THE ROLE OF THE NIGERIAN STOCK EXCHANGE ON CAPITAL FORMATION (1980-2011)

CHAPTER ONE

1. INTRODUCTION

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.

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

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

of the committee was published in 1959 and it recommended

among other things:

1. The creation of facilities for dealing in shares

1. The establishment of rules regulating transfer and;

1. 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 15th

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

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:

1. High Cost of transaction

1. Lack of transparency and

1. 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

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?

1. What factors influence capital formation in the Nigerian economy?

1. What is the role of Stock Exchange on capital formation in Nigeria

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.

1. To evaluate the performance and growth of the Nigerian Stock Exchange.

1. To determine how the exchange could stimulate investment.

1. To quantify the relative importance of the Stock Exchange in determining the capital formation for national development.

1.5     RESEARCH HYPOTHESIS

The  hypothesis  that  could  be  tested  in  this  study  is

stated below:

1. H0: The Nigerian Stock Exchange has no significant impact on capital formation.

1. H1: 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

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.