CAPITAL MARKET REFORM AND THE PERFORMANCE OF THE NIGERIAN STOCK EXCHANGE: AN IMPACT EVALUATION

ABSTRACT
The stock market is a common feature of a modern market economy and it is reputed to perform necessary functions, which promote the growth and development of an economy. This study examined whether the capital market reforms so far carried out in Nigeria have impacted significantly on the performance of the Nigerian Capital Market. To achieve this objective, ordinary least square regression (OLS) was employed using the data of capital market activities from 1988 to 2007. The result indicated that there is a significant difference in the performance of the capital market before and after the reform. This was achieved using the performance indicators which included the market capitalization, volume of stocks traded, value of stocks and the share index. The result showed that the indicators used increased faster in the post reform period than the pre reform period. The result of the study which established positive impact suggest that; government and stakeholders should strengthen the regulation and transparency in all the deals in the market as this will boast and attract more private participation in the market with its overall growth of both the market and the economy. And also, the NSE should find means of cutting down cost of raising fund on the exchange so as to allow more companies the opportunity of accessing fund from the exchange.

CHAPTER ONE 
INTRODUCTION
1.1       BACKGROUND OF THE STUDY
Mobilization of resources for national development has long been the central focus of economic development. For sustainable growth and development, funds must be effectively mobilized and optimally allocated to enable business and the national economies to harness their resources both human and material for optimal output (Tokunbo, 2002).

The capital market is an economic institution which promotes efficiency in resource allocation and capital formation. It enables both corporate organizations and governments to raise long term funds for financing new projects, as well as for project expansion and modernization (Onosode, 1990).

According to Alabede (2004) the role played by the stock market in the economic growth and development of a nation is recognized the world over. Through that role long term funds are not only mobilized but channeled for productive investments.

The stock market provides the fulcrum for capital market activities and it is often cited as a barometer of business direction. According to Obadan (1998), an active stock market may be relied upon to indicate changes in general economic activities as mirrored by the stock market index.

The indispensable nature of the capital market in any economy arises from the two major functions it performs: - mobilizing and channeling of long term investible funds from the surplus sector to the deficit sector of the economy, Usman, (1998).

As a result of this role, governments place due emphasis on the regulation and control of the capital market in general and the stock market in particular. In recent times, there has been growing concern over the role of the stock market in economic growth; hence the market has been the focus of economists and policy makers.

According to Anyanwu (1993), the financial market is a complex mechanism made up of procedures, instruments and institutions through which deficit economic units and the surplus economic unit are brought together to transact business with one another. In his own contribution; Ibenta (2000), defined the financial market as a network of institutional arrangements through which financial resources accumulated by savers of funds are transferred to ultimate users who may be individuals or households, corporate bodies or governments for investment in economic activities, which include both the production and distribution of goods and services.

Ever since government policy began shifting in the direction of limiting the role of the public sector in business activity, the need for reform of the capital market became a critical requirement for creating a viable private sector. The need for promoting balanced financial intermediation in a system significantly short of long term funds has been a strong signal that the domestic capital market in Nigeria was overripe for a major change (Uzor, 2007).

The financial market has two major segments namely the money and capital markets. Ekoko (2007) describes the financial market as a “market where institutions exchange financial assets and liabilities through a process described as intermediation”.

The securities market comprises of two segments – the primary market and the secondary market. The primary market deals with new issues such as initial public offers (IPO), right issues, private placement and offers for sale. The secondary market on the other hand enables trading in existing securities i.e. securities previously issued in the primary market.

Prior to 1998, activities in these two markets were manually executed. Manual allotment of shares was carried out by issuing houses in the primary market subject to clearance by SEC while in the secondary market; trades were characterized by auction/open outcry by stockbrokers on the floor of the Nigerian Stock Exchange.

From 1998, the Federal Government embarked on reforms in various sectors of the Nigerian economy including the Nigerian capital market.

The commencement of Automated Stock Market trading in 1999 marked a watershed in the development of the Nigerian capital market. In that year, the Nigerian Stock Exchange established a subsidiary company called the Central Security Clearing System (CSCS) to handle the clearing and settlement of transactions in the stock market. And subsequently in the same year the exchange commenced electronic transaction in securities.

The Automated Trading System (ATS) alongside the CSCS trading engine has now reduced transaction period to T+3 (i.e. transaction day plus three days) from an average period of three months before the introduction of these measures. This implies debiting a buyer’s account within three days after the transaction, while the seller is enabled to collect his/her cheque within the same period (T+3).

The primary market has also come of age with the introduction of electronic transaction processes in an effort to improve service delivery to investors. Already, e-Dividend and e-Bonus payment systems are being implemented in the market.

In an effort to address the problems associated with manual allotment such as delays in issuance of certificates, e-Allotment is now being introduced by the Security and Exchange Commission.

As earlier stated these reforms were aimed at redressing delays associated with concluding security market transactions and aligning the market with contemporary global best practices where very significant information technology transformations in security transactions have already taken place. The effects/impacts of these reforms individually and collectively need to be investigated, hence the need for this research.

1.2       STATEMENT OF PROBLEM
The performance of the Nigerian Capital Market is currently (Sept. 2009) at a low ebb, due to the global economic meltdown. Despite committed efforts to power the Nigerian economy through various reforms – Nigerian Capital Market- to achieve accelerated grass roots economic development, the Market seems to be faced with various constraints which hinder its performance, rate of national economic growth and development.

The Nigerian Stock Exchange would have done better but for problems of high cost of raising funds, low awareness about the significance of investing in the stock market by Nigerians, stringent conditions for listing companies, fraud among stockbrokers, long period of clearing/ verification of certificates, over trading, insecurity of invested fund, etc.

To address these problems, regulators of the Nigerian economy have embarked on a series of reforms in a bid to solving the problems encountered in the Nigerian Capital Market. The impact of these reforms - electronic reforms- on the performance of the Nigerian Capital Market will be X- rayed.

1.3       OBJECTIVE OF THE STUDY
The broad objective of this study is to determine the impact of capital market reforms on the performance of the Nigerian Stock Exchange.

This study specifically designed:

1.      To compare the pre and post reform performance of the stock market using the market capitalization.

2.      To compare the pre and post reform performance of the stock market using the trading volume.

3.      To compare the pre and post reform performance of the stock market using the value of stocks.

4.      To compare the pre and post reform performance of the stock market using the share market index

Based on the findings, to make policy recommendations on how to improve the overall performance of the Nigerian Stock Exchange.

1.4       SIGNIFICANCE OF THE STUDY
It it’s hoped that this study will be of immense importance in many ways;

The Nigerian policy makers will benefit from the result of the study, as it will form part of the decision making process. Hence it will aid the government in developing new policies.

The operators will use the results of the study to identify their shortcomings and what is expected of them from the public and government. The study will serve as a parameter for operators as to know the need for the potentials of reforms to be exploited, so that more revenue can be generated for the socio-economic growth and development.

Finally, the study will serve as a yardstick/guide for further research on the same topic and other related topics.

1.5       RESEARCH QUESTIONS
The research will be tailored to provide answers to the following questions.

1.      Of what effect is the reform on the market capitalization of the Nigerian Capital Market?

2.      Of what effect is the reform on the trading volume of stocks in the Nigerian Capital Market?

3.      Of what effect is the reform on the value of stocks in the Nigerian Capital Market?

4.      Of what effect is the reform on the stock market index of the Nigerian Capital Market?

1.6       RESEARCH HYPOTHESIS
The following hypotheses are formulated in null form for this study;

1.      There is no significant difference between the stock exchange market capitalization before and after the reforms.

2.      There is no significant difference in the trading volume of stocks in the exchange before and after the reforms.

3.      There is no significant difference in the value of stocks in the stock exchange market before and after the reforms.

4.      There is no significant difference in stock market index before and after the reforms.

1.7       SCOPE OF THE STUDY AND METHODOLOGY
The research will be conducted using data generated from the Nigerian Stock Exchange.


The available data on the study are secondary data from Stock Exchange journals, CBN bulletins and the bullion. Some other sources include newspapers, magazines and other journals both locally and internationally.

Internet facilities will also be explored to extract relevant data required for the research.

1.8       DISPOSITION OF THE THESIS
This thesis is divided into five chapters. In the first chapter the background of the study is presented followed by a problem area discussion, research objectives, significance, research questions, the hypothesis, scope of the study and finally the disposition of the thesis.

In chapter two, theories and previous studies related to the topic will be reviewed. The methodology used in this thesis will be presented in chapter three. Chapter four contains an analysis of the data used in this study.

Finally, chapter five will present the conclusions of the study and recommendations for implementations.

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Item Type: Postgraduate Material  |  Attribute: 103 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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