THE IMPACT OF CAPITAL MARKET ON THE NIGERIAN ECONOMY WITH EMPHASIS ON THE ROLE OF THE NIGERIAN STOCK EXCHANGE

ABSTRACT

The researcher’s mind on the topic, “The impact of the Capital market on the Nigerian Economy with emphasis on the role of the Nigerian Stock Exchange” was captured when a similar topic was discussed at a seminar organized by the Bureau for Public Enterprise (BPE) to conscientize and sensitize Nigerian people to accept the privatization programme.   The organizers sought to expose how highly underutilized the Nigerian Stock market is and what individuals and Corporations would gain in patronizing the market. They also compared the operations and volume  of  transactions with other  emerging stock  markets  in  the  world.  The research work is basically, all about assessing the extent of the impact of the capital market on the socio-economic development of this country and an in-depth search  into  ways  of  improving  upon  the  operations  of  the  Nigerian  Stock Exchange. In his findings, the researcher noted (among other things) that there was underutilization of the Stock Exchange market due to poor enlightenment campaign, and lack of transparency and accountability on the part of the operators of the market. In the conclusion, the researcher admitted that the future prospects of the exchange market is still bright but emphasized that the operators of the market must engender accountability and transparency as this will go a long way to re-installing much desired confidence in the investing public and guarantee the market’s future development

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Nigeria has a formal and active capital market. Before 1961, nearly all formal savings and deposits went through the banking system while the then colonial masters  invested  major capital balances  for  the  country on the  London stock exchange. However, following the establishment of the CENTRAL BANK OF NIGERIA in  1959,  it  was  logical  to  have  a  stock  exchange  in  1960,  which commenced  operations  in  1961.  Thus,  the  foundation  was  ordered  for  the operations of the Nigerian capital market. The capital market tends to provide a forum for the interaction of the economic surplus and economic deficits to attract business under a highly regulated environment.

Earlier in 1959, the Central Bank of Nigeria had floated the first Nigerian development loan stock, which was listed overseas. Subsequent issues in 1961 and thereafter were listed on the new local exchange.

The Nigerian stock exchange is a private, non-profit making organization limited by guarantee. It was incorporated via the inspiration and support of businessmen and the federal government through the CBN, owned by about 300 members. The membership includes financial institutions, stockbrokers and individual Nigerian of high integrity who have contributed to the development of the stock  market and the Nigerian economy. The council members (Board of Director) of the stock exchange are elected at apiece annual general meeting by members of the exchange. The tenure of the presidency is limited to one three-year term.  The  council  is  responsible  for  policy-making but  the  Director  -General (formerly Prof. Ndi Okereke Onyiuke , Emmanuel Ikhazobor) and presently at the time of this research, Dr. Oscar Onyema and his team of executives administer the day to day affairs of the exchange. The council members, management and staff of the Nigerian stock exchange as well as stockbrokers are subject to a stringent regime of codes of conduct, which calls for a higher degree of integrity, discipline, skill and high sense of patriotism.

Dealing members of the stock exchange are the stock broking firms licensed by the exchange to purchase and sell shares on behalf of the investing public. There are over 200 of them at the moment.

The exchange is a Self-Regulatory Organization (SRO), making and enforcing rules  for  its  members.  In  1977,  the  exchange was  reorganized and renamed  “The  Nigerian  Stock  Exchange  (NSE)”.  Today,  the  NSE  has  10 functional trading floors in different parts of the country, namely; Lagos, Abuja, Kaduna, Port Harcourt, Kano, Onitsha, Ibadan, Yola, Benin, Uyo and Ilorin.

1.1.1  Evolution of the Nigerian Capital Market

The Nigerian capital market was established in 1960 and became open for operation in 1961. However, the  evolution of the Nigerian capital market can be traced to as far back as 1946 when the government floated a N600,000 (1.25%  of Government stock as part of the Nigerian Ten-Year plan embarked on to help raise funds from the London Stock Exchange.

In May 1959, the Central Bank of Nigeria (CBN) in pursuance of its role with respect to the development a capital market floated the first federation of Nigerian development loan of N4million on behalf of the government. Due to non- existence of  a formal securities market then, the CBN had to ensure that the stacks carried with them reasonable assurance of marketability by introducing a central register for matching buyers and sellers of shares and suggesting prices at which the deals took place.

Following the favorable report of the Barback committee, whose recommendation led to the registration of “The Lagos Stock Exchange” in March, 1960. This was subsequently followed by its incorporation under Section 2 Cap 7 on the 15th  September, 1960. Trading however commenced formally on June 51961 after the enactment of Lagos Stock Exchange (LSE) Act of 1961.

Some catalytic institutions were established between 1959 and 1965. These institutions are namely; Investment Company of Nigeria (ICON) ltd, Nigeria Acceptance ltd (now NAL merchant Bank), and Nigeria Stock Brokers ltd.

The establishment of the above institutions gave rise to the need for the orderly development of the capital market by regulating the time at which the issues were brought to the market. This necessitated the setting up of the Capital Issues Committee, an adhoc body with no legal backing under the CBN in 1962. Trading at that period was however very low because of predominant lack of awareness of the mechanics of stock exchange transactions and poor communication. An evidence of the prevailing inertia in the stock exchange market at the time is the fact that between 1962- 1970, the exchange handled only four new issues of industrial securities. Issues of federal government were once a year and annual turnover rarely exceeded N15m of which government stock accounted for over 90%.

The market however experienced a significant growth with the implementation of the Nigerian Enterprises Promotion Decree of 1972 and 1977. The companies that complied with these decrees through the Nigerian stock market boosted equity listing such that by the end of 1980, a total of 91 companies were listed on the exchange.

In 1973, the government promulgated the Capital Issues Commission (CIC) Decree of 1973 to give legal backing and more power to the commission in place of the capital issues committee so as to enhance the implementation of the Nigeria Enterprises Promotion Decree (NEPD).

However, the CIC continued to operate as a department in the CBN but had the function of determining the price, timing, and the amount of offers for sale or subscription as set up by the Financial System Review Committee headed by Dr. Pius Okigbo (the then Economic Adviser to the federal government).

“Taking  into account the historical development of the Financial System in Nigeria ;its evolution and impact on socio-economic and political development of an egalitarian society, the Financial System Review Committee was charged with the following terms of reference:

I.     To examine the adequacy, relevance or otherwise of the institution and the structure of the financial system to meet the needs of the economy for rapid economic development.

II.     To examine the organizational and ownership structures of institutions in the system and evaluate their viability in the context of the stated preamble, the economy’s future domestic and international requirements and development trends.

III.    To study operational trends in the system with particular reference to promotional activities of the financial institutions generally.

IV.     To make recommendations in the light of their findings in respect of (1) and above all.

V.     Any other matters or issues which the committee in its own judgment deems relevant and helpful in the successful discharge of their task”.

Dr. P. C Okigbo’s committee among other things recommended the following:

I.     Facilitate effective management of the economy

II.     Provide non-inflationary support for the economy

III.     Ensure that no viable project is frustrated singly for lack of fund

IV.    Achieve greater mobilization of savings and its efficient and effective channeling

V.     Insulate the economy as much as possible and as much as desirable from the vicissitudes of the international economic scene.

VI.     The  establishment of  a  Securities  and  Exchange  Commission (SEC)  to replace Capital Issues Commission (CIC) and the establishment of additional stock exchange. This resulted to the establishment of trading floors at Kaduna, Port Harcourt and the Lagos Stock Exchange (LSE) that was later redesigned the Nigerian Stock Exchange (NSE).

1.2     STATEMENT OF THE RESEARCH PROBLEMS

This research work is concerned with the reasons why the Nigerian Stock Exchange has not made the much desired impact on the economy of this country as designed by the decree establishing it. It will also evaluate the impact of the market with a view to finding solutions to the following problems:

       How can the desired awareness and confidence be instilled on this market?

           How can the functions and roles of this market in facilitating the growth of the economy be achieved?

       How can this market be developed to meet international standard?

At the Nigerian Stock Exchange (NSE), buyers and sellers are the same people. To ensure sound economic development, trading on the exchange has to be extensive. This is because an enduring economic development cannot be achieved if the market is not properly developed. The market and its operators must be seen creating the economic impact and confidence that will enhance the capacity of the market.

1.3     OBJECTIVE OF THE STUDY

The study has the main specific objective which is to ascertain the impact of the capital market on the Nigerian economy and to appraise the awareness or otherwise of  the  existence of  the  stock  market by  showing its  impact  in  the business world. Other specific objectives were raised:

1.       To  determine  the  relationship  between the  capital  market  and  Nigerian Economy;

2.       To determine or rather to evaluate if the deficiencies of the market affect Nigerian Economy;

3.       To establish the effect of the Nigerian stock exchange crisis on Nigerian capital market;

4.       To  ascertain  if  there  are  challenges of  the  Nigerian stock  exchange  in developing the capital market;

5.       To  determine  the  role  of  capital  market  in  developing  the  Nigerian Economy.

1.4     RESEARCH QUESTIONS

To  achieve the  above objectives, the  following research questions were raised:

1.       Is there relationship between capital market and Nigerian Economy?

2.       How  do  the  deficiencies  of  the  Nigerian  stock  exchange  affect  the Nigerian economy?

3.       How  does  the  crisis  in  the  Nigerian stock  exchange affect  Nigerian Capital market?

4.       What are the challenges of the Nigerian stock exchange in developing the capital market?

5.       What  are  the  roles  of  the  capital  market  in  developing  Nigerian economy?

1.5        RESEARCH HYPOTHESIS

1.       There is no significant relationship between capital market and Nigerian economy.

2.       The deficiencies of Nigerian stock exchange market do not affect Nigerian economy.

3.       The crises of Nigerian stock exchange negatively affect Nigerian capital market.

4.       The Nigerian stock exchange does not face any challenge in developing capital market.

5.       Capital  Market  did  not  play  a  significant  role  in  developing  Nigerian Economy.

1.5     SIGNIFICANCE OF THE STUDY

It is a noted fact that for a meaningful transformation of a country to take place, her capital market must be effective and active.

This study will be of significant interest to individuals, corporate bodies and government as it would help them in mobilizing funds from the various networks of institutions that exist in the market.

This study will also be significant to the institutional operators of the market especially the Nigerian Securities and Exchange Commission (SEC) and the future researchers who might want to share this experience. This study will however offer some invaluable points that will bring to the researcher’s mind on the functions and prospect of the Nigerian stock market.

1.7     SCOPE OF THE STUDY

The study covers the Nigerian capital market with a holistic emphasis on the roles of the Nigerian stock exchange with Onitsha branch of the exchange as a contact point. It covers all relevant issues pertaining to the Nigerian capital market and the Nigerian stock exchange Vis-à-vis the Nigerian economy.

1.8     LIMITATIONS OF THE STUDY

In the course of this study, the researcher came across problems which in one way or the other challenge the simple flow of this work. These include:

i.        DISTANCE: In the course of this study, the researcher was visage with the challenge of actually travelling to the Nigerian stock exchange in Onitsha and visiting some stock broking firms in Enugu.

ii.       TIME: It seems there was not enough time to meet up with this work. But however, the researcher properly managed his time effectively and efficiently.

iii.      FINANCE: at a time it was difficult and nearly impossible to continue because of demand for finance.

iv.      FORECASTING AND HOARDING OF INFORMATION: Forecasting seems to be prevalent in the market as most of the transactions were dependent on it. Equally, I observed in the course of this research that those approve for information were not really willing to give it.

v.       FATIGUE:  The  human  bourgeois  also  tried  to  hamper  this  study  by constant body breakdown as a result of fatigue, tiredness and distractions.

1.9     DEFINITION OF TERMS

To  ensure comprehensive understanding of this  research work,  the  under listed terms are defined thus:

1.       Stockbroker:  Is  agent  who  purchases  and  sells  securities  on  a  stock exchange  market  on  behalf of  clients  and  receive  remuneration for  the service in form of a commission.

2.       Stock Exchange: Are a market where securities (bonds, stocks and shares of varying types) are traded openly and where one can purchase or sell any of such securities with relative ease.

3.       Capital Market: Is a market in which long term capital is raised by industry and commerce, the government and local authorities. Simply, it is that part

of the financial market that provides facilities for the transfer of medium and long-term funds to various economic units.

4.     Stockholders:  Individuals,  businesses  and  groups  owning  stocks  in  a corporation.

5.       Financial  Instrument:  Is  a  contract  involving  a  financial  obligation. Examples include stock, bonds, loans and derivatives.

6.       Shares: A share confers on its owner a legal right to have part of the company’s profit and to exercise any voting rights attached to that share.

7.       New Issue Market: Market where stocks are issued for the first time to the members of the public.

8.       The Secondary Market: This is a market where stocks are not being sold for the first time. It can also be referred to as the market for second hand stocks.

9.       Deficit Savings Unit (DSU): An economic unit whose current income is less than its current expenditure.

10.    Savings-Surplus Economic Units: These are units with more funds than they require for current consumption. They are therefore the ultimate savers or fund suppliers to the system.

11.     Financial Institutions: These are institutions that use their funds chiefly to purchase financial assets, deposits, bonds, loans and so on.

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