INTRODUCTION
The role of the financial system in promoting economic growth and
development cannot be over emphasized. The financial system comprises of the
central bank, commercial bank, mutual funds, brokerage firms, discount houses,
and stock exchange, to mention just few. These institutions trade in financial
instrument such as domestic currency, foreign currency, stock, bonds,
derivation and so on, and in the process mobilize funds from surplus unit
(savers) to deficit unit (investors). This help business corporation to
increase investment and expand production, and ultimately accelerate economic
growth.
The controversies
surrounding the role of financial system in the economy started with Schum
Peter (1912) who argued that in a well
functioning financial system, bank help to facilitate economic growth by
enhancing technological innovation through identification and funding of
entrepreneur with the best choice of successfully implementing innovative
product as well as production process supporting this view, Bagehot (1873) and
Hicks (1969) asserted that the development of the financial sector helped to
trigger industrialization in England by increasing the access of the people to
funds, which in turn they use to finance and execute capital projects. Recently,
Levine (1991) argued that developed stock market reduces both liquidity stock
and productivity shock of business. Similarly, Levine and Zervos (1998), and
senhadji (2000) stressed that the establishment of stock market has played
significant role in the development of banking institution, particularly in
emerging market economics.
Thus the author believe that the development of the financial
sector and stock market contribute meaningfully to economic (growth).
Contrary to the
view of Bagehot, Schumpeter and Hicks, some scholars argued that financial
system does not really matter in the growth of the economy. For instance, Nobel
Kureates like Gerald Meier and Dudley seers (1984) and Stern (1989) did not
accord any role to finance or financial system in their discussion of
development. Moreover, Stiglitz (1993) argued that stock market liquidity does
not provide incentives for acquiring information concerning firms or improving
corporate governance. Besides, Shliefer and Summers (1988) asserted that stock
market development may hinder economic growth by promoting counter- productive
corporate take over’s. Furthermore, Singh (1997) argued that stock market may
not be important in attaining higher economic growth.
Given these
conflicting views, it is left to empirical investigation to determine whether
or not stock market financial system development accelerates economic growth,
particularly in Nigeria. The remaining part of this paper is organized as
follows. Section two consists of theoretical and empirical – literature, while
section three contains methodology and data analysis. Policy implication of
findings and recommendation are taken up in section four, section five
summarizes and concludes the paper.
1.1
BACKGROUND
OF THE STUDY
Following
the recommendations of the Barback committee in 1959. The Nigeria stock
Exchange (NSE) was established in 1961. The NSE provide an avenue for buying
and selling shares, government development bonds and other approved securities
so that private sector (companies) and government can raise funds for the
purpose of business expansion and development projects or programmes that will
increase the walfare of the society (Anyanwu et al 1997). The main function of
the Nigeria stock (Exchange) market include among others providing
opportunities for the offering of shares and stock to the public, assisting
both public and private sectors of the economy to raise capital for expansion
of business and development projects; encouraging and promoting the buying and
selling of shares and other securities, so as to ensure adequate liquidity
within the stock exchange; promoting the indigenization decree by encouraging
Nigerians to buy into the shares of foreign companies; encouraging the saving
and investment behavior of Nigerians; making the Nigerian stock market
attract5ive to foreign investors and protecting shareholders and other
participants from sharp practices that may arise during transaction on the
stock exchange.
The Nigerian stock market consists of the primary market,
secondary market and the second tier security market. The primary market is
where new shares or securities are offered. The market also provides machinery
for quoted or listed companies to raise more or fresh funds via issuing of new
shares. In the secondary market, only existing securities are traded. The
market facilitates the transfer of wealth from one individual to another, and
guarantee liquidity within the stock exchange market. The second security
market was created in 1985 to assist indigenous small and medium- scale
enterprise that cannot access or raise capital from the first tier security
market due to its stringent requirement for listing.
Available statistics shows
that prior to 2008- 2009, the Nigerian stock market fared well, as market
indicators (market capitalization, market turnover and all share index) grew
from low to historically high levels. For instance, market capitalization
increased from #0.014billion in 1970 to 34.5billion in 1980 and further to
#16.36billion in 1990. Market capitalization was put at #466.17billion and
#13,295billion 2000 and 2007, respectively (see appendixes). In the same
manner, market turnover increased from #0.014 billion in 1970 to #0.52 billion
in 1980 but declined to #0.31 billion in 1990. Market turnover resumed a rising
trend, jumping to #28.15 billion and #2,100 billion in 2000 and 2007,
respectively. The all share index also did will, increasing from 100 points in
1984 to 513.8 points in 1990 and further to 5,111,00 points in 2000. The all-
share index reached its peak in 2007, standing at 57,990.2 points.
Unfortunately, the loom experienced in the market was been
reversed, as market indicators have declined very rapidly. For example, market capitalization
now stands at approximately at #5,000 billion, while the all- share index is
put at approximately 25,000 points (NSE, 2008).
1.2
STATEMENT OF THE PROBLEM
Considerable debates exist on the relationship between stock
market and economic growth.
Basically,
the debate was been created on whether it is the stock market that leads to the
economic growth or vice versa. In recent years, stock market development is a
common feature of financial and economic development in the developing
countries.
Nevertheless, some analysts discover that the emerging market have
little positive and potentially a large
negative impact on economic growth. Other analysts argue that, because not much
corporate investment is financed through the insurance of equity (Mayer, 1988)
stock markets are unimportant for economic growth. The magnitude dependency of
the performance of stock market on economic growth is valuable information to
policy market. Developing countries stock markets have been reputed to be
insusceptible to economic shocks. Being vulnerable to external shocks, the
strength of stock market is therefore in jeopardy. The linkage between each
country’s measure of stock price and economic activity is an important area to
study in order to obtain mean ingful findings. Thus far, empirical studies on
the relationship between stock market and economic growth have not been carried
out to the extent that certain conclusion can be achieved and agreed most; this
is particularly true in developing countries like Nigeria.
Developing countries stock exchange now face
the challenges of integration and the need for better technical and
institutional development to address the problem of low liquidity. Areas where
problems persist include the lack of harmonization of legislation such as
bankrupt and accounting laws and an un liberalized trade regime. Deficient
electronic trading system and central depository system are not available.
Furthermore, domestic financial liberalization such as steps to improve the
legal and accounting framework, private sector credit evaluation capabilities,
and public sector regulatory oversight seems not to be given due consideration.
1.3
OBJECTIVES
OF THE STUDY
The main objective of this study is to appraise the role of stock
exchange market in a developing economy ( A
case study of the Nigeria stock exchange ). Other critical objectives
that will be looked into are;
1.
To investigate the role of stock market size
and liquidity on economic growth in developing countries.
2.
To find out if there is a relationship between
stock market liquidity and economic growth.
3.
To examine if there is a relationship between
the stock market and economic growth and development in developing countries.
4.
To estimate the relationship between the
economic growth and it potential determinants.
5.
To find out if Nigeria stock exchange is able
to contribute to the economic growth and development of Nigeria.
1.4
SIGNIFICANCE OF THE STUDY
The significance of the study is to show that the stock exchange
has contributed positively to the economic development of developing countries
like Nigeria.
Many Nigerians do not know the operation of the stock exchange and
this therefore makes the study relevant because of the effect detailed
explanation of the operation of the Nigeria stock exchange.
The main significance of this study is to
1.
Attempt to measure achievement of Nigerian
stock exchange in accordance with the socio economic aspiration of the country.
2.
Provide information to broader the knowledge
and high degree of awareness.
1.5
STATEMENT OF HYPOTHESIS
The research hypothesis for study is:
Hypothesis one
HO: there is no significant relationship between stock market size
and economic growth.
H1: There is significant relationship between stock market size
and economic growth.
Hypothesis Two
HO: There is no significant relationship between stock market
liquidity and economic growth.
H1; There is significant relationship between stock market
liquidity and economic growth.
Hypothesis Three
HO: There is no relationship between the stock market and economic
growth and development in developing countries.
H1: There is a relationship between the stock market and economic
growth and development in developing countries.
Hypothesis Four
HO: There is no relationship between the economic growth and its
potential determinants.
H1: There is relationship between the economic growth and its
potential determinants.
1.6
JUSTIFICATION OF THE STUDY
Therefore, the justification of this study can
add to the existing body of the literature and can serve as a starting point on
which future studies can be built on the effect change in consumer attitude
towards the role of Nigeria Stock Exchange in economic growth and development
of Nigeria.
This study will assist all stakeholders of the
importance and relevance of the stock market and how it enhances the economic
growth of developing countries especially banks, stock brokers and other
institution that have relationship with the stock market to understand the
major effects of the stock market in economic development. As the survey
conducted was only restricted to the Nigeria stock exchange.
The research is also significant because it is
a potential fulfillment for the award of Higher National Diploma (HND) in
Banking and Finance. The study will pose challenges to other researchers to
carry out more research in related fields. It will also add to body knowledge
on the subject; since knowledge is a continuous process.
1.7
LIMITATION
AND DELIMITATION OF THE STUDY
A research work of this nature cannot come to
an end without limitation. The researcher encountered numerous problems which
affected the smooth running of the work. These problems include difficulty in
procuring material for the project, time factor and financial constraints.
There was lot constraint as to getting information
and materials for the job. The researcher made series of consultations and
visit to most renowned bank, stock broker and institution to acquire the needed
information.
Combining academic work with job is no doubt a
thought provoking issue, as it has to do with time. Actually, a lot of time was
wasted as the researcher visited the organization and individuals together with
the Nigeria stock Exchange, kano to obtain valuable information for the
project.
The researcher would have obtained more information
than what is obtainable here due to lack of money to visit all branches of
Nigeria Stock Exchange and agencies located a bit far from the researcher place
of resident.
1.8
DEFINATION
OF TERMS (WHERE NECESSARY)
STOCK MARKET: The market in which shares are issued and traded
either through exchanges or over the counter market. Also known as equity
market, it is one of the most vital areas of a stock market economy as it
provides companies with access to capital and investors with a slice of
ownership in the company and the company and the potential of gains based on
the company’s future information.
STOCK EXCHANGE: Organized and regulated financial market where
securities (bonds, notes, shares)are bought and sold at prices governed by the
forces of demand and supply.
LIQUIDITY: The degree to which an asset or liquidity can be bought
or sold in the market without affecting the asset’s price. Liquidity is
characterized by a high level of trading activity. Assets that can be easily
bought or sold are known as liquid assets.
ECONOMIC GROWTH: An increase in the capacity of an economy to produce
goods and services, compared from one period of time to another. Economic
growth can be measured in nominal terms, which includes inflation, or in real
terms, which are adjusted for inflation. For comparing one country’s economic
growth to another, GDP or GNP per capital should be used as these take into
account population difference between countries.
0 comments:
Post a Comment