CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Prior to the late 1980s, international donors and governments in developing countries held the notion that entrepreneurial functions could be better served by the state through public ownership of the means of production, taxation, licensing and regulation. Wikipedia Encyclopedia defines capital markets as the financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments. Financial regulators, such as the UK’s Bank of England (BoE) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties.
Modern capital markets are almost invariably hosted on computer-based electronic trading systems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public. There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial centers like London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year.
A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. A second important division falls between the stock markets (for equity securities, also known as shares, where investors acquire ownership of companies) and the bond markets (where investors become creditors). Microsoft Encarta 98 Encyclopedia (1998) identified the following reasons for government ownership of enterprises. Ensure safety or security, Re-distributive goals, Prevent monopolization, Government controls distribution, Public firms less likely to use price discrimination, Government captures substantial market profits, Macroeconomic stabilization, Developing Countries, and Government has political control
Private entrepreneurs were perceived to be few; while local subsidiaries of multinational firms constituted a considerable chunk of local private sector activity. However, poor performance of the public sector, misallocation of resources, market distortions and negative economic growth influenced a re-evaluation of the state-led development strategy. In the past 30 years, liberalization and privatization have become dominant themes in development planning and strategies particularly in Africa. Donors, governments and development practitioners have exhibited changing attitudes towards the role of the private sector in the development of African economies and, accordingly, have acknowledged the need to facilitate private sector development (Kibuthu, 2005).
In addition, Yartey (2008) argues that the promotion of economic growth led by the private sector requires the creation of an enabling environment within which the private sector can flourish. A key factor is the healthy growth of a nation’s financial sector, which in turn improves the private sector’s access to services such as bank credit, equity capital, payments and risk management services. Generally, the development of the financial sector has followed a trend beginning with the channeling of savings and `investments through banks, followed by the development of capital markets as investors or savers search for higher-returns, and firms seek cheaper capital.
Furthermore, Yartey and Adjabi (2007) posit that financial markets typically comprise several institutions including banks, insurance companies, mutual funds, mortgage firms, finance companies and stock markets. Nevertheless, Miller (1995) argued that in developing countries, particularly in Nigeria, financial markets are dominated by commercial banks, which have not been reliable sources of long-term financing for businesses. The non-bank sources of medium and long-term financing are generally underdeveloped. Kibuthu (2005) contends that the short-term nature of commercial banks’ assets and liabilities as well as regulatory reserve requirements in many countries render those banks incapable of supplying long-term capital.
Jeffrey and Michael (2005) argue that heavy reliance on banks increases the vulnerability of the financial system as exemplified by the Asian financial crisis in the 1990s. Having a functioning financial system, which includes non-bank financial institutions, can protect economies from financial shock. Sam (2001) surmises that in this regard, capital markets are considered better avenues for mobilizing domestic and international capital.
The capital markets have the potential to meet the fixed-capital needs of the private sector. They can ensure the efficient and sustainable funding of governments, corporations, banks and large-scale or long-term projects (Kibuthu, 2005). In addition, capital markets facilitate the mobilization and allocation of medium and long-term funds for productive investment by:
Providing a simple mechanism for the transfer of funds;
- Facilitating companies’ access to a large number of local and foreign investors;
- Widening the array of financial instruments available to savers and investors;
- Increasing the diversity and competition in the financial systems; and
- providing market signals on current situations and future expectations.
Generally, the effective functioning of capital markets requires the following:
- Existence of an exchange, clearing and settlement system;
- Existence of a legal system to enforce contracts;
- Availability of information on financial soundness and
- Future prospects of companies and governance of corporations in a manner that gives the investors’ confidence that their funds will not be stolen or wasted (Sam, 2001).
Meanwhile, developing countries are working towards reforming and deepening their financial systems, through the expansion of their capital markets in order to improve their ability to mobilize resources and efficiently allocate them to the most productive sectors of the economy. A significant policy change has been the establishment of privatization programs, which have facilitated reduction in public debt, improved incentives and efficiency in the operations of the privatized entities, and facilitated better access to capital through the floating of shares to the general public (Claessens, 2005).
Mohtadi and Argarwal (2004) posit that large capital markets lower the cost of mobilizing savings and facilitating investments in the most productive technologies. Thus, Adebiyi (2005) argues that all over the world the capital market has played significant roles in national economic growth and development.
Thornton (1995) argues that economic activities in a country constitute the key drivers of capital market development. Growth in the capital market spurs economic development [Yartey 2008) and empirical evidence shows that there is no sharp demarcation existing between developments in the capital market and economic growth [Filer 2002). Yartey and Adjasi (2007) argue that the establishment of capital markets in Africa is expected to boost domestic saving and increase the quality and quantity of investments. They emphasize that in principle the capital market is expected to accelerate economic growth by providing a boost to domestic savings and increasing the quality and quantity of investments. Equally, capital markets can increase economic development by making available information on firms’ prospects and redistributing investable capital.
Thus, the capital market has contributed to the financing of the growth of large corporations in certain African countries and those large corporations in Africa have made considerable use of the capital market to finance their growth [Yartey and Adjasi 2007). The fact, essentially, is that no matter the extent of argument that exists, the main essence of the capital market is to consolidate growth in the financial system and enhance the consequent impact of the later on economic development in the country.
Nigerian capital market started rolling from 1960 when Nigerian Stock Exchange (Lagos stock) exchange was opened. At present the market is gaining depths and becoming steady. This stock exchange is the pivot of the Nigerian capital market.
This exchange is providing different types of funds to bring the accumulated public wealth into the stock market. At the same time, the large-scale industries of Nigeria are listed on this exchange. There is also another stock exchange in Nigeria that is working with the medium and small-scale industries of the country and providing good support to strengthen the Nigerian capital market.
The development of the Nigerian capital market has some other reasons too. A number of Nigerian banks are investing in the Nigerian stock market so that they can roll the money and can earn some good profit from the market.
The recently introduced minimum capital requirements for the bank have encouraged the banks to choose the stock markets. The Nigerian capital market is still gaining depth and so that it was a bit risky for the banks to take the decision but they took the risk and the results are very positive.
It not only encouraged the individual investors but at the same time provided some good support to the growth of the Nigerian capital market. It is true that the Nigerian capital market is performing well and the country is experiencing some historical public offers by the banks like the Zenith Bank. But at the same time, it is also true that the market has to go a long way to because still now the NSE’s market capitalization is, much lower than the GDP.
According to the ongoing trends, the market capitalization should be nearer to the GDP or in certain cases it is more than the GDP as in the case of Johannesburg that recorded 239% of GDP. The turnover ratio of Nigeria stock exchange was 12.4% in 2005. The Nigerian bond market is also passing through a developing phase.
The main participants of the Nigerian capital market are the Securities and Exchange Commission (regulatory), Nigerian Stock Exchange, stock brokers, trustees, issuing houses, registrars. The investments are done by the insurance companies, pension funds, institutional investors and the individual investors.
More Information in Capital Market
1.2 STATEMENT OF THE PROBLEM
With the ascendancy of the Structural Adjustment Program (SAP) as a policy platform, liberalization and privatization have become dominant themes in development strategies in Nigeria. Thus, the changing attitudes towards the role of the private sector in the development of Nigerian economy have facilitated the development of the capital market. In the 1990s, many countries in Africa set up capital markets as a precondition for the introduction of market economies under the SAP propagated by the international monetary institutions, and to facilitate the privatization of state-owned enterprises.
However, the development of the Nigerian Capital Market dates back to the late 1950s when the Federal Government, through its Ministry of industries set the Barback committee to advise it on the ways and means of setting up a capital market. During that period, financial operators in Nigeria comprised mainly foreign-owned commercial banks that provided short-term commercial trade credits for the overseas companies with offices in Nigeria (Nwankwo, 1991). Their capital balances were invested abroad in the London Stock Exchange. Thus, the Nigeria government in an attempt to accelerate economic growth embarked on the development of the capital market. This is to provide local opportunities for borrowing and lending of long-term capital to the public and private sectors as well as creating opportunities for foreign-based companies to offer their shares to the local investors and provide avenues for the expatriate companies to invest surplus funds in Nigeria.
Based on the report of the Barback Committee, the Lagos Stock Exchange was set up in 1959. With the enactment of the Lagos Stock Exchange Act 1959, the Exchange commenced business in June, 1961. It assumed the major activities of the stock market by providing facilities for the public to trade in shares and stocks, maintaining fair prices through stock-jobbing and restricting the business to its members. The Lagos Stock Exchange was renamed the Nigeria Stock Exchange in 1977, with the following objectives:-
- To provide facilities to the public in Nigeria for the purchase and sale of funds, stocks and shares of any kind and for the investment of money. To regulate the dealings of members’ interests and those of their clients.
- To control the granting of a quotation on the stock exchange in respect of funds, stocks and shares of any company, government, municipality local authorities or other corporate bodies.
- To promote, support or propose legislative or other measures affecting the above objectives.
According to its Memorandum and Articles of Association, the Exchange is incorporated as a private non-profit organization limited by guarantee to undertake three basic functions, which include:
- Provide trading facilities for dealing in securities listed on it;
- Oversee activities relating to trading in securities; and
- Enhance the flow of long-term capital into productive investment and ensuring fairness of prices at which quoted securities are traded.
Initially, trading activities commenced with two Federal Government Development Stocks: one preference share and three domestic equities. The market grew slowly during the period with only six equities at the end of 1966 compared with three in 1961. Government stocks comprised the bulk of the listing with 19 of such securities quoted on the Exchange in 1966 compared to six at the end of 1961. (Nnanna, Englama and Odoko, 2004). Prior to 1972 when the indigenization exercise took off, activities on the Nigerian Exchange were low, in terms of the value and volume of transactions. For instance, the value of transactions grew from Nl.49 million in 1961 to N16.6 million in 1971. Similarly, the volume of transactions grew from 334 to 634 over the same period; though the bulk of the transactions were in government securities, which were mainly development loan stock through which the government raised money for the execution of its development plans. Accordingly, with the promulgation and implementation of the Nigeria Enterprises Promotion Decree of 1972, (whose principal objectives included promoting capital formation, savings and investment in the industrial and commercial activities of the country), the low level of activities in the capital market increased as Nigerians gained the commanding heights of the economy (Ewah, Esang and Bassey 2009).
However, following the criticisms that the Nigerian Stock Exchange was not responsive to the needs of local investors, especially indigenous businessmen who wished to raise capital for their businesses, the NSE, introduced the Second-Tier Securities Markets (SSM) in 1985 to provide the framework for the listing of small medium-sized Nigeria companies on the Exchange. Six companies were listed on this segment of the capital market by 1998 and by 2002, over twenty-three companies had availed themselves of the opportunities offered by this market (Nnanna, Englema and Odoko, 2004).
The major instruments or products available in the Nigerian capital market to date include the industrial equities otherwise referred to as ordinary shares; industrial loans such as debentures, unsecured zero coupons, preference shares, bonds/stocks, specialized project loans/infrastructural loans, government stock/bonds, unit trust schemes, unlisted corporate/industrial loans; among others. The market is currently divided into two broad categories namely equities and debt markets. The equities are instruments or products that confer ownership rights on the investor, while the debt markets are interest-bearing obligations with fixed or floating interest-rates. Thus, Ekezie (2002) noted that capital market is the market for dealings (i.e. lending and borrowing) in longer-term loan able funds. Mbat (2001) described it as a forum through which long-term funds are made available by the surplus to the deficit economic units. Companies can finance their operations by raising funds through issuing equity (ownership) or debenture/bond as securities. Equities have perpetual life while bond/debenture issues are structured to mature in periods of years varying from the medium to the long-term of usually between five and twenty-five years.
The capital market offers access to a variety of financial instruments that enable economic agents to pool, price, and exchange risks. Assets with attractive yields, liquidity and risk characteristics, encourages savings in financial form. This is very essential for government and other institutions in need of long-term fund and for suppliers of long-term funds (Nwankwo, 1991).
Based on its importance in accelerating economic growth and development, governments of most nations tend to have keen interest in the performance of its capital market. The concern is for sustained confidence in the market and for strong investors’ protection arrangements. Nigerian Securities and Exchange Commission (SEC) is the government agency responsible for developing and regulating the Nigerian capital market. It was created by Act No. 71 of 1979 and re-acted as Securities and Exchange Commission Decree No. 29 of 1988. The SEC purses its objectives by registering all market operators based on capital adequacy, competence and solvency as criteria (Ariyo and Adclegal, 2005). The Nigerian Capital Market which is a member of the Nigerian financial system is a market that provides an avenue for the mobilization of long-term funds. This market serves the needs of industries, the commercial sector, government and local authorities, which are big borrowers of funds.
The Nigerian capital market consists of two markets, (Primary and Secondary markets) and some operational institutions. The main institutions in the capital market are the Securities and Exchange Commission (SEC), which is at the apex and represents the regulatory authority for the market, the Nigeria Stock Exchange (NSE), the issuing houses and the stock broking firms. The Secondary Market in Nigeria is the NSE where dealings in existing claims are traded. In general, the Nigerian capital market helps to stimulate industrialization and development in the Nigerian economy. It also improves the growing of domestic corporate sector and helps to reduce dependence on borrowing. Access to finance for new and smaller companies and also the encouragement of institutional development are based on the framework provided by the market.
The mere presence of a capital market in a country boosts the international investment climate as it raises the chances of additional local financing for both foreign and local direct investment. Secondly, the capital market has provided opportunity for investment diversification. A large part of wealth currently invested in Nigeria would have been diverted to foreign countries but for the presence of the capital market. It, therefore, remains a viable institution for holding back capital flight thereby reducing underdevelopment of the economy. Thirdly, the capital market enabled mass participation in the privatization exercise as it did during the implementation of the indigenization program, thereby ensuring that a large number of Nigerians benefited from the ownership of the divested assets. The sale of public wealth through privatization would have benefited a few rich persons, thereby worsening income inequality if a capital market was absent.
Levine and Servos (1998) postulated a strong positive relationship between capital market development and long-term development. Equally, capital market liquidity plays vital roles in the process of development (Bencivenga, et al, 1996).
The capital markets in Nigeria create a free entry and exit for investors. In a private company, it is not easy for an investor (shareholder) to withdraw capital invested without upsetting the company’s capital structure. But for public-quoted companies, as long as an investor’s broker can find prospective investors to buy the client’s shares, the process is over.
One of those important functions of the capital market is to encourage indigenous enterprises to develop its peculiar technologies through accessibility to funds and expertise through international connections. This, it has achieved, tremendously. Moreover, most of the enterprises benefited from the implementation of the Nigerian Enterprises Promotion Act and the privatization policies through the market. Both policies promoted indigenous enterprises, which are the main engines of development in an economy.
Despite the capital market’s laudable performance and benefits, it is still beclouded with some weaknesses in Nigeria. The bureaucratic system of the Securities and Exchange Commission is a hindrance to the smooth processing of applications submitted to it. The private sector to which most enterprises belong is not used to this bureaucratic system of the public sector. The fees charged by the Exchange are unreasonably high and constitute a great burden on enterprises/companies.
Based on the foregoing discussion, the following research questions guided the study:
(1) Has the Nigerian capital market facilitated wealth creation and provision of long-term funds needed for national development in Nigeria from 1980 t0 2009?
(2) To what extent has the Administration of the Nigeria capital market affected the mobilization of long term funds for national development in the country?
(3) What measures could be proffered to enhance the capacity of the Nigerian capital market in mobilizing long term funds for national development in the Nigeria?
1.3 OBJECTIVES OF THE STUDY
The general objective of this study was to examine the roles played by the Nigerian capital market in mobilizing long-term funds for economic development in the country from 1980 to 2009.
The specific objectives of the study were to:
- Analyze the roles of the Nigerian capital market in facilitating wealth creation and provision of long-term funds needed for national development in Nigeria from 1980 to 2009.
- Examine the challenges confronting the Administration of the Nigerian capital market in mobilizing long term funds for national development in the country.
- Articulate measures that could be implemented to enhance the capacity of the Nigerian capital market in mobilizing long term funds for national development in the Nigeria.
1.4 SIGNIFICANCE OF THE STUDY
This study has theoretical and empirical significance. Theoretically, the work provided the linkage and relationship between growth in the capital market and economic development in Nigeria. While some suggest that capital market development has a negative effect on economic growth, others strongly believe that capital market development has a direct link to economic growth. They argue that the role of Capital Market is to allocate the scarce savings to productive investment, to channel funds to investors at a minimum cost and that prices are used as a signal for capital allocation. The study examined whether there is a strong empirical association between capital market development and long-term economic growth. In this regard, it evaluates this association by analyzing measures such as stock market size, liquidity, and integration with world markets, into index of stock market development.
In addition, this study examined how the growth rate of Gross Domestic Topic (GDP) and per capital income regressed in a variety of variables designed for control at initial conditions, such as political stability, investment in human capital and others, affects economic growth. A correlation is drawn between overall capital market development and long-term economic growth.
Empirically, this work helps lead to more exposure about the capital market, the way it operates and runs. The benefits the investing public such as shareholders, bondholders, stock brokers, agents in the capital market, etc and the governments stand to gain if they make proper use of the capital market.
Secondly, it also shows practitioners how investments in the capital market help in facilitating economic development. Developmental program based on capital market is likely to accelerate economic growth because some capital projects like transport, markets, education, health etc can be well and easily funded in the capital markets.
Finally, industries and firms can grow easily through capital market than any other form of funding arrangement. Consequently, this study enlightens the investing public on how to monitor the fluctuations of the stock exchange prices and how to make good judgement for investments.
1.5 SCOPE AND LIMITATIONS OF THE STUDY
As the global economic crises deepen, capital markets around the world are facing competition both from each other and from new high-technology entrants. It seems likely that there will be continued trend towards concentration of securities trading in a few leading centers with domestic stock exchange in some countries becoming increasingly irrelevant. The scope of this study therefore was the analyses of the roles played by Nigerian capital market in the national development of the country. It concentrated on the possibility of the Nigerian capital market in surviving the global economic problems and meets the expectations of Nigerians in solving her numerous economic needs. Development of the Nigerian capital market dates back to the late 1950s when the federal government through its ministry of industries set up the Barback committee. As at that time financial operators in Nigeria were mainly foreigners that provided short-term loans through their commercial banks. Their capital balances were invested abroad in the London stock exchange. In an attempt to accelerate economic growth, the period of 1980s witness the establishment of the Securities and Exchange through decree 29 of 1988. The period, 1980 to 2009, witnessed great innovation in the Nigerian capital market this is the period when most privatized public owed enterprises were carried out. The period witnessed the federal and state governments offering bonds and many indigenous companies such as first bank plc, Nigerian breweries, zenith bank and seventeen others joining the capital market.
The limitation of this study is difficulties in getting relevant information from the various areas of the study such as the Central Bank of Nigeria, the Securities and Exchange Commission and Ministries of Finance, Industries and Commerce, the Debt Management Office of Nigeria who in most cases regards the needed information as secret that could not be divulged to outsiders. These problems, however, were overcome through the use the enormous information on the capital market, in the news media