EFFECTS OF CAPITAL MARKET DEVELOPMENT ON THE ECONOMIC GROWTH OF NIGERIA
This study examines the effect of capital market development on the economic growth of Nigeria using data on Real Gross Domestic Product as a proxy for economic growth while capital market variables constitute the independent variables. This includes Market Capitalization, All Share Index, Number of Listed Securities and the number of listed companies The study adopted an expost-facto research design which utilized secondary data for the period 1983 -2016. While an Augmented Dickey-Fuller unit root test was used for preliminary analysis; an Autoregressive Distributed Lag (ARDL) was used for the model estimation. .A combination of ARDL bounds test for co-integration, ARDL short and long run error correction models were used for estimation. All the tests helped to confirm the integrity of our models. Findings of the study indicate that, the Number of listed Securities and All Share Index maintained a significant relationship with economic growth in Nigeria both in the short and long runs. Based on the findings of study it was recommended that government should help to remove all impediments to stock market development in the form of tax, legal and regulatory barriers as they act as disincentives to investments in the capital market. Again, government should help to maintain policy consistency in the pursuit of growth in the Nigerian capital market. By so doing, counter developmental policies should not be allowed to crowd out the gains of capital market development and by extension on economic growth in the long run. Lastly the government should find ways and means of boosting the confidence of investors to retain their portfolio investments.
Keywords: Capital market, All share index, Market capitalization, Number of listed securities, number of listed companies
1.1 Background of the Study
The capital market is a profoundly specific and coordinated financial market and indeed essential agent of economic growth and development (Odetayo and Sajuyigbe, 2012; Okoye and Nwisienyi, 2013) due to its capacity its ability to facilitate and mobilize saving and investment (Okodua and Ewetan, 2013)
Donwa and Odia, 2010). Shallu (2014) describes the capital market as a market where borrowing and lending of long term funds takes place involving both debt and equity like shares, debentures, bonds etc.
Emeh and Chigbu (2014) posit that capital market adds to financial growth through the through the specific services it performs either directly or indirectly, notable among these functions are: mobilization of savings, creation of liquidity, risk diversification, improved dissemination, acquisition of information, and enhanced incentive for corporate control
Adeusi (2013) opines that capital market is a driver or lubricant that keeps turning the wheel of the economy to growth and development because of its imperative function of not just mobilizing long term funds and channeling them to productive investment, but also effectively allotting these assets to projects of best returns to fund owners.
Although the relationship between capital market and economic growth has been researched in the past in Nigeria, there is still a lot of left to be desired as it concerns its transmission effect to the growth of the economy and also what channels cum variables are most influencing in achieving this feat. The inconclusiveness in research findings makes a case for undertaking this study to lend empirical evidence as well as close the existing research gaps in the aspect of declining market capitalization in Nigeria.
1.2. Problem Statement
There is no gain saying the fact that, the rate of development at the Nigerian capital market has not been able to effectively mobilize capital for the development of other vital sectors of the Nigerian economy. The major reason adduced for this seeming neglect is due to the predominant role the oil sector is playing as the major foreign exchange earner in the country.
The year 2016 witnessed a plunge in oil prices and that of stock market, which remained indelible in the minds of investors on the Nigerian Stock Exchange (NSE), just as it was in the 2008 global financial meltdown, which stemmed from the fact that, the nation’s stock market for the period under review experienced a major setback to the tune of over N1trillion drop in market capitalization. The fall in oil prices also led to the withdrawal of lots of investors and listed firms on the stock market. The share index ratios were not spared either. This was due majorly to the endogenous factors characteristic of the Nigerian financial system. A lot of investments ended up sustaining substantial losses. These helped to dampen the investor’s confidence and eventually led to a decline in growth of the capital market as well as the rate of economic growth in Nigeria.
At this juncture, there are some are pertinent questions that need be asked: – following the plunge of the Nigerian capital market in 2016, what efforts are the government and concerned individuals making to bring back the lost glory of the capital market? What efforts are being made to attract foreign investors into Nigeria and thus, sustain their confidence in the long run given their previous experiences with the stock market? What is the government doing to raise the level of growth in the capital market to complement other sectors of the economy to achieving economic growth? Is the market being supplied with enough securities for trading as depicted by the All share index, market capitalization and the number of participants in the Nigerian capital market?
Lastly, ignorance on the part of the investing public is not helping matters. Most of the investors are conservative. They still are still aligned to the practice of buy and hold stock. They seem to be contented with the dividends they will receive therein, but the truth remains that, that is not the main essence of trading in stocks or participating in stocks trading at the stock market. Shares need to be traded upon regularly for the market to advance and to function effectively and efficiently. These and many more are the problems that this study intends to proffer solutions to.
Thus, this study is set to ascertain the effects of capital market development on the economic growth of Nigeria.
1.3. Objectives of the Study
The broad objective of this study is to examine the effect of capital market development on the economic growth of Nigeria. The specific objectives are to determine the effect of:
i. Market Capitalization on the economic growth of Nigeria;
ii. Listed number of securities on the capital market on the economic growth of Nigeria;
iii. The All share index on the economic growth of Nigeria.
iv. Listed number of companies on the capital market on the economic growth of Nigeria.
1.4. Research Questions
In line with the above objectives, this research work aims at answering the following questions:
i. To what extent has Market capitalization impacted on the economic growth in Nigeria?
ii. To what extent has the Number of listed securities impacted on the economic growth of Nigeria?
iii. To what extent has the all share index impacted on the economic growth of Nigeria?
iv. To what extent has the total Number of listed companies on the stock market impacted on the economic growth of Nigeria?
1.5 Hypotheses of the Study:
H01: Market Capitalization at the Nigerian stock market does not have a significant effect on her level of economic growth.
H02: The Number of listed securities on the Nigerian capital market does not have a significant effect on the economic growth of Nigeria.
H03: The All share index of the Nigerian capital market does not have a significant effect on the economic growth of Nigeria.
H04: The Number of companies listed on the Nigerian capital market does not have a significant effect on the economic growth of Nigeria.
1.6. Significance of the Study.
This study will be of immense benefit to Policy Makers It will enable them to fashion out good and effective policies that could help move the capital market forward It will also be of assistance to private and corporate investors.. It will enable them understand the dynamic surrounding the operations of the market. This study will offer to other researchers an ample opportunity to critique the work and, thus expand on the existing body of knowledge on subject matter. Lastly, this study could also help to educate the general public on the important role the capital market can play in the economic growth of the nation.
2. Conceptual Framework
2.1.1 An Overview of the Nigerian Capital Market.
The capital market consists of institution and mechanisms through which economic units desirous to invest their surplus fund, interact directly or through financial intermediaries with those who wish to procure funds for their businesses. The Securities and Exchange Commission (SEC) is a major regulator in charge of the Nigerian stock market while the Nigerian Stock Exchange (NSE) supervises the operations of the formal quoted market (as a self- regulatory organization).
However, the Nigerian financial markets are encountering difficulties such as poor infrastructural facilities, low level of public awareness as to the benefits derivable from the operation of the capital market, inadequacy of supply of securities, stringent stock exchange listing requirements limiting mostly the smaller companies, illiquid market and unfavorable government policies (Taiwo, 2016)..