Impact of capital market instability on the growth of Nigerian economy

Project Topic- Impact of capital market instability on the growth of Nigerian economy



1.1     Background of the Study

The growth and development of an economy, depends greatly on how the country’s capital market thrives. The capital market can be an important facilitator of economic growth (Applegarth, 2004). Osaze (2000) is of the view that the capital market drives any economy to growth and development because the long term growth capital formation stems from it. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments.

Based on its importance in accelerating economic growth and development, government of most nations tends to have keen interest in the performance of its capital market (Ewah, Esang and Bassey 2009). The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. (Donwa and Odia, 2010).

Generally speaking, the importance of the capital market of any economy (developed or emerging) cannot be swept under the carpet). A direct linkage has been discovered to exist between the capital market of a nation and its economic growth. Capital market is a market for financial assets which have a long indefinite maturity. It is the heart beat of every nation’s economy because of its ability to respond instantly to fundamental problems of change in an economy.

Unlike money market instruments, capital market instrument mature over a period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. Globally, stock exchanges were established for the purpose of facilitating, regulating and controlling the business of buying and selling of securities that have been listed for trading on the exchange (Azu, 2012). Nwite (2005) defined capital market as a financial market where long-term financial securities are traded on.

It is a market that brings together, suppliers and buyers of long-term fiancés for investment. Ologunde (2006) argued that the capital market consists of primary and secondary markets and it encourages savings and real sector investment in any economic environment. Aggregate savings are channeled into real investment which increases capital market stock and as well encourage economic growth of any nation.

Over the years, the relationship between stock market indicators and macroeconomic variables has been an issue of debate among financial scholars and economists (Osisanwa and Atanda, 2012; Obenwogu 2012; Eze, 2011). Most of them had argued that stock prices are influenced by some macroeconomic variables such as interest rate, gross domestic product (GDP), exchange rate, inflation and money supply.

Some empirical study indicate that investors believed that monetary policy and macro-economic variables have a large influence on the volatility of stock prices. Christopher, Minsoo, Huahwa (2006) state that macro-economic variables can influence investor investment decision and as well as motivate many researchers to investigate the relationship between stock market returns and macro-economic variables.

The Nigerian stock exchange came into existence in 1960 September 15, under he name of Lagos stock exchange and came to be known as the Nigeria stock exchange (NSE) in December 1977, it began operations in 1961 with 19 securities listed for trading (George, 2008). The NSE has the following branches in major cities of the country. Kaduna, port-Harcourt, Kano, Onitsha, Ibadan, Abuja and Yola opened in 1978, 1980, 1989, 1990, 1990, 1999, 2002 respectively.

It has 280 securities made up of 33 government stocks, 5 state government bonds, 33 industrial loans (debenture preference) stock and 209 equities of companies as at 2008. The exchange has 23 mutual funds on its memorandum quotation, about 3 million individual investors, hundreds of corporate investments, 20 dealing members and 27 registrars. (George, 2008; Mbedi, 2008).

The Nigerian stock exchange has been operating an automated trading system (ATS) since April 27, 1999, with dealers trading through a network of computer connected to a sever.The ATS has facility for remote trading and surveillance. The market is currently operating nine braches across strategic business locations in Nigeria. The market has been operating to date through the activities of stock brokers or dealers who act as intermediary between lenders and borrowers.

Securities and Exchange Commission (SEC) was established by SEC decree to 14 of 1979 amended in 1988 and 1999 (Anyo and Adelegan, 2008) as the apex regulatory and supervisory body of Nigeria stock market. The number of securities traded in Nigeria stock market has been growing since 1961 with ups and downs due to privatization, recapitalization, merger and acquisition and economic recession.

The Nigeria market that started with only 19 securities in 1961 has 283 listed securities (including government stocks, industrial loans, bonds and equities) as at 24 May 2010, in both first and second tiers securities market ( The Nigerian Stock Exchange Market has maintained All Stock Index since January 1984 to date, and only common stock (ordinary) shares are included in the computation of the index (Okpara, 2010). The federal government of Nigeria deregulation policy, privatization of public corporations and recapitalization of banking sectors impacted on the Nigeria Stock Market return volatility compared with more stable markets like S &P 500.

As a result of this economic policies, the government stocks which has been on the lead since the inception of Nigerian capital market started to decline (Annual Report, 2004). In this study, the relationship between capital market instability and economic growth are determined using the All Share Index, Market Capitalization, Interest Rate and Stock Market Turnover. In line with this, the present study makes use of these variables to investigate the impact of capital market instability on economic growth in Nigeria.

Project Topic- Impact of capital market instability on the growth of Nigerian economy

1.2     Statement of the Problem

The Nigerian stock exchange like others is exposed to global and to external stocks. The external stock is the macro-economic indicators that are expected to cause variation in the stock market price movement (Osisanwa and Atanda, 2012). Maku and Atanda (2009) argued that the changes in Nigeria stock market is often reflected by the movement in stock prices, market index and liquidity of the market and market liquidity is an important attribute of stock market development.

The market turnover is still low in the Nigerian capital market due to untraded investors holdings, ignorance, unfriendly economic policies, political instability and limitations to the activities of institutional investors who attract much savings mainly from individuals. These constraints hinder increase in transacting in the capital market.

Soludo (2012) attributed the near collapse of the Nigerian capital market to the instability in the country’s political and economic system. He went further to opine that a situation of serious policy instability in Nigerian capital market would not lead to much progress in the drive to revive the Nigeria capital market to enable it contribute meaningfully to the growth of Nigeria economy in the short run.

Prior to the 2008 financial crisis, the Nigerian capital market had remained illiquid and experienced a downward trend in stock prices. Because of that, capital market was becoming less attractive to long-term investors and very risky to invest. As a result of high risk in the Nigerian capital market, foreign investors started patronizing other emerging markets. Consequently, the Nigerian stock exchange capitalization dropped is over #8.1 trillion from its peak of #13trillion in 2008 when the financial crisis started spreading to the emerging economics of the worlds.(Business Day,2010)

The relationship between the change in Nigerian stock market returns and change in economic growth has attracted strong debate among analysts based on their studies of developed and emerging markets like Nigerian capital market and instability of Nigeria capital market. The challenges in the global economy have raised issues concerning the sustainability of emerging capital markets, especially the Nigerian capital market. This study is aimed at ascertaining the effect of macroeconomic variables on the changes in stock market returns against the backdrop of the persistent fluctuation in all share index and stock turnover between 1990 and 2012.

1.3     Objectives of the Study

The broad objective of this study is to determine the impact of capital market instability on the growth of Nigerian economy.

Specifically, this study intends to;

  1. Determine whether changes in all share index significantly affect economic growth in Nigeria.
  2. Determine whether changes in stock market capitalization significantly affect economic growth in Nigeria.

1.4     Hypotheses of the Study

Hypothesis 1

HO: There is no significant relationship between all share

       index and economic growth in Nigeria.

HI: There is significant relationship between all share index

and economic growth in Nigeria.

Hypothesis 2

Ho: There is no significant relationship between market

       Capitalization and economic growth in Nigeria.

Hi: There is significant relationship between market

       Capitalization and economic growth in Nigeria.

1.5     Significance of the Study

The study is very important because the Nigerian stock market which witnessed above in the last few years is now experiencing a meltdown, as market capitalization has declined from over 13 trillion in 2007 to 9.9trillion in 2010. The all share index has also fallen from 57, 990.22 points to approximately 24,770.52 points in the same period. Moreover, the confidence of shareholders and investors seems to be eroding.

Thus, it is expected that the study would complement the efforts of government and policy makers in reviving the Nigeria Stock Market and restoring the confidence of shareholders and other participants in the market.

Secondly, the study recommends among others, that the relevant authority should create an enabling environment of political and macro-economic stability for the influx of foreign and local investment into the capital market for its growth and consequently the growth of the economy.

In addition, it is believed that a vibrant and well developed stock market could attract foreign investors and enhance the attainment of higher economic growth.

1.6 Scope of the Study

       This study covers a period of thirteen years (1999-2012). This period was selected because it covers the period that witnessed highest instability of capital market since its inception. The study focuses on the effect of instability on the growth of Nigerian economy.

1.7 Limitations of the Study

       Time constraints pose as the major limiting factor due to the short nature of the academic calendar.

       Another limitation pose by the researcher is inability encountered in gathering of information.

Project Topic- Impact of capital market instability on the growth of Nigerian economy

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0 thoughts on “Project Topic- Impact of capital market instability on the growth of Nigerian economy

  1. I am afraid this project has not reflected the title of the study. The title is: Impact of capital market instability on the growth of Nigerian Economy. The key word here is instability. Instability does not mean change. Rather it means, as the author indicated wide fluctuations or variations in its fundamentals. There are various ways of measuring instability. One of these and the simplest is coefficient of variation i.e. STD/Mean ==> standard deviation divided by the mean. The objective also failed to capture this instability in capital market. Theoretically and methodologically the project is also extremely weak. the Capital asset pricing model is not even discussed to identify the major issues involved which is risk -returns relationship and its specification to capture the flavor of the theory. The economic theory pertaining to this project is Hugh Patrick (1966) supply leading and demand following finance theory and Mckinnon (1973) and Shaw(1973) financial liberalization thesis. These theories were not also presented and examined for relevance. the econometric equation presented and estimated lack the basic arguments for growth. Any growth equation must contain investment. Investment in Nigeria consists of public investment, private investment, investment via the capital market, and foreign investment. All these factors combine to have effect on growth. Thus, a study on capital market is okay but the other variables must be brought into play as control variables.
    Besides, there is no measure of capital market instability variable in the econometric equation which is specified, estimated and interpreted. This is not only strange but curious. The econometric equation must contain variables for risk ( from capital asset pricing model) and investment (from economic theory – Hugh Patrick and Mckinnon, Shaw). The empirical results and the model are both hanging and cannot be taken seriously. Either the title of the project is changed or the title is retained and a major revision of the work is carried out to reflect both the theoretical, methodological and empirical concerns articulated above.

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