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EFFECT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

EFFECT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

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EFFECT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

CHAPITRE ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Because of its ability to facilitate and mobilise saving and investment, the capital market is a highly specialised and organised financial sector that is a vital agent of economic growth. The positive association between capital accumulation and real economic growth has long been established in economic theories (­­­Anyanwu, 1993).

Success in capital accumulation and mobilisation for development varies by country, but it is heavily reliant on domestic savings and international capital inflows. As a result, in order to halt the current economic slowdown,

efforts must be directed towards effective resource mobilisation. In light of this, consideration is given to measures for the growth of the capital market as an institution for mobilising funds from surplus to deficit sectors.

The government has encouraged the growth of the capital market in Nigeria, as it has in other developing countries. Prior to the founding of the Nigerian stock exchange, there were several less formal market arrangements for the operation of the capital market.

It was not notable until Mr. J. B. Lobynesion visited on the invitation of the Federal government in 1959 to advise on the role of the Central Bank in the development of local money and capital markets.

As a result, the government commissioned and established the Barback Committee to investigate and offer recommendations on the ways and means of creating a stock market in Nigeria as a formal capital market. Acting on the committee’s recommendation, the Lagos Stock Exchange (as it was then known) was established in March 1960,

and it was incorporated under Section 2 cap 37 in September 1961, thanks to the collaborative efforts of the Central Bank of Nigeria, the Business Community, and the Industrial Development Bank (Alile&Anao, 1990). The establishment of the Central Bank of Nigeria in 1959, as well as the establishment of the Lagos Stock Exchange in 1961 and, later,

the Nigeria Stock Exchange by an Act in 1979, laid a solid foundation for the operation of the Nigerian Capital Market for trading in long-term securities required for the financing of the industrial sector and the economy at large.

Following the formation of the Lagos Stock Exchange, it was provided additional legal protection and its operations were placed under some sort of government control, resulting in the passage of the Lagos Stock Exchange Act.

The Lagos Stock Exchange, on the other hand, was exclusively operational in Lagos. By the mid-1970s, the need for an effective financial system for the entire nation was emphasised, and the government lobbied for a review of the operations of the Lagos Stock Exchange market.

The review was conducted to address the low capital formation, the enormous amount of currency in circulation held outside the banking system, the unsatisfactory demarcation between the operation of Commercial Banks and the emerging class of Merchant Banks, and the extremely shallow depth of capital.

In response to the aforementioned issues, the government recognised the notion of decentralisation but chose to establish a National Stock Exchange with branches around the country. The Lagos Stock Exchange’s memorandum and articles of association were turned into the Nigerian Stock Exchange on December 2nd, 1977, with branches in Lagos, Kaduna, Port-Harcourt, Yola, and currently in Federal Capital Territory (FCT) Abuja and other cities.

The Nigeria Capital Market may be traced back to 1946, when the British colonial authority issued an N600,000 local loan stock at a 314% interest rate to fund development projects under the Ten-Years Plan Local Ordinance. The loan stock, which had a term of 10-15 years, was oversubscribed by more than N1 million, although local participation was extremely low.

Certainly, potential funds exist in Nigeria, but the overarching issue in this study is to investigate the role of the capital market in harnessing and mobilising these resources (money) to generate economic growth and, as a result, economic development.

1.2 STATEMENT OF THE PROBLEM

There is ample evidence that the majority of Nigerian businesses lack long-term capital. To finance even long-term investments, the corporate sector has relied mostly on short-term financing such as overdrafts. Such funding is dangerous according to the maturity matching idea. All such businesses must raise a suitable combination of short- and long-term capital (Demirguc-Kunt& Levine 1996).

Most recent literatures on the Nigerian capital market have recognised the market’s amazing performance in recent years. However, the capital market’s critical role in economic growth and development has not been experimentally studied, leaving a research deficit in this field.

The purpose of this research is to look into the role of the capital market in Nigeria’s economic growth and development. Aside from the social and structural problems impeding Nigeria’s economic development, the bottleneck generated by a lack of finance to the economy is a key setback to its progress. As a result, the Nigerian capital market must be evaluated.

1.3 OBJECTIVES OF THE STUDY

The study’s overarching goal was to investigate the operations and performance of the Nigerian capital market. The following are the study’s particular objectives:
1.To investigate the activities of Nigeria’s capital market.

To assess the capital market’s performance in relation to Nigeria’s economic growth.
To investigate the rate at which new equities are issued on the stock exchange.
To give recommendations on how to improve market operations in order to boost Nigeria’s economic growth and development.

1.4 RESEARCH QUESTIONS

The following research questions led this study:

How is the Nigerian capital market functioning?
What is the performance of Nigeria’s capital market in relation to economic growth?
iii. How frequently are new stocks introduced on the Nigerian stock exchange?

How can Nigeria’s capital market, with its critical function, encourage economic growth?

1.5 RESEARCH THEORIES

As a result, the following hypotheses will be tested:

Issuance I

H0: In Nigeria, there is no significant association between the money market and economic growth.

Hi: In Nigeria, there is a strong link between the money market and economic growth.

Hypothesis No. 2

H0: There is no substantial association between money market instruments and Nigerian financial system development.

Hi: Money market instruments have a considerable impact on the growth of the Nigerian financial system.

Third Hypothesis

H0: The performance of the money market has no discernible impact on economic growth.

H1: The performance of the money market has no discernible impact on economic growth.

IVth Hypothesis

HO: Changes in investment links have no substantial impact on Nigeria’s money market growth.

Hello: adjustments in investment links have a huge impact on Nigeria’s money market growth.

1.6 SCOPE OF THE STUDY

The economy is a big component with many various and sometimes complex aspects; however, this study only looked at one part of the economy (the financial sector). This book did not cover all aspects of the financial system, but rather concentrated on the capital market and its activities as they affect Nigerian economic growth.

Due to the lack of available data, the empirical research of the impact of the capital market on economic growth in Nigeria was limited to the period between 1980 and 2009.

1.7 SIGNIFICANCE OF THE STUDY

The research looked into the effect or effectiveness of capital market instruments on Nigerian economic growth. Though the scope of the study was limited to the capital market, it is believed that the exploration of this market will provide a comprehensive understanding of capital market operations.

It will add to the existing research on the issue by empirically investigating the role of the capital market in the country’s economic growth and development. The fundamental significance of this study is that it will provide policy recommendations to policymakers on how to improve capital market operations and activities.

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EFFECT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

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