CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The capital market is a major pillar of long-term economic growth. It mobilises long-term debt and equity finance for investment in long-term assets, and it serves governments at all levels, companies and individuals, at home and abroad. Its central task is to channel funds from surplus units of the economy, which have savings, to deficit units, which need finance, and this flow is a critical condition for investment and growth (Enimola, 2024). The market also supplements the traditional lending of banks by providing risk capital in the form of equity and loan capital in the form of debt, and it widens ownership of productive assets.

The theoretical case for this role is well established. In a comprehensive review, Levine (2005) explains that well-functioning financial systems produce information about investment opportunities, allocate capital to its best uses, monitor firms and exert governance, mobilise and pool savings, and make it easier to manage risk, and that these functions influence saving, investment and long-run growth. In a capital market, the prices of shares and bonds react quickly to shifts in demand and supply and to changes in the prospects of a company or industry. Those signals direct capital toward high-return businesses and away from declining ones. Young firms that can raise funds in the market can also expand quickly, which raises output across the economy. Capital markets also give an economy a channel through which foreign capital can enter, which is why their growth is often regarded as a barometer of national economic progress.

Because of these benefits, many African countries have reformed their financial sectors and removed barriers to international capital flows, and African capital markets have become more integrated with world markets. Nigeria's experience reflects this pattern. The Structural Adjustment Programme introduced in 1986 was followed by growth in the financial sector and in market activity, but the market's capacity to mobilise funds weakened after the programme was abandoned in 1994. Later shocks, namely the global financial crisis of 2008 and the fall in oil prices in 2016, cut sharply into market capitalisation and investor confidence (Enimola, 2024). Reform has continued. In March 2025 the National Assembly passed the Investments and Securities Act 2025, repealing the 2007 Act and modernising the legal framework of the capital market. The Nigerian Exchange (NGX) reached a record all-share index of about 155,650 points in October 2025, up about 51% for the year, and its equity capitalisation stood at N95.3 trillion in mid-December 2025 (Proshare, 2025).

The performance of a capital market is usually judged by indicators such as market capitalisation, the number of listed equities, the volume or value of transactions, which reflects liquidity, and new issues of securities. Empirical evidence on how these indicators relate to growth in Nigeria is positive on the whole but mixed in detail. Ogundunmade (2024), using an autoregressive distributed lag (ARDL) approach, found a long-run equilibrium relationship between economic growth and capital market development. Enimola (2024), using data for 2010 to 2023, found that market capitalisation and the volume of trade each had a significant positive effect on economic growth, while the all-share index had a positive but insignificant effect. Adam and Sanni (2015, as cited in Enimola, 2024) reported causality running from GDP growth to market capitalisation and in both directions between GDP growth and market turnover. By contrast, Onisanwa and Adaji (2020) found that the total value of shares traded raised investment growth in Nigeria, whereas the market capitalisation ratio and the turnover ratio dampened it.

These differing results suggest that the effect of the capital market depends on which indicators are used, how growth is measured and which period is examined. This study therefore examines the impact of capital market performance on the Nigerian economy.

1.2 Statement of the Problem

The Nigerian capital market has gone through a series of reforms intended to promote stable growth and development. The aim has been to widen fund mobilisation, improve the efficiency of resource allocation, provide information for investment appraisal and offer a range of instruments with which economic agents can pool, price and exchange risk. Despite the importance attached to these roles, concern persists about whether market performance translates into real growth and development. The economy has remained structurally weak, and market activity has often appeared superficial, which may reflect weak investor protection and confidence and an incomplete assessment of what determines market performance.

Several gaps in the literature motivate this study. First, economic growth and economic development are distinct concepts, but many studies do not distinguish them or examine how they are related. Second, the results of existing studies on the Nigerian market are mixed (Enimola, 2024; Onisanwa & Adaji, 2020), which may partly reflect differences in method and in the indicators chosen. Third, the studies reviewed here tend to rely on indicators of the secondary market, such as market capitalisation, the value of trading or the all-share index, and few combine them with indicators of the primary market, such as new issues, to assess the market in aggregate. This study therefore evaluates the capital market on an aggregate basis, to establish how far it influences economic growth in Nigeria.

1.3 Research Questions

The study seeks to answer the following questions:

1. To what extent does market capitalisation affect gross domestic product (GDP)?
2. How do total new issues affect GDP in Nigeria?
3. To what extent does the volume of transactions in the capital market contribute to GDP in Nigeria?
4. To what extent do total listed equities in the capital market contribute to GDP in Nigeria?

1.4 Objectives of the Study

The main objective of the study is to examine the impact of capital market performance on the Nigerian economy, with GDP used as the measure of economic performance. The specific objectives are to:

1. Determine the impact of market capitalisation on GDP.
2. Assess the effect of total new issues on GDP.
3. Identify the contribution of the volume of transactions to GDP in Nigeria.
4. Examine the impact of total listed equities on GDP in Nigeria.

1.5 Research Hypotheses

The following hypotheses are stated in null form:

H01: Market capitalisation has no significant impact on Nigeria's GDP.

H02: Total new issues have no significant effect on Nigeria's GDP.

H03: The volume of transactions has no significant effect on Nigeria's GDP.

H04: Total listed equities have no significant impact on Nigeria's GDP.

1.6 Significance of the Study

For an economy to be transformed, its capital market must be active and effective, and the strength of that market is widely used as an indicator of national economic strength. The study will be useful to regulatory authorities such as the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC) and the Nigerian Exchange (NGX, formerly the Nigerian Stock Exchange), who must design sound financial policies and reforms. The findings may also help public companies by supporting better corporate governance, fuller financial disclosure and the adoption of International Financial Reporting Standards. Finally, the data and statistical results will be available to future researchers who wish to build on this work.

1.7 Scope of the Study

The Nigerian economy is large and diverse. This study looks at one part of it, the financial sector, and within that sector it concentrates on the capital market and its effect on economic growth. The capital market is chosen because it supplies the long-term funds that investment needs. The study covers the period 1990 to 2017. During this period the market saw major developmental changes and improvements in its policy framework, including more listed companies and securities and higher market capitalisation. New issues and the volume of transactions rose significantly over the period, although they fell in some years, notably as a result of the global financial crisis.

References

Adam, J. T., & Sanni, S. (2015). Capital market development and economic growth in Nigeria. American International Journal of Economics and Finance Research, 3(1), 16–38.

Enimola, H. B. (2024). The impact of capital market on the economic growth of Nigeria. EKSU Journal of the Management Scientists, 3(1), 307–316.

Levine, R. (2005). Finance and growth: Theory and evidence. In P. Aghion & S. N. Durlauf (Eds.), Handbook of economic growth (Vol. 1A, pp. 865–934). Elsevier.

Ogundunmade, T. P. (2024). Effect of capital market on economic growth: An analysis using the autoregressive distributed lag (ARDL) approach. Financial Statistical Journal, 7(2), Article 7495. https://doi.org/10.24294/fsj7495

Onisanwa, I. D., & Adaji, M. O. (2020). Stock market development and investment growth in Nigeria. Journal of Economics and Management, 42(4). https://doi.org/10.22367/jem.2020.42.05

Proshare. (2025). Nigerian capital market outlook 2026: The capital market and Nigeria's economic recovery path. https://proshare.co/articles/ncm-outlook-report-2026-nigeria-market-structure-and-developments-in-2025