ABSTRACT

This project examines the role of the capital market in the development of the Nigerian economy. It investigates how the Nigerian capital market can be benchmarked against standards of good practice in support of national economic development, and it discusses why benchmarking matters for overcoming the weaknesses that the process exposes. The study set out to find out how the Nigerian capital market operates and to evaluate its performance in relation to economic growth. The literature review describes the main instruments of the capital market and the part they have played in economic development. The work is relevant to Nigeria as a whole and to anyone who may wish to carry out further study on the topic. Data were collected from secondary sources, namely statistical analysis of figures in the Central Bank of Nigeria bulletin. The study observed that the problems holding back the Nigerian capital market include a lack of interest in securities and a preference among Nigerians for investing in real assets rather than financial assets, a tendency that should be corrected through reform of securities pricing. The evidence also shows that activity in the capital market tends to have a positive effect on the economy. The study therefore recommends that the regulatory authorities introduce policies that encourage more companies to access the market and that they be more proactive in their surveillance role, in order to check sharp practices that undermine market integrity and weaken investor confidence. It further recommends that, to promote the capital market and stimulate economic growth and development, emphasis be placed on measures that will strengthen the market.

Keywords: capital market, economic development, Nigerian Exchange, securities, market capitalisation

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The capital market is a highly specialised and organised financial market, and it is an essential agent of economic development because of its ability to mobilise savings and channel them into investment. Olawale (2024) describes it as a system of financial institutions and infrastructure that mobilises and distributes long-term funds, allowing businesses and governments to sell stocks and bonds and so to raise long-term finance from the savings of many economic agents. In Nigeria its instruments are mainly company shares, debenture stocks, government and development bonds and unit trusts, and its institutional framework consists of the Securities and Exchange Commission (SEC), the stock exchange, stockbrokers, issuing houses and investors (Olawale, 2024). Through this framework the market contributes to growth by mobilising savings, providing liquidity, spreading risk, disseminating information, widening asset ownership and supporting the growth of the private sector (Olawale, 2024).

Capital accumulation and mobilisation vary across nations, and they depend largely on domestic savings and on inflows of foreign capital. Efforts to overcome economic difficulties must therefore be directed at effective resource mobilisation. This is the reason for attention to the development of the capital market as an institution that moves finance from surplus sectors to deficit sectors. Enimola (2024) points to the scarcity of long-term funds as the reason the capital market is indispensable to the growth of businesses and industries in Nigeria.

The development of the capital market in Nigeria, as in other developing countries, has been encouraged by government. The Nigerian Exchange Group (NGX Group), formerly the Nigerian Stock Exchange, traces its history to 15 September 1960, when the Lagos Stock Exchange was founded, and trading began in June 1961 (NGX Group, n.d.). The federal government used the market to raise long-term loans for on-lending to the regions, and later the states, for development projects from 1961, when the exchange began operation, and states were encouraged to approach the market on their own merit so that they would be subject to market discipline (Olawale, 2024). In December 1977 the Lagos Stock Exchange became the Nigerian Stock Exchange, a national body with branches in other commercial centres, which later included Kaduna in 1978 and Port Harcourt in 1979 (NGX Group, n.d.; ThisDay, 2022). This arrangement placed the exchange on a national footing and made it a more efficient channel for long-term finance for the industrial sector and the wider economy.

The institution has since been restructured. In March 2021 the exchange was demutualised, changing from a member-owned, not-for-profit body into a shareholder-owned company, and it became the Nigerian Exchange Group Plc with subsidiaries for the operating exchange, regulation and real estate (NGX Group, n.d.; ThisDay, 2022). Potential funds clearly exist in Nigeria. The central concern of this project is to examine the role the capital market plays in harnessing and mobilising those funds to generate economic development in the country.

Recent empirical work supports the importance of that role. Olawale (2024), using data from 1981 to 2019, found that market capitalisation and the all-share index were significant predictors of economic growth in the long run, although some results diverged from theoretical expectations. El-Yaqub, Gana, Musa and Yahaya (2024) likewise concluded that the capital market affects Nigerian economic growth in both the short and the long run, and they recommended policies that stimulate stock market development and improve investor confidence. Njoku et al. (2024) examined the effect of the market on human development and unemployment, and they urged regulators to maintain and improve market capitalisation and the all-share index. These findings are not entirely uniform, which is one reason for further investigation.

1.2 Statement of the Problem

There is considerable evidence that most Nigerian businesses lack long-term capital. The business sector has relied mainly on short-term financing, such as overdrafts, even to finance long-term needs. Under the maturity-matching principle this practice is risky, and firms need to raise an appropriate mix of short-term and long-term capital. Enimola (2024) similarly identifies the scarcity of long-term funds as the central difficulty facing business and industry.

Olawale (2024) observes that the moderate performance of the Nigerian capital market has not translated into marked economic growth, and that declining confidence has led investors and listed firms to withdraw from the market, which has hurt share indices. The existing literature reflects mixed findings and relies on different periods and indicators, and more empirical evidence is needed on how the market affects development (Olawale, 2024; Njoku et al., 2024). The vital role of the capital market in economic development has therefore not been settled empirically, which creates a research gap.

Besides the social and institutional factors that hinder economic development in Nigeria, the shortage of finance to the economy is a major setback. It is therefore necessary to evaluate the Nigerian capital market, and this study examines its contribution to the country’s economic development.

1.3 Objectives of the Study

The broad objective of the study is to examine the activities and performance of the Nigerian capital market. The specific objectives are to:

1. examine the operations of the Nigerian capital market;
2. evaluate the performance of the capital market in relation to economic development in Nigeria;
3. examine the rate at which new stocks are issued on the capital market; and
4. make recommendations on how the operations of the market can be improved to boost economic development in Nigeria.

1.4 Significance of the Study

The study explores the role and effectiveness of capital market instruments in Nigerian economic development. Although the scope of the study is limited to the capital market, it is hoped that the investigation will give a broad view of how the market operates. It will add to the existing literature by examining empirically the role that the capital market plays in the country’s economic development. The main importance of the study is that it will provide policy recommendations to policy makers on ways of improving the operations and activities of the capital market. It will also be useful to regulators, investors, listed companies and students who wish to understand how the market supports the economy.

1.5 Research Questions and Hypothesis

The research is guided by the following questions:

i. How does the Nigerian capital market operate?

ii. What is the performance of the capital market in relation to economic development in Nigeria?

iii. At what rate are new stocks issued on the Nigerian capital market?

iv. How can the capital market, through its crucial role, stimulate economic development in Nigeria?

The following hypothesis will be tested in the course of the research:

H₀: Capital market operations have no role in Nigerian economic development.

H₁: Capital market operations have a role in Nigerian economic development.

1.6 Scope and Delimitation of the Study

The study covers the Nigerian capital market and its contribution to economic development. It is limited to secondary data drawn from the Central Bank of Nigeria statistical bulletin and related capital market publications, and it focuses on the operations, performance and new issues of the market. It does not cover the money market or other segments of the financial system except where they are mentioned for comparison.

1.7 Organisation of the Study

The study is divided into five chapters, organised as follows.

Chapter one is the introduction, in which the main theme of the research is presented. It comprises the background to the study, the statement of the problem, the objectives of the study, the significance of the study, the research questions and hypothesis, the scope and delimitation of the study and the organisation of the study.

Chapter two is the literature review on the role of the capital market in the economic development of Nigeria.

Chapter three presents the research methodology, including sources of data, the method of data analysis and model specification.

Chapter four is the analysis of the data.

Chapter five contains the summary, conclusion and recommendations.

References

Ahmad El-Yaqub, B., Gana, U., Musa, I., & Yahaya, I. (2024). Impact of capital market on Nigerian economic growth from 1990 to 2022: New evidence from an ex-post facto research design. Scholars Journal of Economics, Business and Management, 11(5), 170–179.

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

NGX Group. (n.d.). About NGX Group: Our history and key milestones. https://ngxgroup.com/about

Njoku, C. O., et al. (2024). Effect of capital market on the economic development of emerging economies: The Nigeria experience. International Journal of Professional Business Review, 9(9), e04795. https://doi.org/10.26668/businessreview/2024.v9i9.4795

Olawale, A. (2024). The impact of capital market on the economic growth of Nigeria. GSC Advanced Research and Reviews, 21(1), 13–26. https://doi.org/10.30574/gscarr.2024.21.1.0303

ThisDay. (2022, October 12). Nigerian capital market’s 62 years of impact. https://www.thisdaylive.com/2022/10/12/nigerian-capital-markets-62-years-of-impact/