ABSTRACT
The study investigated the impact of Stock Exchange
Market on economic growth in Nigeria. The descriptive survey design was used in
the study. The target population comprised employees in the employment of
financial institutions in Lagos metropolis. A sample of 200 senior management
employees was randomly selected from ten financial institutions in the
metropolis. A 20-item self-developed questionnaire with Likert scale
was used in the study. Pearson product moment correlation co-efficient
statistical method was used to test hypotheses, and the results of the analysis
revealed that:
1.There is a significant relationship between Stock
Exchange Market and economic growth in Nigeria.
2.Activities in the Stock Exchange Market have a
significant impact on economic growth in Nigeria.
3.The performance of the stock market has a
significant impetus for economic growth and development.
From the findings of this study, it can be
concluded that the stock market promotes economic growth is not in doubt.
Hence, there is the need to restore confidence to the market by regulatory
authorities’ activities that portray transparency, fair trading transactions
and dealings in the Stock Exchange Market.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Stock
Exchange Market is an engine of economic growth and development globally;
Nigeria inclusive is made up of markets and institutions which facilitate the
issuance and secondary trading of long-term financial instrument. The history
of Stock Exchange Market could be traced to 1946 when the British colonial
administration floated a N600, 000 local loan stock bearing interest at 3.% for
the financing of developmental projects under the Ten Years Plan Local
Ordinance. The loan stock, which had a maturity of 10-15 years, was
oversubscribed by more than N1 million, yet local participation of the issued
was terribly poor. An as result of poor local participation federal government
established several economic programmes with hope to foster economic and
financial development, such Structural Adjustment Programme (SAP) 1986, Vision
2010, Vision 2020, Millennium Development Goal (MDGs), National Economic
Empowerment Development Strategy (NEEDS), State Economic Empowerment
Development Strategy (SEEDS), and other development plans.
Recently,
Stock Exchange Market has experienced unprecedented growth which was attributed
to the banking sector reform of 2004-2005. (Nwankwo, 1991) says that Stock
Exchange Market has helped government and corporate entities to raise long term
capital for financing new projects, and expanding and modernizing industrial
and commercial concerns. Pedro and Erwan (2004) assert that financial market
development raises output by increasing the capital used in production and by
ensuring that capital is put into best uses. Beckaert et al (2005) analyze that
Stock Exchange Market development would lead to financial liberalization, which
will lead to a 1% increase in annual real economic growth.
Studying the link between domestic stock
market development and internationalization, Laessens et al., (2006) using a
panel data technique concluded that domestic stock market development as well
as stock market internationalization are positively influenced by the log of
GDP per capita, the stock market liberalization, the capital account
liberalization and the country growth opportunities and negatively influenced
by the government deficit/GDP ratio. Ekundayo (2002) argues that a nation
requires a lot of local and foreign investments to attain sustainable economic
growth and development. The Stock Exchange Market provides a means through
which this is made possible. It is on the premises that this research paper
wishes to examine the impact of the Stock Exchange Market on Economic Growth
and Development from 1990 to 2011.
The
Stock Exchange Market is a network of financial institutions and infrastructure
that interact to mobilize and allocate long-term funds in the economy. The
market affords business firms and governments the opportunity to sell stocks
and bonds, to raise long-term finds from the savings of other economic agents.
The Stock Exchange Market is a highly specialized and organized financial
market and indeed an essential agent of economic growth because of its ability
to facilitate and mobilize saving and investment. The sourcing of long-term
finance through the Stock Exchange Market is essential for self-sustained
economic growth, which is consistent with external adjustment and rapid
economic growth (Iyola, 2004).
The
Stock Exchange Market effectively started operations in Nigeria on 5th June,
1961 under the provision of the Lagos Stock Exchange Market Act 1961, which
transformed into the Stock Exchange Market in December 1977 as a result of the
review of the Nigerian financial system (CBN, 2007). The Securities and
Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to
regulate the capital market, but it commenced actual operation in 1980. It took
over regulatory functions from Capital Issues Commission, which was established
in 1973. Since then, various forms of financial instruments have been issued in
the Stock Exchange Market by new and existing business to finance product
development, new projects or general business expansion.
The
capital market, no doubt, is pivotal to the level of growth and development of
the economy. Chinwuba and Amos (2011) note that Stock Exchange Market is one of
the major institutions that acts in propelling a prostrate economy for growth
and development. Nyong (1997), sees it as a complex institution imbued with
inherent Mechanism through which long-term funds of the surplus sectors of the
economy are mobilized, harnessed and made available to deficit sectors of the
economy.
Osaze
and Anao (1999), assert that Stock Exchange Market is the cornerstone of any
financial system since it provides the funds needed for financing, not only
business and other economic institutions, but also the programs of government
as a whole. Ilaboya and Ibrahim (2004), stress that Stock Exchange Market
functions as an economic barometer for galvanizing economic activities.
The
journey to the present democratic experience in Nigeria commenced on May 29,
1999, when the military government returned power to civilian administration.
The agitation for the exit of the military was embarked upon because of the
popular belief among the stakeholders in the economy that, democracy, among
other things, promotes economic growth. Supporters of democracy also argue that
the motivation of citizens to work and invest, the effective allocation of
resources in the market place, and profit-maximizing private activity can all
be maintained in a climate of liberty, free-flowing information and secured
control of property (North, 1990). In the light of the above background, the
question that would readily come to mind is whether or not Stock Exchange
Market has significantly impacted on the growth of the Nigerian economy, given
the enabling environment provided by the supportive democratic structure. Indeed,
this is one question that past related empirical work have failed to answer.
This study is therefore undertaken to satisfy this “curiosity” and hence fill
the existing gap.
Saving,
capital formation and economic growth have been central to the economic
development debate for several decades. The links between these issues, on the
one hand and direction of causality on the other, still remain subject to
further analysis across countries. Accepting that the relationship is
unidirectional (i.e. moving from savings to investment and hence to economic
growth) may be misleading. (Ben, 1999), stressed that Stock Exchange Market
provides arrangement through which households, firms, and government that
intend to invest more than they can bid for the funds of other spending unit
who have surplus funds, and this is necessary for economic growth. Capital
markets are the complex of institutions and mechanisms through which long –term
funds with maturity of 5years and above are pooled and made available to business,
governments, individual, and instruments already outstanding are transferred.
As in the case of the money market, the capital markets are local, regional,
and national in scope, (Bekaert, 1993).
Mobilization
of resources for national development has long been the central focus of
development economists. As a result of this, the centrality of savings and the
investment in economic growth has been given considerable attention in the
literature Rostow (1960), Malinvaud (1997), Soyode (1990), Aigbokan (1995),
Samuel (1996), Demirguc-Kunt and Roos (1996), for sustainable growth and
development, funds must be effectively mobilized and allocated to enable
business and the economy harnessed their human, material, and management
resources for optimal output.
The
existing literature clearly shows that developed economies had explored the two
channels through which resources mobilization affects economic growth, and
development – money and Stock Exchange Market (Demirguc-Kunt and Roos, 1996;
Samuel, 1996). This is however, not the case in developing economies where
emphasis was placed on money market with little consideration for Stock
Exchange Market(Nyong, 1997),
Since
the introduction of structural adjustment programme (SAP) in Nigeria the stock
market has grown very significantly. Alile (1996), Soyode (1990). This is as a
result of deregulation of the financial sector and privatization exercise which
exposed investors and companies to the significance of the stock market. Equity
financing became one of the cheapest and flexible sources of finance from the Stock
Exchange Market and remain a critical element in the sustainable development of
the economy (Okereke, 2000). The line
between the stock market performance and economic growth has often generated
strong controversy among analysts based on their study of developed and
emerging markets Samuel (1996); Demirguc-Kunt and Roos (1996); Akinifesi
(1987); Levine and Sara (1996); Obadan (1998); Onosode (1998); Emenuga (1998);
Osinubi (1998); According to Nyong (1997) the financial structure of a firm,
that is, the mix of debt and equity financing, changes as economies develop,
the tilt is however, more towards equity financing through the stock market.
As
economies develop, more funds are needed to meet the rapid expansion. The stock
market serves as a veritable tool in the mobilization and allocation of savings
among competing users, which are critical to the growth and efficiency of the
economy (Alile, 1984).
The
determination of the overall growth of an economy depends on how efficiently
the stock market performs its allocative functions of capital. As the stock
market mobilizes savings, concurrently it allocates a larger proportion of it
to the firms with relatively high prospects as indicated by its rate of returns
and level of risk. The importance of this function is that capital resources
are channelled 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 (Alile, 1997).
The
role of the financial system in promoting economic growth (and development)
cannot be over emphasized. The financial system comprises of the central bank,
commercial banks, mutual funds, brokerage firms, discount houses, and Stock
Exchange Market, to mention just few. These institutions trade in financial
instruments such as domestic currency, foreign currency, stocks, bonds,
derivatives and so on, and in the process mobilize funds from surplus unit
(savers) to deficit unit (investors). This helps business corporations to
increase investment and expand production, and ultimately accelerate economic
growth.
The
controversies surrounding the role of financial system in the economy started
with Schumpeter (1912) who argued that in a well functioning financial system,
banks help to facilitate economic growth by enhancing technological innovation
through identification and funding of entrepreneurs with the best chance of
successfully implementing innovative products as well as production process.
Supporting this view, Bagehot (1873) and Hicks (1969) asserted that the
development of the financial sector helped to trigger industrialization in
England by increasing the access of the people to funds, which in turn they
used to finance and execute capital projects. Recently, Levine (1991) argued
that developed stock market reduces both liquidity shock and productivity shock
of businesses. Similarly, Levine and Zervos (1998), and Khan and Senhadji
(2000) stressed that the establishment of stock market has played a significant
role in the development of banking institutions, particularly in emerging
market economies. Thus, the authors believe that the development of the
financial sector (and stock market) contribute meaningfully to economic growth.
Contrary to the views of Bagehot, Schumpeter and Hicks, some scholars argue
that financial system does not really matter in the growth of the economy. For
instance, Nobel laureates like Gerald Meier and Dudley Seers (1984) and Stern
(1989) did not accord any role to finance (or financial system) in their
discussion of development. Moreover, Stiglitz (1993) argued that stock market
liquidity does not provide incentives for acquiring information concerning
firms or improving corporate governance. Besides, Shliefer and Summers (1988)
asserted that stock market development may hinder economic growth by promoting
counter-productive corporate takeovers. Furthermore, Singh (1997) argued that
stock market may not be important in attaining higher economic growth.
1.2 Statement of the Problem
There
is argument amongst researchers and economists as to the relevance of the
financial system in economic growth and development. The literature is awash
with the views of many influential economists like Robinson (1952), Meier and
Seers (1984), Lucas (1988), and Stern (1989) who believed that finance plays an
in consequential (if any) role in economic growth and development of nations.
A
contrary view is however held by another group of researchers and economists to
the effect that financial system of a country plays an important role in
economic growth. Those that have demonstrated this line of thinking in their
research work included Schumpeter (1932), Bagehot (1962), Cameron (1967),
Goldsmith (1969), Mckinnon (1973), Shaw (1973) and Ojo (1984).
Building
on this line of thinking, Gelb (1989), Ghani (1992), King and Levine (1993a,
1993b) and De Grogorio and Guidotti (1995) demonstrated how measures of banking
development are strongly correlated with economic growth in a cross section of
countries. Besides evaluating the general importance of the financial system in
economic development, other researchers had stressed empirically the specific
role of Stock Exchange Market (stock and bond markets) in economic growth.
Despite
the popular belief that democracy promotes economic activities which in turn
engenders economic growth, the growth of the Stock Exchange Market in Nigeria
is still very small in relation to the size of the economy. CBN (2007) has it
that a comparative analysis of equity market capitalization of the Stock
Exchange Market with some countries in North and South America, Asia, Europe
and Africa shows that the Nigerian market is relatively very small. Worse still
are the attendant ugly consequences of the Stock Exchange Market meltdown,
characterized by the crash of the market capitalization from a high record of
N13.5 trillion in early 2008 to less than N4.5 trillion in the corresponding
period of 2009. This development necessitated an investigation by the House of
Representatives, through its committee on Nigerian capital market, of the
circumstances surrounding the 2009 crash of the Nigerian capital market, and
this investigation is otherwise known as the Stock Exchange Market probes.
However,
given these scenario, one begin to wonder if the Stock Exchange Market has
really fared well in terms of its impact on the growth of the Nigerian economy
since the return to civilian administration in Nigeria. Suffice it to re-state
here that no past focused on this very important period (beginning from 1999),
which this study intend to cover. What is seen in other related works is a
combination, in varying degrees, of periods of military and civilian rule.
Given these conflicting views, it is left to empirical investigation to
determine whether or not stock market (financial system) development
accelerates economic growth, particularly in Nigeria.
Therefore, there has been a concern by
individuals and even corporate bodies alike as to whether the Stock Exchange
Market is actually achieving this laudable goal of capital
market-led-development. To this end, the following research problems were
poised:
1. What is the impact of Stock Exchange
Market on economic growth in Nigeria?
2. What is the direction of causality
between Stock Exchange Market performance and economic growth in Nigeria?
3. What is the transmission mechanism
between Stock Exchange Market performance and economic growth in Nigeria?
1.3 Objectives of the Study
The
broad objective of this study is to assess the impact of Stock Exchange Market
on economic growth in Nigeria. To achieve this, the specific objectives of this
study are to:
1. Investigate the relationship between Stock
Exchange Market and economic growth in Nigeria.
2. Examine whether the activities in the Stock
Exchange Market impact positively on the economy.
3. Determine if the performance of the stock
market is an impetus for economic growth and development.
1.4 Research Questions
1. Is there any relationship between Stock
Exchange Market and economic growth in Nigeria?
2. Do the activities in the Stock Exchange
Market impact positively on the economy?
3. Do the performance of the stock market is
an impetus for economic growth and development?
1.5 Research Hypotheses
1. There is no significant relationship
between Stock Exchange Market and economic growth in Nigeria.
2. Activities in the Stock Exchange Market
have no significant impact on economic growth in Nigeria.
3. The performance of the stock market has
no significant impetus for economic growth and development.
1.6 Significance of the Study
The
study will be useful to scholars of financial discipline, the government of
this nation, participants or operators in the Stock Exchange Market and other
stakeholders as it will provide policy recommendations on the basis of its
findings. The stock market has helped government and corporate entities to
raise long term capital for financing new projects, and expanding and
modernizing industrial / commercial concerns.
The
outcome of this study is significant in that it is intended to contribute to
the growing body of literature on quality of project financing management in
both public and private sectors in general, and at the same time contribute to
the conceptual treatment of market capital applications to development
processes in project finance specifically. Second, there is a potential for
other public agencies to benefit from this study. Additionally, this study will
focus on the departments/groups which are sub-units of organizations,
illuminating how departments/groups can benefit from components of project
financing.
1.7 Scope of the Study
The
researcher intends to review the structure and relevant aspects of operations
and developments in the Nigerian capital market, with main focus on the
determination of the impact of Stock Exchange Market on economic growth in
Nigeria. Therefore, the study is not to compare the Nigerian capital with those
of other countries, because theoretically and practically, Stock Exchange
Market are basically the same but may differ in their levels of developments.
The
study will be restricted to a period of twenty four years from 2000 to 2012.
The choice of the timeframe is predicated by the fact that the Stock Exchange
Market witnessed a lot of changes with the introduction of the 1986 SAP and its
obvious implication. The major limitation in this study is that it will rely
only on secondary data generated from the publications of Stock Exchange Market
(NSE), Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN)
and National Bureau of Statistics (NBS) as well as other materials relevant to
the study as access to these materials is difficult.
1.8 Definition of Terms
The
operational definition of terms used in the study is as follows:
Capital
Market: It is defined as a collection of financial institutions set up for the
granting of medium and long - term loans. It is a market for government
securities, for corporate bonds, for the mobilization and utilization of long
term funds for development; the long term end of the financial system.
Commercialization:
This is defined as the reorganization of enterprises wholly or partly owned by
the federal government in which such commercial enterprises shall operate as
profit making commercial ventures without any intervention from the federal
government.
Liquidity
of a Stock Market: This relates to the degree ofaccess, which investors have in
buying, and selling of stocks in such a market. The more liquid a stock market
is, the more investors will be interested in trading in the market.
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