ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY, THE NIGERIA EXPERIENCE 1986-2006

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ASSESSMENT OF THE PERFORMANCE OF THE CAPITAL MARKET IN A DEREGULATED ECONOMY, THE NIGERIA EXPERIENCE 1986-2006

TABLE OF CONTENTS

 

Title Page                                                                                                                    i

Approval Page                                                                                                            ii

Certification                                                                                                                iii

Dedication                                                                                                                   iv

Acknowledgements                                                                                                    v

Abstract                                                                                                                        vi

                                                                                                                                   

List of tables                                                                                                                vii

 

CHAPTER ONE: INTRODUCTION

1.1      Background of the study                                                                            1

1.2     Statement of the problem                                                                            2

1.3     Objectives of the Study                                                                               3

1.4      Research Questions                                                                                             4

1.5      Research Hypothesis                                                                                          5

1.6      Significance of the study                                                                                   7

1.7      Scope of the study                                                                                              8     1.8      Operational and Definition of term                                                                                                          9

1.9      References

 

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1       Introduction                                                                                                     10

2.2       Meaning of Capital Market                                                                               11

2.3       Characteristics of well Functioning Capital Market                                         12

2.4       The Role of Capital Market in an Economy                                                     13

2.5       Capital Formation and Economic Growth Process                                           14

2.6       Sources of Capital Formation                                                                           15

2.7       Overview of the Nigeria Financial system                                                        16

2.8       Capital Market and Money Market Distinguished                                           17

2.9       Historical Development of the Nigerian Capital Market                                18

2.10     Instruments or Securities that are traded in the Nigeria Capital Market        19

2.10.1  Fixed Income Securities                                                                                 20

2.10.2  Equities                                                                                                           21

2.10.2.1           Common Stock                                                                                   22

2.10.2.2           Preferred Stock                                                                                   23

2.10.2.3           Derivatives                                                                                          24

2.10.3.1           Warrants                                                                                              25

2.10.3.2           Call Options                                                                                       26

2.10.3.3           Put Options                                                                                         27

2.10.3.4           Futures                                                                                                28

2.11     Constituencies of and Major Participants in Nigeria Capital Market             29

2.11.1  Funds Providers                                                                                              30

2.11.2  Users of Funds                                                                                                31

2.11.3  Intermediaries/Market Operations                                                                  32

2.11.4  Regulators                                                                                                       33

2.12     Operations in the Nigeria (Capital Market                                                      34

2.12.1  Stockbrokers/Dealers                                                                                      35

2.12.2  The Jobber                                                                                                       36

2.12.3  Investment Banks                                                                                           37

2.12.4  Issuing Housing                                                                                              38

2.12.5  Share Registrars                                                                                              39

2.13     The Nigeria Stock Exchange (NSE)                                                               40

2.13.1  Overview                                                                                                        41

2.13.2  Functions of the Nigeria Stock Exchange                                                      42

2.13.3  Rules and Regulations of the Nigeria Stock Exchange                                  43

2.13.4  Membership and Organisation of the NSE                                                     44

2.13.5  Pricing of Securities at the NSE                                                                     45

2.13.6  Stock Price Movement at the NSE                                                                 46

2.13.7  Trading System of the NSE                                                                            47

2.13.8  Cleaning Delivery and Settlement System of the NSE                                  48

2.14     Investments Regulations in the Nigeria Capital Market                                 49

12.14.1 Introduction                                                                                                   50

12.14.2 The Securities and Exchange Commission (SEC)                                         51

2.14.2.1 Functions of Securities and Exchange Commission                                     52

2.14.2.2 SEC and Development of the Nigeria Capital Market                                 53

2.14.2.3 Regulatory Tools of Securities and Exchange Commission                         54

2.14.3  Last Performance of the Capital Market Empirical Evidence                        55

2.14.4  Process of Capital Mobilisation in the Nigeria Capital Market                      56

2.14.5  Modalities of Stock Market Quotation                                                           57

2.14.6  Listing Requirement                                                                                       58

2.14.7  Methods of Fund Raising in the Nigerian Capital Market                             59

2.14.8  Approval Required                                                                                         60

2.14.9  Professionals Involved in the Floatation of Securities                                   61

2.14.10 Benefits of Public Quotation                                                                                     62

2.14.11 Some Common Problems Associated with Stock Holding                           63

2.15     Trend in Nigerian Capital Market Performance (1986-2006)             64

References

 

CHAPTER THREE: RESEARCH METHODOLOGY

3.1       Research Design                                                                                             65

3.2       Specification of Models                                                                                  66

3.3      Sources of Data                                                                                              67

3.4       Techniques of Analysis                                                                                   68

 

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1       Data Presentation                                                                                            73

4.2       Data Analysis                                                                                                  74

4.3       Regression Results and the Stated Hypothesis                                              75

 

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1       Summary of findings                                                                                      76

5.2       Conclusion                                                                                                      77

5.3       Recommendation                                                                                            78

5.4       Suggestion of Further Study/Research                                                           79

 

Bibliography

Appendix I

Appendix II

 

LIST OF TABLE

 

Table 2.1: Market Capitalization (1986 – 2006)                                                         62

Table 2.2: Growth in the Number of Listed Security (1990 – 2006)                         63

Table 4.1: Yearly: GFCF, GDP, MC, LS, (1986 – 2006)                                           74

Table 4.2: Natural Log of Table 4.1                                                                            75

 

 

 

 

CHAPTER ONE

INTRODUCTION

 

1.1    BACKGROUND OF THE STUDY

The capital market is a financial market that provides facilities for mobilizing and dealings in long-term funds for economic growth and development. Wilkinson (2007) defines capital market as “any place or system where the requirements of business enterprises and public authorities or governments for medium and long-term capital funds can be met”. It is the market in which corporate equity and long term debt securities that is shares and bond (those maturing in more than one year) are issued and traded.

 

Ajie (2002) is of the view, “that pivotal role of the capital market in any economy could have been dispensed with, if a firm or even an individual for that matter could operate in a financial vacuum”. As a matter of fact, it is because firms for example, operate in close contacts with various financial intermediaries and markets that they are afforded not only the mechanism through which their idle funds can be invested but also one that is capable of satisfying their needs for additional funds.

 

As observed by Okereke-Onyiuke (2000), raising funds from the Capital Market makes possible among others, the construction of factories, offices, buildings, highways, bridges and the acquisition of machineries. This opportunity which the Capital Market offers facilitates capital mobilization and allocation among several competing activities.

 

In theory, Capital Markets are intended to provide investors and borrowers with a wide range of trading and investment vehicles and to better mobilize and allocate a country’s financial resources and support economic growth. This market brings together all the providers and users of capital. Buying stock allows investors to gain an equity interest in the company and become part owner. When investors buy bonds, they essentially loan money to the company or government that issued the bond and become creditors of that issuer. The market also provides them with new and more varied saving vehicles as alternative to bank deposit. For borrowers capital markets provide access to more funds for expansion which can help in economic growth. Levine and Zervos (1998) are of the opinion that well functioning capital market, along with well designed institution and regulatory system, foster economic growth through private initiatives.

 

There is empirical evidence strongly suggesting that well functioning capital market promote long-run economic growth. In particular, Levine and Zervos (1998) find that indicators of capital market performance such as market capitalization, turnover, growth in the number of listed securities, and so on are correlated with economic growth and its sources – total factor productivity growth and capital formation.

 

In the recent past, capital market performance has received increased attention among governments and development finance institutions, with emerging market accounting for a growing share of the worldwide boom in the capital markets. Countries at different levels of development are promoting the performance of their capital markets with the expectation that these efforts will pay off in terms of faster economic growth.

 

In Nigeria, the role of the capital market in economic growth of the country has continued to attract increased attention from the government and market practitioners.  Al-Faki (2008), emphasizes that “the Nigerian capital market has experienced considerable growth in the last decade. In the last year alone(2007), the Nigerian Stock Exchange all-share index has almost doubled to 51,000 points, and market turnover has also increased”. According to him, the factors responsible for this growth of market are firstly, public enlightenment programmes that the Commission carries out periodically to reach and enlighten the public all over the country. Other factors are the reduction of the cost of transaction which has enhanced competition in the Nigerian capital market. The Commission, in collaboration with other stakeholders, has also continued with the efforts aimed at promoting the reactivation of the bond market in Nigeria.

 

According to Wilkinson (2007), “deregulation is defined as dismantling or abolition of state intervention in economic matters with the purpose of reducing the influence of the state in the economy, abolishing bureaucratic obstacles and legal regulations”.

 

The deregulation of the Nigerian economy started with the introduction of the Structural Adjustment Programme (SAP) in July 1986 and since then, conscious efforts are made regularly to put in place new policies and where necessary, fine tune existing ones to ensure rapid and sustainable economic growth of the country; emphasizes reliance on the country’s natural resources (Nigeria, 1986).

 

As observed by Okereke-Onyiuke (2000), properly articulated and implemented, these government reforms are bound to improve the performance of the Nigerian capital market as a vehicle for increased capital formation thereby leading to rapid economic growth of the country”. This improvement would help the capital market’s ability to mobilize savings, attract new listing and liquidity through increased trading activities (turnover).

 

Therefore, this study attempts an assessment of the performance of the Capital Market in the deregulated Nigerian economy and covers the period 1986-2006.

 

1.2    STATEMENT OF THE PROBLEM

A capital market like Nigeria’s is bedevilled with a lot of problems that make exact measurement of its impact on various aspects of the economy quite challenging. Some economic analysts like Okigbo Report(1986) and Odife Report(1996) have observed that the Nigerian Capital Market has performed below expectations as a purveyor of cheap and stable funds for Nigeria’s economic growth due to its underdevelopment, which has impeded long-term funds flow through it. They argue that the performance of the Nigerian Capital Market as a source of long-term financing of Nigeria’s economic growth is inhibited by among other things; pervasive poverty that has impacted adversely on the saving culture; poor partnership spirit of Nigerians that has inhibited the development of public limited companies; poor perception of the market by offshore investors; low public awareness of the benefits of investing in the Capital Market; poor dissemination; few number of trading instruments; low market capitalization; high transaction costs in the market; bad corporate governance among others

 

The need to eliminate these observed performance inhibitors and therefore enhance the performance of the Nigerian capital market has led the federal government through the Nigeria Stock Exchange (NSE), Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC) to embark on reforms aimed at a broader, deeper and more efficient Capital Market.

 

The on-going reforms in the capital market in addition to the privatization programme of the government and the consolidation programme taking place in the banking and insurance sectors through the capital market are expected to deepen the market, assist Nigerians in imbibing the culture of investing in the capital market and therefore increase the activities of the capital market.

 

However, evidence from the Nigerian Capital Market shows that in spite of these deregulation, the market is still characterized by few number of trading instruments, low market capitalization, low market turnover, unrealistic stock pricing, high transaction cost, lack of market transparency, and so on.  Thus, there is need for a proper assessment of the performance of the capital market in the deregulated Nigerian economy.

 

 

1.3       OBJECTIVE OF THE STUDY

The general objective of this study is to assess the performance of deregulated capital market in the mobilization of long term funds for Nigeria’s economic growth.

Specifically, the study seeks to achieve the following:

  1. Evaluate the impact of deregulated capital market performance measures on capital formation in Nigeria
  2. Examine the impact of deregulated capital market performance measures on the Nigerian economy.

1.4         RESEARCH QUESTIONS

              Our research questions are:

  1. How does the deregulated capital market impact on gross fixed capital formation in Nigeria.
  2. How does the deregulated capital market impact on the economy.

1.5       HYPOTHESES OF THE STUDY

This study was guided by the following hypotheses:

Ho1:     The capital market performance as measured by market capitalization and growth of listed securities does not have significant positive impact on gross fixed capital formation.

Ho2:     The capital market performance as measured by market capitalization and       growth of listed securities does not have significant positive impact on gross domestic product.

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