AN ASSESSMENT OF THE ROLE OF FINANCIAL MARKET IN THE ECONOMY: A CASE STUDY OF NIGERIAN STOCK EXCHANGE
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigerian financial system comprises the financial markets and financial institutions. Financial market refers to a framework within the financial system for the buying and selling of short and long term funds. Financial markets are mechanism for facilitating the issuance of securities. They provide the system for issuing stocks, bonds, and other securities. Financial markets can therefore be said to mean an arrangements or structure for exchange of financial instrument. Financial market can be divided into two. Capital market and money market.
Capital market is the hub of the National economy as the pivot for capital formation (savings) and investment. It therefore, plays a vital role in wealth creation, employment generation, poverty reduction and income redistribution.
As it’s popularly known, the Nation Economy Empowerment and Development Strategy (NEED) of the Federal government of Nigeria is predicted on four key strategies viz reforming the way government works and its institutions, growing the private sector, implementation of a social charter for the people and reorientation of the people with an enduring African Value System. In growing the private sector by the use of appropriate strategy elements such as revitalization deregulation and liberalization programmed amongst others. The mobilization of medium and long-term investment capital is encouraged where the capital market is expected to play a major and critical role.
The capital market provides a veritable framework, the institutional and regulatory platform for realization of the lofty goals of the NEEDS Agenda. In the absence of the capital market, industrial growth would be hampered, as the money market is not designed to provide such funds. An efficient capital market mobilizes funds and allocates a greater proportion to those companies with the highest prospective rates of return after giving the allowance for risk. This allocation function is critical in determining the overall growth of the economy.
The Nigerian capital Market has strong impact on the Nigerian economic society. Every aspect of the economy could participate by getting listed on the Nigerian stock exchange. The capital market is a good place for long-term capital generation and thus, has a strong impact on industrial development and further helps develop the economy. The enlightenment of the public on the impact of the capital market could be a strong determining factor towards economic growth as organizations and individuals alike could participate in the market at their different levels.
Capital market is a financial market that provides facilities for mobilizing and dealing in medium and long term funds. The players on the capital market are the operators who act as intermediaries between the providers of the funds and the fund users. Cooley and Roden (2009:42) see capital market as any place where securities greater than one year are bought and sold.
The Nigerian capital market is two, which can be broadly classified into primary market and secondary market.
Primary market is a market where new securities are issued. According to Anyafo (2004), primary market is a segment of capital market where securities are first issued and it is sometimes refers to as the new issues market, securities sold in the primary market being launched into the market for the first time. In other words, it is a market for buying and selling of virgin securities. Examples of primary market are issuing house.
Secondary Market is a market for trading for existing securities. In other words, secondary market is a re-sale market where investors buy and sell previously issued securities which Emekekwue (2000) in fun referred to as bend-down boutique. Example of secondary market includes Nigeria stock exchange, the activities of brokers and dealers.
1.2 STATEMENT OF THE PROBLEM
The capital market is not void of problems: the limited numbers of available instruments traded in the market were discriminated in favour of large firms; the problems of unclaimed dividends among others have been able to hinder or draw back the swift/ function of the capital market in Nigeria. Also, considering the underdeveloped state of the Nigerian Stock Exchange, what could be done to position it strongly as its western counter parts. Thus, the study focuses, on the assessing the role of capital market towards the Nigeria economy.
1.3 OBJECTIVES OF THE STUDY.
The objectives of the study includes:-
(1) To ascertain the role of the capital market towards the growth of the Nigerian economy.
(2) To examine whether the establishment of capital market in Nigeria is justifiable.
(3) To identify the vital function performed by the primary market in Nigeria.
(4) To identify the causes of the recent Nigeria capital market melt down.
(5) To identify the role of secondary market in Nigeria capital market.
1.4 RESEARCH QUESTIONS
The study seeks to provide answers to the following questions:-
(1) What is role of the capital market towards the growth of the Nigerian economy?
(2) Is the establishment of capital market in Nigerian Justifiable?
(3) What is the vital function performed by the primary market in Nigeria?
(4) What are the causes of the recent Nigerian capital market melt down?
(5) What role is played by the Nigeria secondary market?
1.5 RESEARCH HYPOTHESES
In embarking on this study the researcher has the following hypotheses to be tested:
(1)H1: The role of the Nigerian capital market is to mobilize long term funds, create wealth and generate employment.
H0: The role of the Nigerian capital market is not to mobilize long term funds, create wealth and generate employment.
(2)H1: The establishment of capital market in Nigeria is justifiable.
H0: The establishment of capital market in Nigeria is not justifiable.
(3)H1: The vital function performed by the Nigerian primary Market is to facilitate buying of virgin securities.
H0: The vital function performed by the Nigerian primary market is not to facilitate buying of virgin securities.
(4) H1: The recent capital market melt down in Nigeria was as a result of inadequate infrastructural facilities and high production costs.
H0: The recent capital market melt down in Nigeria was not as a result of inadequate infrastructural facilities and high production cost.
(5) H1: The role played by the Nigerian secondary market is buying and re-selling of previously issued securities.
H0: The role played by the Nigeria secondary market is not buying and re-selling previously issued securities.
1.6 SIGNIFICANCE OF THE STUDY.
The study is significant in a number of ways.
It will help future students to read and know much about capital market in Nigeria.
It will also serve as a reference material for future researchers.
1.7 SCOPE OF THE STUDY
The study focuses on Assessing the Role of the Capital Market towards Nigerian Economy, Performance of capital market, the role of the capital market in economic development, the meltdown of the Nigerian capital market, causes, consequences and future of the Nigerian capital market, primary and secondary markets.
1.8 LIMITATIONS OF THE STUDY
The major constraints of the study include, Attitude of the respondents, time constraint, and financial constraint.
Attitude of the respondents: Some of the respondents were unwilling to cooperate with the researcher since they derive no financial benefit from the study.
Time: the researcher was constrained by time; he could not visit all the places where data and information relevant to the study could be obtained.
Financal Constraint: A lot of money is required in data collection, analysis and interpretation. The researcher is constrained financially.
1.9 OPERATIONAL DEFINITION OF TERMS.
Market Price: The prevailing price of security in the stock market.
Liquidity: The ease at which a financial instrument can be converted into cash.
Issued Capital: The portion of the authorized capital of a company which has actually been issued to subscribers (investor) which may or not have been paid for
Accrued Dividend: The regular dividend considered to be earned but which has not been declared on legally issued stock or other instruments or part ownership of a legally organized or financial institution
Stock Exchange: Organization, which provides facilities for trading in securities by its member and also sets rules for the admission and trading of exiting securities as well as to guide the business conduct of members.
Venture Capital: Money which is invested in a commercial venture with an uncertain chance of success, hence, such money is called risk capital.
Shareholder: An individual or institution having ownership interest in a company and this entitle to certain right and privilege according to holders of equity shares.
Company Capitalization: This is the total amount of equity investment in a company that could also include long-term debt that considered by the company and debt holders as an investment in the company.
Capital market; This is a network of specialized financial institutions that in various ways bring together supplies and users of fund in a long term purpose.
Securities: Securities are written or reported document by which chain of holders in specified property are secured, this could be stock, shares or bonds.
Automate Trading System. A security trading arrangement where by transaction on the stock exchanges are achieved through network of companies.
Primary Market: This is a market where new securities are issued.
Secondary Market: This is a market for trading existing securities.
Market Operators: Consisting of the issuing houses, (merchant bank) stock broking firms, trustees, registrars etc.