CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Almost all the economist laid emphasis on capital

formation as the major determinant of economic growth. The

meaning of capital formation is that society does not apply the

whole of it’s current productive activity to the needs and

immediate desire of consumption but directs some part of it

to the creation of capital goods tools and instruments

machines and transport facilities plants and equipments all

the various forms of real capital that can so greatly increase

the efficiency of productive effort. The essence of capital

formation is to divert a portion of society’s currently available

resources for the purpose of increasing the stock of capital

goods so as to make possible for an expansion of consumable

output in the future.

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The research focuses it’s attention on Nigerian Stock

Exchange which as the most visible mirror of the formal

capital market in the country. The Nigerian Stock Exchange is

one of the institutions on the capital market which specializes

in all forms of marketing trading securities. It is a network of

individual institution and instrument. The market plays a

central and dispensable role for which is has been variously

described as the “hall mark” or the heart of the capital market.

The rapid economic development of any economy

depends among other things on ready access of adequate

financial resources (Alile and Anao 1990). The desire to

develop financial market in an economy is intimately

connected with the objective of accelerating industrial and

agricultural development. Among this financial market is the

stock exchange which deals with the mobilization of bank

medium and long term capital funds (Sule and Momoh 2009).

The mechanism of stock exchange came into existence to

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enable investment which were inherently illiquid to become

liquid through reconversion into cast at the decision of the

investor without inconveniency the company (Olowe 1997).

Today words like globalization have become familiar in

economic and finance parlance and past growing intern

dependence of economics and financial markets cannot be

ignored.

The development of the capital market in Nigeria dates

back to 1946 when the first government securities was

floated; the institutional facilities for the operation was

however absent and did not commence until fifteen years later

when the Nigerian Stock Exchange (now the Nigerian Stock

Exchange) was established in 1961.

Consequently in 1953 the Federal Government set up a

committee under Professor R.H. Barback to advise on ways

and means to fostering a shares market in Nigeria. The report

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of the committee was published in 1959 and it recommended

among other things:

(1) The creation of facilities for dealing in shares

(2) The establishment of rules regulating transfer and;

(3) Measures to encourage saving and issue of

government and other organizations.

As follow up to this report the then Lagos Stock Exchange

now Nigerian Stock Exchange was incorporated on 15

th

September 1960 through the collective encouragement of the

business community the Nigerian Industrial Development

Bank Limited (NIDB) and the Central Bank of Nigeria.

Conclusively the availability of a secondary market

endangers capital formation and socio-economic development.

The allocative function as critical in determining the overall

growth of the economy ie the financial sector. Therefore the

role of the Nigerian Stock Exchange in the economy is an

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engine for capital formation saddles with the private sector in

general to achieve economic development program.

1.2 STATEMENT OF THE PROBLEM

The Nigerian Stock Exchange market is faced with

numerous problems which comprises of decreased trading

activities where by persistent rise in the demand for securities

without a corresponding increase in its supply. In this case

investments are not easily found for purchase.

Given the number of years since the Nigerian Stock

Exchange has been established and the substantial financial

resources available in the country coupled with the existing

institutions one can claim that the entire spectrum of the

capital market has not been sufficiently active especially when

compared with the capital unit of similar or lesser aged units

in other developing countries. The factors responsible for this

could be identified to include:

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(1) High Cost of transaction

(2) Lack of transparency and

(3) Poor economic performance etc.

The spinal effect of the global economic crisis on the

Nigerian Stock Exchange continued in 2009 with the

exorbitant lending rate mounting pressure on the stock

market as a result of massive borrowed fund in the market.

The rush by stock investors to liquidate their investment to

repay their loans in order to avoid the excessive lending rate

caused the Nigerian Stock Market to crash. (Sere Ejembi

2008) noted that it is not the global financial crisis and the

speculative sub prime mortgage bubbles and bust alone that

is responsible for the crash of the stock market other

contributory factors lent support. Some of these namely;

margin lending by the deposit money banks (DMBs) stock

price appreciation that had no correlation with the

fundamentals in the quoting companies and local investors

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opting to invest in foreign capital markets to take advantage of

the low stock price.

This study intends to evaluate the performance of the

Nigerian Stock Exchange interms of its trading activities and

determine the extent to which it’s contributes to the capital

formation process of the economy of at all there is causation

between them.

1.3 RESEARCH QUESTION

The study will examine the following questions

1. How does the Nigerian Stock Exchange influence capital

formation in Nigeria?

2. What factors influence capital formation in the Nigerian

economy?

3. What is the role of Stock Exchange on capital formation

in Nigeria

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1.4 RESEARCH OBJECTIVES

This study is primarily aimed at examining critically the

activities and performance of the Nigerian Stock Exchange

especially the study aims to;

1. To determine the impact of the Nigerian Stock Exchange

on capital formation.

2. To evaluate the performance and growth of the Nigerian

Stock Exchange.

3. To determine how the exchange could stimulate

investment.

4. To quantify the relative importance of the Stock

Exchange in determining the capital formation for

national development.

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1.5 RESEARCH HYPOTHESIS

The hypothesis that could be tested in this study is

stated below:

(1) H

0

: The Nigerian Stock Exchange has no significant

impact on capital formation.

(2) H

1

: The Nigerian Stock Exchange has significant impact

on capital formation.

1.6 SIGNIFICANCE OF THE STUDY

The significant of this research is to examine the

usefulness of the Nigerian Stock Exchange as a vehicle for

capital market shows that Nigerian Stock Exchange

contributes positively to the national development because it

portrays the capabilities to raise funds from the surplus to the

deficit for investment purpose.

Therefore the design of an optimal capital structure

which ensures adequate and sustainable growth for national

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development; this is the responsibility of the Nigerian Stock

Exchange. The beneficiaries of this research work are the

government industries and individuals would benefit from the

capital market role on capital formation.

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