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

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

ABSTRACT

This study is an assessment of the performance of the capital market in the deregulated Nigerian economy from 1986-2006. The research focus was directed toward a deeper understanding of how capital market performance has impacted on capital formation and economic growth in Nigeria. We concentrated on two capital performance indications namely; market capitalization and growth in the number of listed securities. Secondary data from Central Bank of Nigeria (CBN), Nigeria Stock Exchange (NSE), and Federal Office of Statistics (FOS), which were obtained through library research of relevant publications, were used. The econometric technique of multiple regression analysis was used as the main estimation tool to measure the degree of relationship between capital formation and Nigeria’s economic growth respectively and capital market performance measures. The study was guided by two hypotheses. Both linear and log linear specifications of each of the relationships were tried. Our hypotheses were tested with the R2 test and f-test. The major findings of the study were: that the log linear specifications suit our data more in terms of goodness of fit, precision of the estimates and tolerable level of multi collinearity and that capital market performance has both significant and positive impact on capital formation and economic growth in the deregulated Nigerian economy. The study concluded that to increase the level of capital formation in Nigeria and enhance economic growth of the country, efforts should be made to enhance the performance of the capital market but how fast the market moves to assume its rightful position as a major channel of capital formation needed for Nigeria’ rapid economic growth will depend on how fast the major obstacles impeding its performance are dispensed with. It recommended some measures to be implemented to enhance the performance of the Nigeria capital market. Like The regulatory and supervisory framework needs to be continuously reviewed and strengthened to embrace the activities of the market, emphasis on transparency and accountability on all aspects of economic management and corporate governance, etc.

CHAPTER ONE

1.0       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 bedeviled 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.

1.6       SIGNIFICANCE OF THE STUDY

This study is significant for a number of reasons:

1. The study will expose the performance of the capital market in resources mobilization in a deregulated economy such as Nigeria’s.
2. The examination of the performance of the capital market in a deregulated Nigerian economy will keep market participants including investors informed in the benefits of the government on business and investment.
3. The study will also keep policy makers informed as to whether deregulation programmed of the government and reform process are in course, that is, achieving the desired goals and if not the problems militating against it.
4. Furthermore, the study will show if the reforms made so far in the Nigeria capital market are adequate to bring about the much needed investment flow for economic growth.
5. In addition, the study will suggest ways to improve the effectiveness of the reform programmed and how best the Nigeria capital market could be invigorated to meet the growth needs of the economy.

Finally, the work will serve as reference material for future and further work in related areas.

1.7       SCOPE OF THE STUDY

This study covered the period of 1986 to 2006. The Nigerian economy and the capital market in particular are believed to have witnesses major reforms aimed at enhancing their performance within this period. The study concentrated on the Nigeria capital market size. Market capitalizing is the value of a corporation as determined by the price of its equity performance indicators namely; Market Capitalization and growth in listed securities. The study will also keep policy makers informed as to whether

1.8       OPERATIONAL DEFINITION OF TERMS

1. Allotment: The part of stock issue apportioned or assigned by an investment firm to a purchase or subscriber usually.
2. Collateral Security: Any security put up to reinforce an obligation
3. Delivery: The handing over of possession of shares certificates on a delivery day.
4. Ex-dividend Date: The day, on or after which the night to receive a current dividend is not transferred automatically
5. Ex-dividend (Ex Div, Xd) Period: The period during which the quoted price of a security excludes the payment of any declared dividend to the buyer, and the dividend reverts to the seller.
6. Floatation: The issue of a security by a new company or on behalf of the company by an issuing house.
7. Issue Price: The price for a new security sold to the public determined by an underwriter or syndicate.
8. Listed Securities: Any bonds or stocks that have been admitted for trading on a stock exchange and whose issues have complied in every way with the listed requirements of the exchange.
9. Market Capitalization: The value of a firm as determined by the market price of the issued and outstanding common stock.
10. Stock: The legal capital of a corporate dividend into shares.

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