IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

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 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 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 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 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     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 examines the operations of the Nigerian capital market.

2. To evaluate the performance of the capital market in relation to the economic

     growth in Nigeria.

  3. To examine the rate at which new stocks are issued on the capital market.

4.     To make recommendations as to how the operations of the market could be  improve to boost economic growth and development of Nigeria.

1.4     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 recommendations to policy-makers on ways to improve operations and activities of the capital market.

1.5 RESEARCH QUESTIONS AND HYPOTHESES
             This research was guided by the following research questions:

       i.             How is the operation of Nigeria capital market?

     ii.            What is the performance of the capital market in relation to economic growth in Nigeria?

  iii.            What is the rate at which new stocks are issued on the Nigerian capital market

  iv.             How could the capital market through its crucial role stimulate economic growth in Nigeria?
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     SCOPE AND DELIMITATION 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.

1.7 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.

Chapter two is the literature review of the impact of capital market on the economic growth of Nigeria.

Chapter three forms the research methodology which includes sources of data, method of data analysis and model specification.

Chapter four is the data analysis while chapter five includes the summary, conclusion and recommendations.

CHAPTER TWO

2.0                                  LITERATURE REVIEW

2.1     THEORETICAL AND CONCEPTUAL FRAMEWORK

           Capital market is defined as the market where medium to long terms finance can be raised. The capital market is the market for dealing (that is lending and borrowing) in long term loanable funds.

Substantial academic literature and government strategies support the finance-led growth hypothesis, based on an observation first made almost a century ago by Joseph Schumpeter that financial markets significantly boost real economic growth and development. Schumpeter asserted that finance had a positive impact on economic growth as a result of its effects on productivity growth and technological change. As early as 1989 the World Bank also endorsed the view that financial deepening matters for economic growth "by improving the productivity of investment". (Wikipedia, 2011).

          Mbat (2001) described it as a forum through which long term funds are made available by the surplus to deficit economic units. It must however, be noted that although all surplus economic units have access to the capital market, not all the deficit economic units have the same easy access to it. The restriction on the part of the borrowers is meant to enforce the security of the funds provided by the lenders. In order to ensure that lenders are not subjected to undue risks the borrowers in the capital need to satisfy certain basic requirement. It has very profound implication for the socio-economic growth and development of any nation.

Conceptual Framework

Credit Development

Investors Access to Affordable Credit

Increase in GDP

Increase Investment

Source: Own 2011

.

2.2     REVIEW OF RELATED CONCEPTS

2.2.1  CAPITAL MARKET AND ECONOMIC GROWTH

            In principle, the capital (stock) market is expected to accelerate economic growth, by providing a boost to domestic savings and increasing the quantity and the quality of investment. The market is expected to encourage savings by providing individuals with an additional financial instrument that may better meet their risk preferences and liquidity needs. Better savings mobilization may increase the saving rate. The capital market also provides an avenue for growing companies to raise capital at lower cost. In addition, companies in countries with developed stock market are less dependent on bank financing, which can reduce the risk of a credit crunch. The capital market therefore is able to positively influence economic growth through encouraging savings among individuals and providing avenues for firm financing (Charles & Charles, 2007).

          Capital market offers access to a variety of financial instruments that enable economic agents to pool, price and exchange. Through assets with attractive yields liquidity and risk characteristics, it encourages savings in financial form. This is very essential for government and other institutions in need of long term funds and for suppliers of long term funds. Companies can finance their operation by raising funds through issuing equity (ownership) or debenture/bond borrowed as securities. Equity have perpetual life while debenture /bond issues are structured to mature in periods of years varying from the medium to long-term of usually between five and twenty five years.( Mbat, 2001).

          Based on the performance of capital market in accelerating economic growth, government of most nations tends to have keen interest in its performance. The concern is for sustained confidence in the market and for a strong investor’s protection arrangement. Economic growth is generally agreed to indicate development an economy, because it transforms a country from a five percent saver to a fifteen percent saver. Thus it is argued that for capital market to contribute or impact on the economic growth in Nigeria, it must operate efficiently. Most often, where the market operate efficiently, confidence will be generated in the minds of the public and investors will be willing to part with hard earned funds and invest them in securities with the hope that in future they will recoup their investment.(Ewah et al, 2009)

          The theoretical explanation on the nexus between capital market and economic growth is further expanciated using Efficient Market Hypothesis (EMH) developed by Fama in 1965. According to EMH, financial markets are efficient or prices on traded assets that have already reflected all known information and therefore are unbiased because they represent the collective beliefs of all investors about future prospects. Previous test of the EMH have relied on long-range dependence of equity returns. It shows that past information has been found to be useful in improving predictive accuracy. This assertion tends to invalidate the EMH in most developing countries. Equity prices would tend to exhibit long memory or long range dependence, because of the narrowness of their market arising from immature regulatory and institutional arrangement. They noted that, where the market is highly and unreasonably speculative, investors will be discouraged from parting with their funds for fear of incurring financial losses. In situations like the one mentioned above, has detrimental effect on economic growth of any country, meaning investors will refuse to invest in financial assets. The implication is that companies cannot raise additional capital for expansion. Thus, it suffices to say that efficiency of the capital market is a necessary condition for growth in Nigeria.(Nyong, 2003).

          Ariyo and Adelegan (2005) contend that, the liberalization of capital market contributes to the growth of the Nigeria capital market, yet its impact at the macro-economy is quite negligible.

          In another exposition, Gabriel (2002) as enunciated by Nyong (2003) lay emphasis on the Romanian capital market and conclude that the market is inefficient and hence it has not contributed to economic growth in Romanian.

          Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible.

          Ewah, et al (2009) capital market provide the opportunities for the purchase and sale of existing securities among investors thereby encouraging the populace to invest in securities fostering economic growth.

2.2.2  DEFINITION OF CAPITAL MARKET

          The literature involves citing difference contribution on what capital market is all about and what means to follow in having a strong, viable and reliable market.

          Jhingan (2004) the capital market is a market which deals in long term loans. It supplies industries with fixed and working capital and finance medium term and long term borrowings of the central, states and local governments. Thus the capital market comprises the complex of institutions and mechanisms through which medium term funds and long term funds are pooled and made available to individual business and governments.

          The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. This is made possible through some vital roles played, such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy (Pat &James, 2010).

2.2.3  OVERVIEW OF THE NIGERIAN CAPITAL MARKET

          The capital market is cornerstone of every financial system since it provides the funds needed for financing not only business and other economic institutions, but also the programme of government as whole.

 The capital market is essentially a market for long term securities that is stock, debenture and bonds lasting for usually longer than three years.

 The proper functioning of the capital market was not set up until the establishment of the Central Bank in 1959 and launching of the Lagos stock exchange in 1961even though securities were floated as far back as 1946.

          The needs to have an organized stock exchange came up and committee was set up by the government under the chairmanship of Prof. R.W.Barbock to consider the feasibility of having indigenous forum for the purchase and sales of shares and stocks.

 The Nigeria capital market was established for the following reasons below.

       i.            To overcome difficulties of selling government stock

     ii.            To provide local opportunities and lending for long term purpose

  iii.            To enable authorities mobilized long term capital for economic growth and development

  iv.            To enable the foreign business the chance of offering their shares to interested Nigerians to invest and participate in the ownership of these foreign business.

In view of the above the major participants in capital market are

Government

Quoted Companies (listed companies)

Stock Brokers

Central Bank of Nigeria (C.B.N)

Banking and non Banking Financial Institutions

Nigerian Stock Exchange

Nigerian Securities and Exchange Commission

Functions of the capital market

a.     The promotion of rapid capital.

b.     It is machinery for mobilizing long-term financial resources for industrial development.

c.      The provision of an alternative source of fund other than taxation for government.

d.     The mobilization of savings from numerous economic units for growth and development.

e.      The provision of liquidity for any investor or growth of investors.

f.       The broadening of the ownership base of assets and the creation of a healthy private sector.

g.     It is an avenue for effecting payment of debts

h.     The encouragement of a more efficient allocation of new investment through the pricing mechanism.

i.       The creation of a built in operational and allocation efficiency within the financial system to ensure that resources are optimally utilized at relatively little cost.

j.       It is a necessary liquidity mechanism for investors through a formal market for debt and equity securities.

2.2.4THE NIGERIAN SECURITY AND EXCHANGE COMMISSION

          The Nigerian security and exchange commission (NSEC) is the apex institution for the regulation and monitoring of the Nigeria capital market. The commission was established under the security and exchange commission decree 1979, operating retrospectively from 1^st April 1978.

 Prior to the SEC, two bodies had in succession been responsible for the monitoring of capital market activities in Nigeria. The first was capital issues committee, which operated between 1962 and 1972. It could not be seen as the superintendent of the capital market because its functions were more or less advisory without the force of instruction even through its functions included the coordination of capital market activities. The next body was the capital market issues commission (CIC) which came into being in March 1973. The C.I.C, unlike its predecessor, had full powers to determine the price, timing and volume of security to be issued. Despite this wider power, the CIC could not be seen as the apex of capital market because it concerned itself with public companies alone and its activities did not cover the stock exchange and government securities.

          The enabling Act of the Securities and Exchange Commission specifies its overriding objectives as investors’ protection and development while its functions were divided into two regulatory and development.

         The functions of the commission are extensively spelt out in Nigeria Securities and Exchange Commission Decree (Decree No 29) of 1983 and the Nigerian Enterprises Promotion Decree 1990. According to section (6) subsection (9) to (10) the commission is charged with the following duties and functions.

       i.            Determining the amount of price and time when securities of companies are to be sold to the public whether through offer for sale or subscription.

     ii.            Registering all securities proposed to be offered for sale to or for subscription by the public.

  iii.            Maintaining surveillance over the securities market to ensure orderly, fair and equitable dealing in securities.

  iv.            Protecting the integrity of the security market against any abuses arising from the practice of insider trading.

     v.            Acting as regulatory apex organization for the Nigerian capital market including the Nigerian Stock Exchange and its branches to which it would be at liberty to delegate power.

  vi.            Creating the necessary atmosphere for the orderly growth and development of the capital market.

vii.            Reviewing, approving and regulating merger acquisition and all forms of business combination.

viii.            Registering Stock Exchange or their branches, registers investment advisers, securities dealers and their agents and controlling and supervising their activities with a view to maintaining proper standards of conduct and professionalism in the securities business.

  ix.            Undertaking such other activities as are necessary or expedient for giving fall effect to the provision of this decree.

2.2.5  THE NIGERIAN STOCK EXCHANGE

          As one of the constituencies of the capital market, the exchange is a private, nonprofit making organization, limited by guarantee. It was incorporated via the inspiration and support of businessmen and the federal government. But owned by about 300 members. The membership includes financial institution, stockbrokers and individual Nigerians of high integrity, who have contributed to the development of the stock market and Nigerian economy.

 The Nigerian stock exchange started with the incorporation of the then Lagos stock exchange in 1960. Trading commenced on the exchange in 1961 after the enactment of the Lagos stock exchange Act of 1961, the self regulatory organization was subsequently reorganized and renamed the Nigerian stock exchange 197, based on the report and recommendation of Pius Okigbo financial system review commission.

The stock exchange is thus an institution of capital market, which provides trading floors where all dealing members operates on every business day. The exchange now has nine (9) branches and all the branches function principally as trading floor.       

Functions of Nigerian Stock Exchange

       i.            To provide opportunities for raising new capital.

     ii.            To promote increasing participation by the public in the private sector of the economy.

  iii.            To provide appropriate machinery to facilitate further offerings of stocks and shares to the public.

  iv.            To provide a central meeting place for members to buy and sell existing stocks and shares and for granting quotation to new ones.

     v.            To reduce the risk of liquidity by facilitating the purchasing and sale of securities.(  Al-faki, 2007).

2.2.6    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. The most widely used measures of economic growth is the rate of growth in a country’s total output of goods and services gauged by the gross domestic product (GDP)

Economic growth can also be refers to as the increase of per capita gross domestic product (GDP) or other measures of aggregate income, typically reported as the annual rate of change in the real GDP.

          Economic growth is primarily driven by improvement in productivity, which involves producing more goods and services with the same inputs of labour, capital, energy and materials. (Wikipedia).

2.2.7     IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH OF NIGERIA

          The Nigeria capital market provides the necessary lubricant that keep turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to funds owners.

          The market is very vital to the growth and development of any country because it support government and corporate initiative finances the exploitation of new ideas and facilitates the management of financial risk.

          The capital market has impacted on economic growth and development of Nigeria through the following.

       i.            The capital market encouraged the inflow of foreign capital when foreign companies or investors invest in domestic securities.

     ii.            It reduces the over reliance of the corporate sector on short term financing for long term projects and also provides opportunities for  government to finance projects aimed at providing essential amenities for  socio-economic development.

  iii.            The capital market aid the government in privatization programme by offering her shares in the public enterprises to members of the public through the stock exchange.

  iv.            It has impacted positively by providing avenue for the marketing of shares and other securities in order to raise fresh fund for expansion of operations leading to increase production/output.

     v.            The market provides means of allocating the nation real and financial resources between various sectors, industries and companies. Through the capital formation and allocation mechanism the market efficiently distributes the scarce resources for the optimal benefit to the economy.

2.3     EMPIRICAL REVIEW

          The link between capital market and economic growth has been empirically investigated by researchers in both Nigeria and other countries.

2.3.1   EMPIRICAL REVIEW ON OTHER COUNTRIES

          Demetriades, et al (2001) utilized time series data from five developed countries, to examine the relationship between stock market and economic growth, controlling for other effect of the banking system and stock market volatility. Their result supports the view that, although banks and stock market may promote economic growth, the effect of bank is more. They suggested that the contribution of stock market to economic growth may have been exaggerated by studies that uses cross country regressions.

          Mohtadi and Agarwal (2004) examined the capital market and economic growth in developing countries using a panel data approach that covers 21 emerging markets over 21 years (1977 - 1997), they found that turnover ratio is an important and  statistically insignificant  determinant of investment  by firms and that these investment in turn are significant determinant of aggregate growth. Foreign direct investment is also found to have a strong positive influence on aggregate growth. The result of their study indicates that both turnover ratio and market capitalization are important variables as determinants of economic growth.

          Nieuwerburgh, et al (2005) investigated the long term relationship between capital (stock) market development and economic growth in Belgium. Their result shows that the market causes economic growth in Belgium.

          Mishra, et al (2010) examined the impact of capital market efficiency on economic growth of India using the time series data on market capitalization, total market turnover and stock price index over the period spanning from the first quarter of 1991 to the first quarter of 2010. Their study reveals that there is a linkage between capital market efficiency and economic growth in India. This linkage is established through high rate of market capitalization and total market turnover. The large size of capital market as measured by greater market capitalization is positively correlated with the ability to mobilize capital and diversify risk on an economy wide basis. The increasing trend of market capitalization in India would certainly bring capital market efficiency and thereby contribute to the economic growth of the country.

2.3.2     EMPIRICAL REVIEW ON NIGERIA

Osinubi and Amaghionyeodiwe (2003) examined the relationship between the Nigerian stock market and economic growth during the period 1980- 2000. Unfortunately, their results did not support the claim that stock market development promotes economic growth.

Adam and Sanni (2005) examined the role of stock market in Nigeria’s economic growth using Granger-Causality test and regression analysis. The study discovered a one-way causality between GDP growth and market capitalization and a two-way causality between GDP growth and market turnover. They also observed a positive and significant relationship between GDP growth turnover ratios. The study advised that government should encourage the development of the capital market since it has a positive relationship with economic growth.

Obamiro (2005) investigated the role of the Nigerian stock market in the light of economic growth. The author reported a significant positive effect of stock market on economic growth. He suggested that government should create more enabling environment so as to increase the efficiency of the stock market, and to attain higher economic growth.

          Ewah, et al (2009) appraised the impact of the Nigeria capital market efficiency on the economic growth of the nation using time series data from 1961 to 2004. They found that the capital market in Nigeria has potential of growth inducing but it has not contribute meaningfully to the economic growth of Nigeria because of low market capitalization, illiquidity, misappropriation of funds among others.

Ezeoha, et al (2009) investigated the nature of the relationship that exists between stock market development and the level of investment (domestic private investment and foreign private investment) flows in Nigeria. The study discovered that stock market development promotes domestic private investment flows, thus suggesting the enhancement of the economy’s production capacity as well as promotion of the growth of national output. However, the results show that stock development has not been able to encourage the flow of foreign private investment in Nigeria.

          Afees and Kazeem (2010) critically and empirically examined the causal linkage between stock market and economic growth in Nigeria between 1970 and 2004. The indicator of the stock market development used are market capitalization ratio, total value traded ratio and turnover ratio while the growth rate of gross domestic product is used as proxy for economic growth, using the Granger causality (GC) test, the empirical evidence obtained from the estimation process suggests a bidirectional causality between turnover ratio and economic growth, a uni-directional relationship from market capitalization to economic growth and no causal linkage between total value traded.  The result of the causality test is sensitive to the choice of variable used as proxy for stock (capital) market. Overall the result of the G.C test suggested that capital market drive economic growth.

CHAPTER THREE

3.0     METHODOLOGY OF RESEARCH

          This chapter included sources of data, method of data analysis and model specification.

3.1     SOURCES OF DATA

          The data for this study was obtained mainly from secondary sources particularly from Central Bank of Nigeria (CBN) statistical Bulletins, Nigerian Stock Exchange (NSE) fact books, Security and Exchange Commission (SEC) market Bulletins and relevant journals.

3.2     METHOD OF DATA ANALYSIS

         The procedure for analyzing the data was econometric procedure. Here the technique used was the multiple regression analysis to test whether the capital market indices have impacted on the economic growth of Nigeria proxy by Gross Domestic Product (GDP).

3.3     MODEL SPECIFICATION

         Model which specifies that economic growth [proxy by Gross Domestic Product (GDP)] is significantly influenced by the capital market indices (market capitalization, new issues, value of transaction and total listing) is formulated as follows,

GDP= f (MCAP, TNI, VLT, TLS)

LnGDP= α₀+ α₁LnMCAP+α₂LnTNI+α₃LnVTS+α₄LnTLS+U

Where;

The a priori expectation is α₁, α₂, α₃, α₄> 0

LnGDP= Gross Domestic Product

LnMCAP= Market Capitalization

LnTNI= Total New Issues

LnVLS= Total Listed Equity and Government Stock

U = Disturbance Term

α = Intercept

α₁ - α_{4 =} Coefficient of the Independent Variables.

Note, All variables are in their natural logarithm form.

CHAPTER FOUR

4.0                        DATA PRESENTATION AND ANALYSIS

            This chapter tends to present and analyzed data with aim of scaring the role of capital market in economic growth of Nigeria and it further interpret and discuss the result.

4.1     DATA PRESENTATION

Year	Real GDP	Total new issues (N) M	Market capitalization (Equities and debts,) (N  B)	Value of transactions (Government and industrial securities (N M)	Total listing on the Nigerian Stock Exchange (Equity, industrial loan and govt. stock)
1980	31546.8	372.3	4464.2	388.7	157
1981	205222.1	455.2	4979.8	304.8	194
1982	199685.3	533.4	4025.7	215	205
1983	185598.1	448.5	5768	397.9	212
1984	183563	159.8	5514.9	256.5	213
1985	201036.3	817.2	6670.7	316.6	220
1986	205971.4	833	6794.8	497.9	240
1987	204806.5	450.7	8297.6	382.4	244
1988	219875.6	400	10020.8	850.3	253
1989	236729.6	1629.9	12848.6	610.3	267
1990	267550	9964.5	16358.4	225.4	295
1991	265379.1	1870	23125	242.1	239
1992	271365.5	3306.3	31272.6	491.7	251
1993	274833.3	2636.9	47436.1	804.4	272
1994	275450.6	2161.7	663680	985.9	276
1995	281407.4	4425.6	180305.1	1838.8	276
1996	293745.4	5858.2	281815.8	6979.6	276
1997	302022.5	10875.7	281887.2	10330.5	264
1998	310890.1	15018.1	262517.3	13571.1	264
1999	312183.5	12038.5	300041.1	14072	268
2000	329178.7	17207.8	472290	28153.1	260
2001	356994.3	37198.8	662561.3	57683.8	261
2002	433203.5	61284	764975.8	59406.7	258
2003	477533	180079.9	1359274.2	120402.6	265
2004	527576	105418.4	2112549.6	225820	277
2005	561931.4	552782	2900062.1	262935.8	288
2006	595821.6	707400	5120000	470253.4	294
2007	634251.1	1935080	13294059	1076020.4	310
2008	672202.6	1509230	9562970	1679143.7	301
2009	716949.7	1724214	7030.8	685716.2	266

Sources: Central Bank of Nigeria (CBN), NSE Statistical Bulletin (Various issues) 

4.2     PRESENTATION OF RESULTS

Summary of the regression result.

The model was transformed to the natural logarithm

          LnGDP = 2.33207 - 0.0638544LMCAP + 0.116748LVLS + 2.72605LTLS

          S.E = (2.25664) (0.0362538)* (0.0275652)*** (0.460238)***

          R² = 0.835878

          R² = 0.816941

          P – Value (F) = 2.41 e-10

          DW = 1.507042

         

Note:

          *Statistically significance at 10% level of significance

          **Statistically significance at 5% level of significance

***Statistically significance at 1% level of significance.

4.3     DISCUSSION OF RESULTS

             The regression result as shown above revealed that three variables are statistically significance, two at 1% and one at 10% level of significance. On the basis of apriori expectation the coefficient of two of the variables that is log value of transactions (LnVLS) and log total listed security (LnTLS) are positively signed while the coefficient of log market capitalization (LnMCAP) is negatively signed.

          The LnMCAP is significant at 10% level of significance which conformed to the apriori expectation. This implies that 10% increase in LnMCAP leads to 6.3% increase in GDP. Also it is found that LnTLS is also significant at 1% level of significance, this mean that 1% increase in LnTLS leads to increase in GDP by 272.605 %. The LnVLS is also significant at 1% level of significance; this means that 1% increase in LnVLS leads to 11.67704 % increase in GDP. The constant is not statistically significant at any level of significance.

The implication is that the economy responds favourably to measures taken to increase total listing of equities and government stocks, market capitalization and value of transaction in Nigeria Stock Exchange.

R² (coefficient of determination) shows that 83.5% of total variation in the dependent variable (GDP) is explained by LnMCAP, LnVLS, LnTLS and it drop to 81.6% after adjusting for degree of freedom.

DW (Durbin-Watson) =1.507042 shows that there is element of positive autocorrelation meaning that there is a linear relationship between Gross Domestic Product (GDP) and the independent variables.

The t- value of LnMCAP (-1.7613) which is negatively signed has significant impact on the economic growth. The negative signed of the LnMCAP may not be unconnected with the yet shallow mature of the Nigeria capital market even though the, VLS, and TLS tends to have improved remarkably since the banking consolidation in 2005.

However LVLS and LTLS were positively signed and also statistically significant at 1% level. The finding agrees with Ariyo and Adelegan (2005) and Ewah, etal (2009) who found or asserted that capital market had a positive impact on economic growth and development of Nigeria. But has not contributed meaningfully to economic growth and development due to low market capitalization (MCAP), low volume of transaction, few listed companies illiquidity etc. also the result show no positive relationship between the capital market and economic growth and development.

CHAPTER FIVE

5.0     SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1     SUMMARY

        The study examined the impact of capital market on economic growth of Nigeria between 1980 to 2009. The findings of the study reveal the following

v The regression result confirms that there exists positive relationship between the capital market and economic growth. The relationship is statistically significance. This is in essence means that the impact of the capital market on economic growth is strong and significant.

v Another major outcome of the study is that a unit increase in total listing of equity and government stock (TLS) result in an increase in GDP. The implication of this is that the economy responds favourable to measures taken to increase TLS in Nigeria Stock Exchange.

v The positive result of the total listing of equity and government stock implies that funds raised by the industries and governments in the capital market are spent on productive sector which enhance economic growth.

v The result of the value of transaction in the capital market means that the simplicity in buying and selling of securities has potential to influence economic growth positively. 

These findings agree with Ewah, et al (2009) who found that capital market in Nigeria has potentials for growth inducing but has not contributed meaningfully to the economic growth of Nigeria due to low market capitalization etc.

5.2     CONCLUSION                                                       

          The study reveals that the capital market impact on economic growth via market capitalization, value of transaction and total listing of equity and government stock. As it was observed market capitalization, government stock and value of transaction are important capital market variables that are capable of influencing economic growth. Hence the capital market remain one of the mainstream in every economy that has the power to influence or impact economic growth therefore the organized private sector is to invest in it. The market capitalization have not impact significantly on the GDP while volume of transaction and total listed equities and Government stock have significant impact on the GDP. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market and moreforeign investors should be encouraged to participate in the market for improvement in the declining market capitalization so that it could contribute significantly to the Nigerian economic growth.

5.3     POLICY RECOMMENDATIONS

          In order for the Nigeria capital market to be pivotal force in Nigeria economic growth and development, the following suggestion or recommendation are put forward.

v First improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology like automated trading and settlement practice, electronic fund clearance and eliminate physical transfer of shares.

v There is also need to restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transaction and dealing in the stock exchange. It must also address the reported case of abuse and sharp practices by some companies in the market.

v Since the total listing is significant at 1% level of significance but still far cry compare to other exchange like South African and Egypt. Therefore, these should be increase in the total member listed companies to ensure stable macroeconomic environment in order to encourage foreign multinational companies (MNCs) or their subsidiaries to be listed on the Nigerian stock exchange, relax the listing requirements to the first tier market and ensure tax rationalization in the capital market to encourage quotation and public interest in shareholdings.

v  Lastly, to boost the value of transactions in the Nigerian capital market, there is need for availability of more investment instruments such as derivatives, convertibles, future, and swaps options in the market.

v Given the present political dispensation, all the tiers of government should be encourage to fund their realistic developmental programme through the capital market. This will served as a leeway to freeing the resources that may be used in other sphere of the economy.

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Appendix

Model 1: OLS, using observations 1980-2009 (T = 30) Dependent variable: l_RGDP Coefficient Std. Error t-ratio p-value Const -2.33207 2.25664 -1.0334 0.31092 l_MCAP -0.0638544 0.0362538 -1.7613 0.08994 * l_VLS 0.116748 0.0275652 4.2353 0.00025 *** l_TLS 2.72605 0.460238 5.9231 <0.00001 *** Mean dependent var  12.58402 S.D. dependent var  0.588285 Sum squared resid  1.647175 S.E. of regression  0.251700 R-squared  0.835878 Adjusted R-squared  0.816941 F(3, 26)  44.13955 P-value(F)  2.41e-10 Log-likelihood  0.963875 Akaike criterion  6.072249 Schwarz criterion  11.67704 Hannan-Quinn  7.865270 Rho  0.046696 Durbin-Watson  1.507042