenating the Nigerian capital market for sustainable financial sector development which should translate to growth. This forms the motivation for this study.
Several reforms have been formulated to affect the Nigerian capital market directly and indirectly. The most important was the 1995 Nigerian Investment Promotion Act that was enacted to guarantee the ease of transfer of funds through authorised dealers. This study therefore equally intends to ascertain to what extent the 1995 reform impacted on the Nigerian capital market. Most recent literatures on the Nigeria capital market have concentrated on the vital role of the capital market on aggregate economic growth and development, (Adenuga, 2010; Oke and Adeusi, 2012; Abu, 2009; Kolapo and Adaramola, 2012).The effect of the Nigeriancapital market on financial sector developments and the determinants of the capital market have seldom been investigated in Nigeria thereby creating a research gap in this area.
1.3 Research Questions
- How is the trend of the capital market of Nigeria?
- What are the determinants of capital market development in Nigeria?
- To what extent did the 1995 Nigerian Investment Promotion Act affect capital market development in Nigeria?
- Does the capital market impact on financial sector developmentin Nigeria?
1.4 Objectives of the Study
The broad objective of this study examined the performance of Nigerian capital market. The specific objectives of the study are as follows:
- To examine the trend of the capital market of Nigeria
- To ascertain the determinants of the Nigerian capital market development.
- To what extent did the 1995 Nigerian Investment Promotion Act affect capital market development in Nigeria
- To evaluate the extent to which theNigerian capital market impacts on financial sector development.
1.5 Hypotheses of the Study
The hypotheses of this study are stated based on the Null, while the alternative is inferred. They are:
H01: There exist no significant determinants of capital market development in Nigeria.
H02: The 1995 Nigerian Investment Promotion Act does not significantly impact on capital market development in Nigeria.
H03: There exist no significant impact of the capital market operations on financial sector development in Nigeria.
1.6 Policy Relevance of the Study
The study examines the impact of capital market instruments on the sectors of the Nigerian economy. 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 determinants of the capital market and the role which the capital market plays on the financial development of Nigeria.
To this end, the study will therefore be relevant to researchers as well as fellows of the Academia as it contributes to the existing stock of knowledge and instigates the prevailing debate in this area, thereby suggesting areas for further research. The study is equally relevant to administrators and politicians/policy-makers as it will provide policy recommendations on ways to improve operations and activities of the capital market as well as improving its influence on the financial market.
1.7 Scope of the Study
The study is a country specific study focusing on the Nigerian economy. The study examines the capital market and how it relates to the financial sector. The study proposes to use a time series data ranging from 1981 to 2013.