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AN ANALYSIS OF THE IMPACT OF STOCK
MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
Background
of the study
The
mobilization of resources for national development has long been the crucial
focus of development economists. This is
because, for sustainable growth and development to take place, funds must be
effectively mobilized and allocated to enable business and the economy
harnesses their human, material and managerial resources for optimal output. It is against this background that every
country has a financial system which serves as a mechanism for the mobilization
of resources for the attainment of economic growth. Consequently, the more
developed the financial system of an economy is, the more efficient it is
likely to be in the mobilization and allocation of resources for development
purposes.
The
financial system of any society is the framework within which capital formation
takes place. According to Odife (1994),
it is the framework within which the savings of some members of the society are
made available to other members of the society. Put differently, it is the
arrangement or mechanism by which the savings surplus units of the economy
transfer their resources to the borrowing deficit units for the purpose of
enhancing economic growth (Okereke €“ Onyiuke, 2009). The financial system is made up of two major
markets. These are the money market and
the capital market. According to Elakama
(2009), the two markets are at the heart of the financial system.
The money
market is a type of market where short term funds and securities such as
treasury bills, inter-bank deposits, Banker€™s acceptance, certificate of
deposits etc whose tenor are usually shorter than or equal to a year are bought
and sold. In other words, it is a market
where short term capital is sourced. The
capital market on the other hand is a type of market where long term debt
instruments whose tenor exceeds a year are traded. According to Sulaiman (1999), it is a network
of interrelated institutions governed by operational guidelines, which permit
the sale of equity and long term debt.
Furthermore, Al-Faki (2006) describes the capital market as a network of
specialized financial institutions, series of mechanism, processes and
infrastructure that, in various ways, facilitate the bringing together of
suppliers of medium to long term capital for investment in socio-economic
development projects. Instruments traded
in the capital market include equities, debts, government bonds, corporate
bonds, preference shares, debentures, rights etc.
Within the
broad classification of the capital market is the stock market, which operates
as the rallying point for the overall activities in the capital market. According to Alile and Anao (1984), the stock
market is the pivot around which every activity in the capital market revolves. Its follows therefore that without the
facilities provided by the stock market, it is doubtful if the capital market
can efficiently perform its expected role of resource mobilization (Ologunde,
Elumilade and Asaolu, 2006). It is in
the light of the above that the stock market is considered a vital element in
the mobilization and allocation of resources in any modern economy.
Until now,
the literature has mainly focus on the role of financial intermediation in the
process of economic growth and capital accumulation. Indeed, many studies have analyzed the
channels through which banks and other financial intermediaries may help to
increase, for example, the savings rate or the average productivity of capital
and, in turn growth. Recently, however,
with the upsurge in world stock markets and with a large proportion of this
boom accounted for by emerging markets, there has been a growing interest among
economists and policy makers on the role played by stock market development in
the process of economic development.
Recent research has therefore begun to focus on the linkage between the
stock market and economic development.
It is no wonder, that the World Bank Economic Review dedicated its May
1996 issue to the role of the stock market in economic growth.
The stock
market also known as the stock exchange or equity market performs some
functions that promote the growth of the economy (Osinubi, 2004). Firstly, as an economic institution, the
stock market promotes efficiency in capital formation and allocation. Secondly, the stock market serves as a
veritable tool in the mobilization and allocation of savings among competing
uses which are critical to growth of the economy. Thirdly it enables governments and industry
to raise long term fund for financing new projects and expanding and
modernizing industrial/commercial concerns, thereby increasing the quantity and
quality of investment. Fourthly, by
performing its function of allocating capital efficiently, the stock market, as
it mobilize savings concurrently allocates a larger proportion of it to the
firms with relatively high prospects as indicated by their rate of returns and
level of risk. The importance of this
function is that capital resources are channeled by the mechanism of the forces
of demand and supply to those firms with relatively high and increasing
productivity, thus enhancing economic expansion and growth. Additionally, the stock market performs the
functions of intermediating between the needs of firms and investors; providing
a means of sharing investment risks; providing information about companies,
promoting and providing the means of improving corporate governance etc. Furthermore, well functioning stock market
provides low cost equity capital for firms imposes control on the investment
behaviour of firms through continuous adjustment of shares and serves as a
mechanism for attracting foreign portfolio investment. Given the above functions, it is expected
that the development of the stock market will both enhance and lead to growth
of the economy.
In
recognition of the importance of the stock market in economic development, many
developing countries have launched stock exchanges during the past few decades.
This explains the drive toward the establishment of stock exchanges in African
countries especially during the past two decades, with new stock markets
established in Ghana, Malawi, Swaziland, Uganda and Zambia. Prior to 1989, there were just eight stock
markets in Africa, of which three were in North Africa and five in Sub-Sahara
Africa. At present, more than 50% of the
fifty four African countries operate stock exchanges, accounting for over
twenty-two stock exchanges in Africa (Komo, 2008). According to Komo, this rapid expansion of
stock exchanges in Africa has contributed to economic development in various
ways, which amongst others include facilitating the privatization process,
diversifying the financial services, facilitating long term capital
mobilization, provision of alternative investment opportunities, attracting
capital inflow and serving as a signal of overall macroeconomic performance.
Aware of the
crucial role played by the stock market in any modern economy, the Nigerian
government in 1960 established the Nigerian Stock Exchange (NSE). Like many African countries, Nigeria has
invested in developing her stock market as a means of providing opportunities
for greater fund mobilization and improved efficiency in resource allocation. This study therefore examines whether stock
market development promote growth in Nigeria.
STATEMENT OF
RESEARCH PROBLEM
The role of
a developed stock market in the development of any economy cannot be over
emphasized in view of its potentials and likely impact on the economy if well
harnessed. It is a known fact that
nations cannot develop without the needed long term funds for development
projects, and the more developed a stock market is, the higher the potential
for sourcing long term fund for industrialization. Indeed, as pointed out by Osinubi, a well
functioning stock market serves a veritable tool in the mobilization and
allocation of resources needed to meet the rapid expansion of the economy as it
develops.
Over the
years, the Nigerian Stock market has experienced relative stability and
recorded impressive growth. This growth has been most significant especially
since the introduction of the Structural Adjustment Programme (SAP) in the
early 1980s, which brought about the privatization, commercialization and
liberalization programmes, all of which has helped in boosting activities in
the stock market. However, as noted by
Ogwumike and Omole (1997), when compared with other emerging and developed
markets, it becomes evident that the Nigerian Stock Market is still relatively
small in size and underdeveloped. For
example, a comparison of the Nigerian Stock Market in terms of number of listed
equities reveals that while Nigeria has only 214 equities listed in 2005, even
though its stock exchange was established in 1960, Singapore has over 500
(established in 1979), Hong Kong 695 (established in 1986) and Istanbul over
900 (established in 1986). This thus indicates
the relative poor performance of the Nigerian Stock Market vis-Ã -vis those of
other countries. Moreover, Osazee (2007)
pointed out that less than 21 percent of the 400,000 registered companies in
Nigeria are not currently quoted on the Nigerian Stock Exchange, a situation
which he attributes to the unattractiveness of the market as well as the lack
of incentives for more companies to go public.
Furthermore, while the growth of the stock market has been impressive,
same cannot be said of the growth of the Nigerian economy.
In
recognition of the above, the research questions for this study are:
Has the
growth of the Nigerian Stock Market promote economic growth in Nigeria?
Has the
market acted as a mechanism for attracting foreign capital inflow?
How has the
market facilitate the mobilization of long term fund for financing long term
development project?
1.3 OBJECTIVES OF THE STUDY
The stock
market is a common feature of a modern economy and it is reputed to perform
some functions that promote the growth and development of the economy. Given the above, this study is therefore
carried out primarily to empirically ascertain the impact of the Nigerian Stock
Market on economic growth. Specifically,
the objectives are:
to identify
the channels through which the stock market impacts on economic growth;
to examine
the establishment of the Nigerian Stock Market, as well as its performance and
growth;
to identify
the performance/growth drivers of the Nigerian stock market;
to identify
the challenges facing the Nigerian Stock market and examine various ways of
boosting its performance and growth.
1.4 HYPOTHESES OF THE STUDY
A research
hypothesis is a scientific statement expressing the relationship between two or
more variables which is meant to be tested.
In the light of the primary objective of this study, the following
hypotheses have been formulated
1. Ho: The development of the Nigerian Stock
Exchange is not positively associated with economic growth in Nigeria.
2. H1: The development of the Nigerian Stock
Exchange is positively associated with economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The
significance of an efficient and well functioning stock market in spurring
economic growth has been well emphasized in the literature. Therefore, a constructive and objective study
of the stock market which aims at highlighting its role in the process of
capital formation and national development will be of great importance both to
individual investors, firms and policy makers.
As a market
place where securities (Stocks, bonds, shares) are bought and sold openly with
relative ease, the stock exchange is very important to investors. Hence, prospective share holders and
investors would find the work relevant as the research study focuses on the
Nigerian Stock Exchange where activities of the capital market are usually
carried out. Furthermore, since the
stock market is a reliable means through which firms can source for low equity
capital, as well as the fact that the prices of the stocks of firms quoted on
the stock exchange serves as an indication of the overall performance of the
firm, this research study will also be of great significance to firms. Additionally, this research will be relevant
to the government as it will enable it have a better knowledge of the policies
necessary to enhance or improve the contribution of the stock market to the
economy.
This
research work will also serve as a reference for subsequent write-ups and
stimulate further in-depth and insightful study in this area of study.
1.6 SCOPE OF THE STUDY
In view of
its primary objective, this study focuses mainly on the activities of the
Nigerian Stock Market without detailed reference to other markets in the
capital market. The study covers activities
of the Nigerian stock market for a period of 28 years, from 1981 to 2008. The choice of this period is anchored on the
fact that it covers both the relatively small and high activities performance
of the market.
1.7 LIMITATIONS OF THE STUDY
This
research was limited by certain constraints which include difficulty in
sourcing data from certain relevant organization, non availability of data on
certain variables, restrictions on accessing certain materials on the internet
and insufficient financial resources for the study.
Lastly, this
study was also constrained by inadequate time on the part of the researcher,
since attention had to be given to other course work.
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