THE ROLE OF STOCK EXCHANGE MARKET IN A DEVELOPING ECONOMY ( A CASE STUDY OF THE NIGERIA STOCK EXCHANGE ).

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.

CHAPTER ONE

                 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).