THE ROLE OF THE CAPITAL MARKET ON ECONOMIC GROWTH AND DEVELOPMENT (1986-2016)
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CHAPTER ONE
INTRODUCTION
1.1 Background to the study
The major engine of economic growth in any country is the capital market. The capital market is an essential agent of economic growth because of its ability to facilitate and mobilize savings and investment. The capital market is a subset of the financial system that is involved in the provision of long term funds for productive use. The capital market drives any economy’s economic growth because it is necessary for long term growth capital formation (Osaze, 2000). Capital formation entails accumulated savings out of the current incomes of either organization or individual. It is investment in fixed assets which in part is financed with monies raised through the capital market (Al-Faki, 2006). But evidences from past studies have revealed a growing concern and controversies on the role of the capital markets on economic growth and Development .
Olawoye (2011) noted that the capital market is an essential agent of economic growth because of its ability to facilitate and mobilize savings and investment. The ability to mobilize and invest lies in the nations strength in effective resource mobilization which enables internal wealth generation and domestic savings as well as inflows of foreign capital.The capital market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2000; Levine and Servos, 1996; Obadan, 1995; McKinnon, 1973). Thus, the consideration of the capital market as the institution for financial management from surplus sectors of the economy to the sectors that are seeking to be financed. The market is viewed as a complex institution imbued with inherent mechanism in which long term funds of the major sector of the economy comprising of household, government and firms are mobilized, harnessed and made available to different sector of the economy (Ndako, 2010). The capital market has been one of the major channels through which foreign funds are injected in most economy and the tendency towards economic growth is more visible there than in anywhere else.it is therefore valid to state that the growth of the capital market has become one of the barometers for measuring economic growth of a nation(Emeruga, 1998).Therefore, for a country to attain a sustainable economic growth, it requires both local and foreign capitals made available by the opportunities provided by the capital market (Ekundayo, 2002). However, non-availability of long-term funds for investment financing has constituted a barrier to the development and growth of most African countries, particularly in many developing countries such as Nigeria, wherein capital has become a major constraint to economic development .
The capital market in recent times has experienced unprecedented growth which was attributed to the banking sector reform of 2004- 2005. The market was instrumental to the initial twenty five banks that were able to meet the minimum capital requirements of N25 billion during the banking sector consolidation and reforms in 2005. (Nwankwo, 1991) posited that the capital market has helped government entity to raise long term capital to finance new projects and modernizing industrial and commercial concerns.
The capital market especially in developing country is expected to boost domestic savings and also mobilizes long term debt and equity finance for investments in long term asset. Access, ease and cost of raising funds from capital market depend to a large extent on the level of development and performance of the market. Most developed countries such as the United States of America (USA), France, Japan, etc. have a developed capital markets with high performance. Business organization and government in these countries rely on the capital market for growth and development in those countries. The capital market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2000; Levine and Servos, 1996; Obadan, 1995; McKinnon, 1973).
Dealers in the securities segment of the capital market include banking institutions, stockbrokers, investment and merchant bankers and venture capitalists that intermediate between the market and the public. Well-functioning financial markets are very crucial for the promotion of global financial integration. An efficiently functioning domestic financial market can better position a country’s competitiveness in the markets for global capital (Senbet&Otchere, 2005).
The financial market, which comprises the capital and money markets as well as other submarkets, plays crucial roles in the functioning of any modern economy. However, for the purpose of this research work emphasis will be on the capital market. The capital market is believed to be an important sector of every economy whether it is developed or developing. This is because of the fact that the capital market performs a vital role in the growth of the economy by providing the avenue through which foreign investors make investment in the country which in turn may boost the growth of the economy in terms of foreign Direct Investment (Daniel, 1999).
The impact of the capital market performance on a nations growth are determined by a number of factors which includes how financial asset are priced, volume of transactions and new issues of securities, the size of the market, market capitalization etc. This study poses to evaluate the impact of capital market on economic growth in Nigeria.
1.2 Statement of the Problem
The capital market in Nigeria has gone through some reforms over the years with the intention of stimulating the economy and creating a stable economic growth and development. Recently, reforms were carried out in order to provide opportunities for an improved fund mobilization, efficiency in allocation of resource and provision of necessary information for assessment. In spite of these reforms, great concern has been raised on the performance of the capital market in Nigeria in relation to the growth and development of the economy which when viewed from the nature of the activities taking place in the market appeared superficial. This can be linked to the lack of enabling framework that maintains and improve confidence and investor protection and also evaluation of factors that are significant in determining capital market performance.
Deducting from the extensive studies on the role of the capital market on economic growth, the capital market is expected to contribute to economic development and development through the transmission mechanism of mobilization of saving, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long term and non-debt financial capital, which enables company to avoid over reliance on debt financing and enhance incentives for corporate control among others.
1.3 Research questions
Based on the broad statement of research problem, the following research question were raised. They are as follows;
- What is the impact of the capital market on economic growth?
- Is there a relationship between market capitalization and economic growth?
- How does total new issues affect gross domestic product in Nigeria?
- To what extent does the volume of transaction in the capital market contributes to the gross domestic product in Nigeria?
- To what extent does the volume of shares traded in the capital market affect the gross domestic product in Nigeria?
1.4 Objectives of the study
The main objective of the study of to examine the impact of capital market performance on economic growth in Nigeria .However, the specific objectives are to:
- evaluate the impact of the capital market on the Nigerian economy.
- Determine the impact of market capitalization on gross domestic product in Nigeria (GDP).
iii. Evaluate the effect of total new issues on the gross domestic product in Nigeria.
- Identify the impact of the volume of transaction on gross domestic product in Nigeria.
- Examine the Impact of total listed securities on gross domestic product.
- Examine the relationship between the capital market and the stock exchange market.
1.5 Hypothesis of the study
In line with the objectives of the study the following hypotheses have been formulated in null form :
H01: Market capitalization has no significant impact on Nigerias gross domestic product.
H02: Total new issues have no significant effect on Nigerias gross domestic product.
H03: Volume of transaction has not significantly affected Nigerias gross domestic product.
H04: Total listed equities have no significant impact on Nigerias gross domestic product
Significance of the study
It is a noted fact that for any meaningful economic transformation of a country to take place, the capital market must be effectively active. It has also been an acknowledged fact that the economic strength of any nation is measured according to how actively and effectively the capital market is performing (Adamu,2008).The study will be of immense significance to regulatory authorities such as the CBN, NSE and SEC in coming up with sound financial policies and reforms that will boost the performance of the capital market. This would strengthen public companies by ensuring that corporate governance practices in Nigerian public companies are aligned with international best practices through improved financial disclosure of information and adoption of International Financial Report Standards (IFRS). Finally, future studies may want to share this experience by extrapolating some of the data as well as the statistical inferences that this study has come up with.
1.6 Scope of the Study
The Nigerian economy is a large component with a lot of diverse and sometimes complex parts. In this regard the study looks at a particular part of the economy by focusing particularly on the financial sector. Even then, the study does not cover all the parts of the financial sector, but focuses only on the capital market and its activities as such its impact on Nigerian economic growth and development. This is informed by the importance of the capital market to the economic development of the country because it provides long term funds needed for investment for the growth of the economy.The choice of the period of study, 1995-2015 is predicted on the reasoning that, the market has experienced remarkable developmental changes as well as improvement in the policy framework of the market. This is in terms of its operational activities, increase in the number of quoted companies and securities, as well as market capitalization. Although, new issues and volume of transactions have all recorded significant increase during the period of study but there have been records of downturn in some years as a result of the global financial crisis.
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