CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The capital market is a highly specialized and organized financial market

and indeed essential agent of economic growth because of its ability to facilitate

and mobilize saving and investment. To a great extent the positive relationship

between capital accumulation real economic growths has long affirmed in

economic theories (Anyanwu 1993).

Success in capital accumulation and mobilization for development varies among

nations but it is largely dependent on domestic savings and inflows of foreign

capital. Therefore to arrest the menace of the current economic downturn effort

must be geared towards effective resources mobilization. It is in realization of

this that consideration is given to measure for the development of capital market

as an institution for the mobilization of finance from the surplus sectors to the

deficit sectors.

The development of capital market in Nigeria as in other developing

countries has been induced by the government. Though prior to the

establishment of stock market in Nigeria there existed some less formal market

arrangements for the operation of capital market. It was not prominent until the

visit of Mr. J. B. Lobynesion in 1959 on the invitation of the Federal

government to advice on the role the Central Bank could play in the

development of local money and capital market. As a follow-up to this the

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government commissioned and a set up the Barback Committee to study and

make recommendations on the ways and means of establishing a stock market

in Nigeria as a formal capital market. Acting on the recommendation of the

committee the Lagos Stock Exchange (as it was called then) was set-up in

March 1960 and in September 1961 it was incorporated under Section 2 cap

37 through the collaborative effort of Central Bank of Nigeria the Business

Community and Industrial Development Bank (Alile &Anao 1990). With the

establishment of the Central Bank of Nigeria in 1959 and the coming into

existence of the Lagos Stock Exchange in 1961 and Subsequently the Nigeria

Stock Exchange by an Act in 1979 a sound foundation was laid for the

operation of the Nigerian Capital Market for trading in securities of long term

nature needed for the financing of the industrial sector and the economy at

large. After the incorporation of the Lagos Stock Exchange it was granted

further protection under the law and its activities was placed under some sort of

control by the government hence the passing of the Lagos Stock Exchange Act.

However the Lagos Stock Exchange was only operational in Lagos. By the mid

70’s the need for an efficient financial system for the whole nation was

emphasized and a review by the government of the operations of the Lagos

Stock Exchange market was advocated. The review was carried out to take care

of the low capital formation the huge amount of currency in circulation which

was held outside the banking system the unsatisfactory demarcation between

the operation of Commercial Banks and the emerging class of the Merchant

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Banks and the extremely shallow depth of the capital.

In response to the problems mentioned above the government accepted

the principle of decentralization but opted for a National Stock Exchange which

will have branches in different parts of the country. On December 2nd 1977 the

memorandum and article of association creating the Lagos Stock Exchange was

transformed into the Nigerian Stock Exchange with branches in Lagos

Kaduna Port-Harcourt Yola and now in Federal Capital Territory (FCT) Abuja

and some other cities. The history of Nigeria Capital Market could be traced to

1946 when the British colonial administration floated a N600 000 local loan

stock bearing interest at 3¼% 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. Certainly potential fund abound in

Nigeria but the overriding consideration in this project is to examine the impact

of the capital market in harnessing and mobilizing these resources (fund) to

generate economic growth in the country and consequently economic

development.

1.2 STATEMENT OF THE PROBLEM

There is abundant evidence that most Nigerian businesses lack long-term

capital. The business sector has depended mainly on short-term financing such

as overdrafts to finance even long-term capital. Based on the maturity matching

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concept such financing is risky. All such firms need to raise an appropriate mix

of short- and long-term capital (Demirguc-Kunt& Levine 1996).

Most recent literatures on the Nigeria capital market have recognized the

tremendous performance the market has recorded in recent times. However the

vital role of the capital market in economic growth and development has not

been empirically investigated thereby creating a research gap in this area. This

study is undertaken to examine the contribution of the capital market in the

Nigerian economic growth and development. Aside the social and institutional

factors inhibiting the process of economic development in Nigeria the

bottleneck created by the dearth of finance to the economy constitutes a major

setback to its development. As a result it is necessary to evaluate the Nigerian

capital market.

1.3 RESEARCH QUESTIONS

This research was guided by the following research questions:

i. What is the performance of the capital market in relation to economic

growth in Nigeria?

ii. How could the capital market through its crucial role stimulate economic

growth in Nigeria?

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1.4 OBJECTIVES OF THE STUDY

The broad objective of this study examined the activities and performance

of Nigerian capital market. The specific objectives of the study are as follows:

1. To evaluate the performance of the capital market in relation to the

economic growth in Nigeria.

2. To make recommendations as to how the operations of the market could

be improve to boost economic growth and development of Nigeria.

1.5 HYPOTHESIS OF THE STUDY

The hypothesis that would be tested in the course of this research is stated

below as:

H0: That the capital market operations have no impact on Nigerian economic

growth.

1.6 SIGNIFICANCE OF THE STUDY

The study explored the impact or effectiveness of capital market

instruments on Nigerian economic growth. Though the scope of the study was

limited to the capital market it is hoped that the exploration of this market will

provide a broad view of the operations of the capital market. It will contribute to

existing literature on the subject matter by investigating empirically the role

which the capital market plays in the economic growth and development of the

country. The main importance of this study is that it will provide policy

Comment [O2]: See the order in which Chapter

one should appear

1.8 Background of the study

1.9 Statement of the problem

1.10 Research questions

1.11 Objectives of the study

1.12 Hypothesis of the Study

1.13 Significance of the study

1.14 Scope of the study

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recommendations to policy-makers on ways to improve operations and

activities of the capital market.

1.7 SCOPE AND LIMITATION OF THE STUDY

The economy is a large component with lot of diverse and sometimes

complex parts; this research work only looked at a particular part of the

economy (the financial sector). This work did not cover all the facets that make

up the financial sector but focus only on the capital market and its activities as

it impacts on the Nigerian economic growth. The empirical investigation of the

impact of the capital market on the economic growth in Nigeria was restricted

to the period between 1980 and 2009 due to the non-availability of some

important data.

1.8 ORGANIZATION OF THE STUDY

The study is divided into five (5) chapters and organized as follows:

Chapter one form the introduction part this is where the main theme of the

research is given. It comprises of the statement of the problem objectives of the

study research questions and hypotheses significance of the study scope and

delimitation of the study and organization of the study.