CHAPTER ONE

INTRODUCTION
1.1 Background to the Study

The capital market is a profoundly specific and coordinated financial market and

indeed essential agent of economic growth and development due to its capacity and its

ability to facilitate and mobilize saving and investment. Capital formation in more recent

times has been used in financial economics to refer to savings drives, setting up financial

institutions, fiscal measures, public borrowing, development of capital markets, and

privatization of financial institution and development of secondary markets Adeusi

(2013).

However, capital market is very fundamental for the economic growth of a

country. The role of the capital market in the capital formation of a country cannot be

overemphasized. Thus, Chou and Yuan (2007) stated that capital market is noted to

perform two important functions of mobilizing funds from surplus sources and making

same available to deficit sources, thereby matching individual saver‘s needs with firms

requiring funds, and the resulting capital build up that leads to increase in investment and

economic growth. Capital markets are the pillars for a formidable and sustainable capital

formation policy of Nigeria. The whole essence of the capital market is to meaningfully

increase the economic growth of a country. Economic growth is an increase in the

capacity of any economy including that of Nigeria to produce goods and services which

will be compared from one period of time to another.

1
 Meanwhile, Ibi, Joshua, Eja and Olatunbosun (2015) in their study revealed

that the undeveloped and shallow nature of capital markets in developing countries is

one of the factors responsible for their economic sluggishness. However, the

contribution of capital market in industrial sector development in developing country

like Nigeria is still open to debate. Oke and Adeusi (2012) examined the effect of

capital market on economic growth in Nigeria, using time series data from 1981 to

2012. The results revealed that capital market promoted economic development in

Nigeria during the period.

Similarly, Ifionu and Omojefe (2013) revealed that capital market has positive

impact on economic growth in Nigeria via market capitalization both in the short run

and in the long run. In addition, Victor, Kenechukwu and Richard (2013) result also

showed that capital market has positive relationship with industrial sector

development in Nigeria. In contrary, Nwaolisa, Kasie and Egbunike (2013) found that

capital market has positive but insignificant impact on economic growth in Nigeria.

While Howells and Soliman (2004) have held that financial market has a long run

impact on economic growth by mobilizing savings into productive investment which

leads to the growth rate of output.

Emeh and Chigbu (2014) posit that capital market adds to financial growth

through the through the specific services it performs either directly or indirectly,

notable among these functions are: mobilization of savings, creation of liquidity, risk

diversification, improved dissemination, acquisition of information, and enhanced

2
incentive for corporate control. Adeusi (2013) opines that capital market is a driver

or lubricant that keeps turning the wheel of the economy to growth and development

because of its imperative function of not just mobilizing long term funds and

channeling them to productive investment, but also effectively allotting these assets

to projects of best returns to fund owners. Although the relationship between capital

market and economic growth has been researched in the past in Nigeria, there is still a

lot of left to be desired as it concerns its transmission effect to the growth of the

economy and also what channels cum variables are most influencing in achieving this

feat. The inconclusiveness in research findings makes a case for undertaking this

study to lend empirical evidence as well as close the existing research gaps in the

aspect of declining market capitalization in Nigeria.

However, this study is undertaken to examine the contribution of the capital

market in the Nigerian economic growth and development. Aside the social and

institutional factors inhibiting the process of economic development in Nigeria,

the bottleneck created by the dearth of finance to the economy constitutes a major

setback to its development. As a result of this, it is necessary to determine effect

of capital market development on the economic growth of Nigeria

1.2 Statement of the Problem

However, the rate of development at the Nigerian capital market has not been able

to effectively mobilize capital for the development of other vital sectors of the Nigerian

economy. The major reason adduced for this seeming neglect is due to the predominant

3
role the oil sector is playing as the major foreign exchange earner in the country Omojefe

(2013).

The year 2016 witnessed a plunge in oil prices and that of stock market, which

remained indelible in the minds of investors on the Nigerian Stock Exchange (NSE),

just as it was in the 2008 global financial meltdown, which stemmed from the fact

that, the nation’s stock market for the period under review experienced a major

setback to the tune of over N1trillion drop in market capitalization. The fall in oil

prices also led to the withdrawal of lots of investors and listed firms on the stock

market. The share index ratios were not spared either. This was due majorly to the

endogenous factors characteristic of the Nigerian financial system. A lot of

investments ended up sustaining substantial losses. These helped to dampen the

investor’s confidence and eventually led to a decline in growth of the capital market

as well as the rate of economic growth in Nigeria.

They still are still aligned to the practice of buy and hold stock. They seem to be

contented with the dividends they will receive therein, but the truth remains that, that

is not the main essence of trading in stocks or participating in stocks trading at the

stock market. Shares need to be traded upon regularly for the market to advance and

to function effectively and efficiently. These and many more are the problems that this

study intends to proffer solutions to. It is against this background, this study is set to

ascertain the effect of capital market development on the economic growth of Nigeria.

4
1.3 Research Questions

The following research questions are raised from the problem identified

i. How extent Market Capitalization on the economic growth of Nigeria?

ii. What is number of securities on the capital market on the economic growth of

Nigeria?

iii. How does all share index on the economic growth of Nigeria

iv. Is the listed number of companies on the capital market on the economic growth

of Nigeria?

1.4 Research Objectives

The main objective of the study is to examine the effect of capital market

development on the economic growth of Nigeria. the specific objectives include to;

i. examine Market Capitalization on the economic growth of Nigeria

ii. determine number of securities on the capital market on the economic growth

of Nigeria

iii. investigate all share index on the economic growth of Nigeria

iv. find the listed number of companies on the capital market on the economic

growth of Nigeria

1.5 Research Hypotheses

The following research hypotheses are formulated in this study

H0:1 Market Capitalization at the Nigerian stock market does not have a significant effect

on her level of economic growth.

5
H0:2 The Number of listed securities on the Nigerian capital market does not have a

significant effect on the economic growth of Nigeria

H0:3 The All share index of the Nigerian capital market does not have a significant effect

on the economic growth of Nigeria

H0:4 The Number of companies listed on the Nigerian capital market does not have a

significant effect on the economic growth of Nigeria

1.6 Justification for the Study

It is hoped that the findings of this study will benefit the followings; the policy

makers, academics and practice.

This study will be of immense benefit to Policy Makers It will enable them to

fashion out good and effective policies that could help move the capital market forward. It

will also be of assistance to private and corporate investors.. It will enable them understand

the dynamic surrounding the operations of the market. This study will offer to other

researchers an ample opportunity to critique the work and, thus expand on the existing

body of knowledge on subject matter. Lastly, this study could also help to educate the

general public on the important role the capital market can play in the economic growth of

the nation.

It will enable them to fashion out good and effective policies that could help

move the capital market forward. It will also be of assistance to private and corporate

investors. It will also enable them understand the dynamic surrounding the operations of

6
the market. The finding of study could also help to educate the general public on the

important role the capital market can play in the economic growth of the nation. The

main importance of this study is that it will provide policy recommendations to policy-

makers on ways to improve operations and activities of the capital market.

Also, It will contribute to existing literature on the subject matter by investigating

empirically the role, which the capital market plays in the economic growth and

development of the country. Lastly, this study will offer to other researchers an ample

opportunity to critique the work and, thus expand on the existing body of knowledge on

subject matter.

1.7 Scope of the Study

The economy is a large component with lot of diverse and sometimes complex

parts; this research work only looked at a particular part of the economy (the financial

sector). This work did not cover all the facts that make up the financial sector, but focus

only on the capital market and its activities as it impacts on the Nigerian economic

growth. The empirical investigation of the impact of the capital market on the economic

growth in Nigeria was restricted to the period between 2016 to 2019 due to the non-

availability of some important data

1.8 Organization of the Study

The study is divided into five (5) chapters and organized as follows: Chapter One

begins with background to the Study and comprises the followings; Statement of this

study, Research Questions, Research Objectives, Research Hypotheses, Justification for

7
the Study, Scope of the Study and Organization of the Study. Chapter Two deals w i t h

the literatures review of the effect of capital market on the economic growth of

Nigeria. It includes concepts, theories and empirical reviewed. Chapter Three deals

w i t h the research methodology which includes sources of data, method of data

analysis and model specification. Chapter four has to do with the data analysis while

Chapter five includes the summary, conclusion and recommendations.