CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The capital market is a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds in the economy. The market affords business firms and governments the opportunity to sell stocks and bonds, to raise long-term finds from the savings of other economic agents. The capital market is a highly specialized and organized financial market and indeed an essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. The sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).

In the last two decades, studies on the capital market have received considerable attention from contemporary finance and economics literature resulting from its role in the provision of long-term, nondebt financial capital which enables companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio and also in the mobilization of resources for national growth. According to Ndako (2010), the capital market is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy comprising households, firms, and government are mobilized, harnessed and made available to various sectors of the economy. For sustainable economic growth, funds must be effectively mobilized and allocated to enable businesses and the economies harness their human, material, and management resources for optimal output. Hence, the capital market is an economic institution, which promotes efficiency in capital formation and allocation.

The capital market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2000; Levine and Servos, 1996; Obadan, 1995; McKinnon, 1973).

The capital market effectively started operations in Nigeria on 5th June, 1961 under the provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock Exchange in December 1977 as a result of the review of the Nigerian financial system (CBN, 2007). The Securities and Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from Capital Issues Commission, which was established in 1973. Since then, various forms of financial instruments have been issued in the capital market by new and existing business to finance product development, new projects or general business expansion.

The importance of the capital market as an efficient channel of financial intermediation has been well recognized by the researchers, academicians, and policy makers as a primary determinant of the economic growth of a country, both developed and developing. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Underdeveloped or poorly functioning capital markets typically are illiquid and expensive which deters foreign investors. Furthermore, illiquid and high transactions costs also hinder the capital raising efforts of lager domestic enterprises and may push them to foreign markets (Mishra, et al., 2010).

1. STATEMENT OF THE PROBLEM

In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economy. The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities (Obadan, 1998).

Despite the popular belief that democracy promotes economic activities which in turn engenders economic growth, the growth of the capital market in Nigeria is still very small in relation to the size of the economy. CBN (2007) has it that a comparative analysis of equity market capitalization of the Nigerian capital market with some countries in North and South America, Asia, Europe and Africa shows that the Nigerian market is relatively very small.

In the light of the above, the study will investigate the relationship between capital market and economic development in Nigeria.

1. AIMS AND OBJECTIVES OF THE STUDY

The aim of the study is to investigate the relationship between capital market and economic development in Nigeria.

Specifically, the study seeks to:

1. Examine  the relationship effect of capital market on economic growth of Nigeria
2. Assess the challenges of capital market on the economic growth of Nigeria
3. Evaluate the role and contributions of capital market on the economic growth of Nigeria

1. RESEARCH QUESTIONS

The following research questions will be formulated and address in the study:

1. What is the relationship effect of capital market on economic growth of Nigeria?
2. What are the challenges of capital market impeding economic growth of Nigeria?
3. What are the role and contributions of capital market on the economic growth of Nigeria?

1. RESEARCH HYPOTHESIS

 H0 there is no significant relationship between capital market and economic development in Nigeria

H1 there is significant relationship between capital market and economic development in Nigeria

1. SIGNIFICANCE OF THE STUDY

The study is highly significant because it will investigate the relationship effect of capital market to economic growth of Nigeria. It will also investigate the role and contributions of capital market on the economic growth of Nigeria.

Ultimately, the study findings will enable the policy makers of the State and economists to gear up strategies on improving capital market to enable economy of Nigeria to thrive.

1. SCOPE OF THE STUDY

The study is limited to the effect of capital market on economic development of Nigeria.

The study focuses on the challenges of capital market impeding economic growth of Nigeria; the role and contributions of capital market on the economic growth of Nigeria; and the relationship between capital market and economic development in Nigeria.

1. LIMITATION OF THE STUDY

TIME CONSTRAINTS: One the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

FINANCIAL CONSTRAINTS: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1.9 DEFINITION OF TERMS

Capital market

Capital market has been broadly defined as an institution where medium and long term finance can be raised (Akingbohungbe. 1996). It can also be viewed as a network of specialized financial institutions, series of mechanism, process and infrastructure that facilitates the contact between suppliers and users of medium to long term capital for investment in the economy.

Economic growth

Economic growth means an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth is a process by which a nation wealth increases over time.