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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 8 NO 1, JUNE, 2010


THE CAPITAL MARKET AND NIGERIA’S ECONOMIC GROWTH
Olalekan Emmanuel Obademi
and
O. David Adeyanju
Department of Financial Studies, Redeemer’s University, Redemption Camp, Lagos
E-mail: olalekanobademi@yahoo.com
  Abstract
This paper discusses mainly the roles of the capital market in a growing economy with reference to Nigeria. The discussions herein centre on the imperatives of capital market operations in Nigeria’s business environment against earlier contrary views of respected scholars in the light of the recent economic reforms and the challenge posed by globalization,given the recent global financial crisis that has threatened the initial enthusiasm about the capital market in Nigeria. An attempt was also made to highlight key issues in measuring capital market performance, and taking the Nigerian case into consideration, an appraisal of the capital market was done. In the concluding part, requirements for sustaining the gains of enhanced capital market contribution to the economy and improving on the level of success recorded were stated with special reference to the expected roles of the government and also capital market operators.

Keywords: Capital, market, reforms, capitalization, growth


Introduction.
In line with the trend of economic reforms embarked upon by many nations of the world to restructure their economies, and position  such national economies strategically to take advantage of the globalized market, successive governments in Nigeria have made one attempt or the other, since the days of  the Structural Adjustment Programme introduced by the Babangida administration to date, to carry out structural changes in our economic life as a nation.

The structural changes have come in form of monetary policies, fiscal policies, exchange rate policies, trade export and import policies in order to achieve desirable macroeconomic stability that will engender growth and development. Interestingly, since the coming of the Obasanjo administration in 1999, the conceptualisation and implementation of economic reforms have taken a fairly more focused and serious pattern.

By and large the Obasanjo administration  laid a foundation that can be viewed as placing Nigeria in the take-off stage of Rostow’s  (1961) economic growth model. A characteristic feature of this stage is an increase in social infrastructure to support economic activities and the broadening of the economic opportunity space for private investment both by local entrepreneurs and foreign entrepreneurs.

 The obvious from the foregoing happenings is that a changing and growing economy like Nigeria needs enormous amount of funds to fully explore the opportunities opened up by the reforms which was anchored on the National Economic Empowerment And Development Strategy blueprint and now the Vision 20-2020. This is where the capital market’s role comes in as it is expected to play the traditional role of financial intermediation by pulling financial resources from surplus units to deficit units and end-users for productive economic purposes even at this time of unpredictable revenue from crude oil being a fall-out the global financial crisis.

Unfortunately many scholars in time past have spoken lightly of the relevance of the capital market in developing countries. The claim of Ojo (1997) in his paper on “The Rationale For Stock Market Promotion For Africa’s Development (Pg 16) where he said that the stock market plays insignificant roles as a source of  business finance  sounds quite strange. This is because the capital market indeed has significant roles and has been playing  significant roles in Nigeria’s economic environment till date.

 Rotberg (1991) who was one time the Vice President and Treasurer of the World Bank also said that the development of capital markets should not be the priority of developing countries since they could be counter-productive. He said the stock market institution is a luxury institution of an advanced capitalist system that developing countries could least afford. However, contrary to the views expressed by these respected people, and in the light of new evidences, the capital market has significant roles to play in growing the economy of developing nations and as such the view expressed by these scholars can be said to be myopic and not in tune or in tandem with current realities. No doubt these aforementioned scholars might have had a rethink on their earlier positions.

It is true that in recent times the global financial crisis has impacted negatively on the capital market resulting in asset bubbles hence the objective of this write-up is to suggest ways of forestalling the negative impact of such internationally induced distortions by addressing the problems inherent in the operation of Nigeria’s capital market and her operators. Consequently a descriptive analysis method is hereby employed focussing on the performance of the capital market vis a vis their indices and their peculiar challenges.

 

 The imperatives of capital market operations in Nigeria’s business environment.

Considering the needed magnitude of growth in real resources and their allocation within an economy, financial markets are germane to the quest for growth not minding the claim that sometimes asset valuation may not adequately reflect the rate of return in investment in productive capacity. The fact is that the capital market cannot be overlooked nor wished away by any nation that is serious about achieving economic growth. The failure of state directed credit to achieve economic growth makes it imperative for the capital market to take the lead.

 Also the fact that bank financial investment is often not enough makes the capital market important considering the quantum of funds in dollar conversion of what is needed for development projects after the naira devaluation and the global competitiveness of foreign direct investment quest by developing countries around the world. Moreover, retained profits are no more sufficient for expansion in the face of the present information technology revolution. The situation has been further worsened with the endemic crisis in the banking industry.

 

The capital market thus among others help in financing the savings-investment gap both domestically and internationally as well as finance other activities that can result in economic growth. Ordinarily the need for long term finance makes the capital market relevant to our development drive. It is common knowledge that in Nigeria in the last few years as a consequence of the liberalisation, privatisation and re-capitalisation policies of the government that has swept across the telecommunication, energy, manufacturing, banking and insurance sub-sector, the capital market has played enviable roles in the attainment of the objectives of the government in pushing up the growth figures and enhanced human welfare coupled with the redistribution of income and benefits within the Nigerian business environment.

Levine et al (1997), in their study on the compatibility of stock market development with financial intermediaries and economic growth posited that  stock market development is positively correlated with the development of financial intermediaries and long term economic growth. In Nigeria in recent times, the bank re-capitalisation exercise was facilitated by the capital market.

The increasing activity of the capital market according to the Security and Exchange Commission resulted in an average annual percentage growth of about 81% in the new issue market between year 2000 and year 2005.


          

Growth in the primary market activities.
      Year                                                        Percentage

  1. 19%
  2. 59.5%
  3. 175%
  4. 27.3%
  5. 122%

Source: Financial Standard, July, 2007


Expectedly the secondary market has also been positively affected. Reports of activities in the secondary market show significant yearly growths with an average growth in turnover of 62.4%.  Also reports have shown that trades on the Nigerian Stock Exchange since the turn of the century totalled 1.23 trillion by the end of year 2006. From an average daily turnover of 15.6million shares valued at 55.7 million naira in1999, performance on the secondary market has shown tremendous growth in market activity. For example average daily turnover rose to 19.9million shares worth 122million naira in 2000 and by year 2001 increased to 24.1million shares worth 230million naira. Thereafter, average daily turnover rose successively to 26.4 million shares worth 237.2million naira. 53.2million shares worth 474.8 naira and 75.03million shares valued at 882.1million naira in 2002, 2003, 2004 and 2005 respectively.
As at year 2005, average daily turnover had crossed new digits to 107.64million shares worth 1.06billion naira and in 2006 average daily trades totalled 150.9million shares worth 1.94billion. As at July in the year 2007 average daily turnover has gone up from an initial average of 296.69million shares worth 4.53billion naira early in the year to 459million shares worth 5.81billion naira as at the end of the first week in July 2007. Market capitalisation has risen from 300billion naira in 1999 to 8.4 trillion naira in May 2007.  The positive changes in the capital market activities has also become noticeable on the increase yearly in the proportion of market capitalisation on Nigeria’s gross domestic product as shown below;


     

 Growth of market capitalisation as a percentage of GDP

         Year      Percentage 

1999 9.39

2000 9.77

2001 12.07

2002 14.0

2003 18.9

2004 29.1

2005 25.1

2006 28.4                        

 Source: Financial Standard, July 2007 


Also taking a sincere look at the success recorded through the operations of the capital market, there is no gainsaying the fact that the foreign direct investment attracted to Nigeria has increased considerably in the last four years. Recently the Central Bank of Nigeria reported that in the year 2006, $2.5 billion as foreign direct investment was attracted into the Nigerian economy while in the same year the size of the capital market grew sevenfold to the tune of five trillion naira.
How does this impact on the economy we may ask? Bosworth and Collins (1999) in their study found that foreign direct investment by raising total factor productivity raises a country’s rate of output growth.
Borenztein et al (1998) also found that foreign direct investment adds to capital accumulation and raises the efficiency of investment.  In addition, foreign direct investment facilitates technology transfer which is much needed in our present day Nigeria. One of the evidences that an economy is growing is that the capital market is growing and till now this is the Nigerian experience.
However, it is instructive to state that other criteria by which the performance of the capital market is measured include:

  1. the volume or number of securities listed.
  2. efficiency of the operational procedure vis a vis the rate at which transactions are concluded at the floor of the exchange and information dissemination efficiency.
  3. how efficient are the regulations and controls at the stock exchange.
  4. market capitalization or size of the market.
  5. all share price index
  6. allocative efficiency in respect of how resources are channelled to the most efficient users.
  7. pricing efficiency as it concerns the interplay of demand and supply
  8. The number of new issues and the size of the new issues to gross fixed capital formation

Market capitalization which is the total value of all equity securities listed on the stock exchange is an important measure of assessing the size of a capital market and this is largely influenced by factors such as the price of securities in the market, size or volume and value of securities traded, the efficiency of the flow of information, the activities of market speculators, the existence of and activities of market makers or jobbers who are considered as specialists as well as the role of specialised portfolio managers. Talking about the size of new issues as it relates to gross fixed capital formation, essentially the size of the new issues to gross fixed capital formation is an indication of investor’s confidence in the market and the comparative or alternative cost implication of raising similar funds by other means.

Gross fixed capital formation is the total investment in fixed assets in an economy. According to literature and in practice it is expected that the relationship between new issues of stock and total investment in fixed assets will give a clear picture of new investments funded by new issues of stock.

In respect of the information availability, how well the market makes available and respond to market information is important. Consequently, a market is said to be efficient when prices fully reflect available information and this is being witnessed in the Nigerian capital market as at now. Prices fully and speedily reflect available information.
 Generally the capital market has been contributing to Nigeria’s economic growth even as it has served as a source of funds for many States of the federation seeking to embark on capital projects. There have been remarkable activities both in the primary market and the secondary market with attendant redistribution of wealth through dividends earned by even previously small investors despite the recent lull in the market which is argued to be a passing phase in the cycle of global capital market operations. The figures shown underneath are quite instructive to this;


Market Capitalization and GDP

Year

Market Capitalisation Nbillion

GDP at Current Basic Prices Nbilion

Market Capitalisation/GDP

1986

6.79

69.1

9.8

1987

8.30

105.2

7.9

1988

10.02

139.1

7.2

1989

12.58

216.8

5.9

1990

16.36

267.5

6.1

1991

23.13

312.1

7.4

1992

31.27

532.6

5.9

1993

47.44

683.0

6.9

1994

66.37

899.9

7.4

1995

180.31

1933.2

9.3

1996

285.82

2702.7

10.6

1997

281.96

2802.0

10.1

1998

262.52

2708.4

9.7

1999

300.04

3194.0

9.4

2000

472.90

4537.6

10.4

2001

662.6

5178.2

12.8

2002

764.9

5454.2

14.0

2003

1359.3

7180.1

18.9

2004

1925.9

8265.0

23.3

2005

2900.1

7839.2

37.0

2006

5120.90

N.A

N.A

2007

13294.59

N.A

N.A

2008 (Sept)

12814.68

N.A

N.A

Source: SEC Annual Reports and Statement of Accounts

Performance of Equity Securities Listed on the Nigerian Stock Exchange


Year

Number Listed

Trading Value Nm

Market Cap Nm

Index

Turnover Ratio %

P/E Ratio

Dividend Yield %

1980

91

10.01

4,464.2

N.A

0.51

4.9

11.5

1981

93

11.20

4,976.8

N.A

0.32

4.6

11.4

1982

93

11.75

5,025.7

N.A

0.85

4.7

11.8

1983

93

12.10

5,768.0

N.A

0.58

0.5

11.3

1984

93

12.00

5,514.9

100

0.47

3.8

10.4

1985

96

13.90

6,670.7

127.3

0.51

4.3

10.6

1986

99

22.00

6,794.8

163.8

0.6

3.8

9.9

1987

100

27.20

8,297.60

190.9

0.68

4.7

11.2

1988

102

22.40

10,020.80

233.6

0.44

4.8

10.7

1989

111

22.90

12,848.60

325.3

0.28

5.6

11.7

1990

132

87.80

16,358.40

513.8

0.72

7.0

12.0

1991

142

90.00

231,25.00

783.5

0.6

5.7

10.4

1992

153

237.10

312,72.60

1108

1.1

6.8

7.0

1993

174

286.60

474,36.10

1544

0.8

6.0

6.5

1994

177

401.30

663,68.00

2205

0.9

6.0

8.4

1995

181

1788.10

180,305.10

5092

1.02

6.8

7.9

1996

183

6,922.60

285,815.80

6992

2.5

10.5

9.6

1997

264

10,923.20

281,887.20

6429

3.9

10.7

8.7

1998

264

13,555.30

262,517.30

5673

5.2

8.2

6.6

1999

269

14,026.60

300,041.10

5266

4.1

5.6

5.3

2000

260

28,146.50

472,290.00

8111

5.9

7.1

7.5

2001

258

57,612.60

662,561.30

10963

8.9

9.7

7.3

2002

258

59,311.30

764,975.80

12137.7

7.9

6.8

10.8

2003

265

113,886.60

1,359,274.20

20128.9

8.6

8.6

10.5

2004

277

223,776.50

2,112,549.60

23844.5

11.6

9.5

9.7

2005

288

254,707.80

2,900,062.10

24085.8

10.1

12.8

9.5

2006

288

468,588.40

5,120,900.00

33189.30

N.A

N.A

N.A

2007

301

2,083,339.00

13,294,590.00

57990.22

N.A

N.A

N.A

2008

301

2,201,880.00

12,814,680.00

46216.13

N.A

N.A

N.A

Source: SEC, NSE, CBN Reports

 


Translating economic reforms to economic growth

The ultimate aim of the present reforms in the financial system is to achieve economic growth, however if the benefits of the operations of the capital market will translate into the much more desired growth many of the problems confronting the market should be addressed. These problems include:

  1. the unstable macro-economic environment and policy instability
  2. insider abuse in the market
  3. use of the market to launder funds abroad resulting in illiquidity
  4. inadequate regulation and supervision
  5. disincentive to foreign capital inflow due to interference with the price determination mechanism that infringe on the transaction of a free market framework
  6. Exorbitant cost of raising funds through the capital market arising from high fees paid to operators, professionals and regulatory bodies as well as to advertising cum marketing agencies.

Other related issues are that there must be a reliable legal institution that protects investments, a relatively stable currency, policy consistency and predictability, regulation and controls should be effective because the problem of inefficient capital allocation which is common to banks are a result of imperfect information is not supposed to be allowed in the capital market and capital market operators and participants must scale up their skills and competencies from time to time.

In addition to the aforementioned support factors, there is the need for private sector control with less undue government interference. The government is expected though to provide a good political and business climate for capital market activities.

 

Conclusion

With the gradual shift from bank- dominated credit to capital market enhanced funds, it has become obvious that the capital market is key in achieving economic growth and development. Irrespective of the argument put forward by respected scholars who subscribe to bank finance over capital market finance in Nigeria, contemporary issues and reality has made us realise that the capital market can not be wished away if truly Nigeria desires enviable economic growth.  

It is gladdening to know that as a consequence of the growth in the activities and interest in the capital market, Capital Market Study as a course is been considered to be offered as a major course in Nigerian universities. 

References.
Borenztein et al (1998) Foreign Direct Investment and Capital Formation.

Bosworth and Collins (1999)  “Capital Flows to Developing Economies: Implication for Saving and Investment” Brookings Papers on Economic Activity

Financial Standard (2007):Issuing houses: Providing anchor for economic growth. (2007, July 09). Financial Standard, pp. 10-12

Levine, R. (1997) “ Financial Development and Economic Growth: Views and Agenda” Journal of Economic Literature, vol.35, pp 688-726

Ojo, A.  (1997) The rationale for stock market promotion for Africa’s development

Rostow, W (1961). The Stages of Economic Development: A Non-Communist Manifesto. Cambridge: University Press

Rotberg, E. (1991). “Stock Market Not a Priority for many Developing Countries” Speech at a Seminar on “Emerging Stock Markets” at IMF Visitor’s Center, Washington D.C. (Reported in IMF Survey, December 2, 1991, pp.354)