CHAPTER ONE

GENERAL INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The dynamism of debt capital markets constitutes a pivotal component in the economic

architecture,1 especially for emerging economies like Nigeria. These markets play a crucial role

in channeling surplus funds from savers to borrowers, effectively facilitating the allocation of

resources and the distribution of risk across the financial system. For startup companies, which

are often characterized by their innovative approaches and substantial growth potential, access to

debt capital markets can be a double-edged sword,2 offering both opportunities for expansion and

exposure to the volatility of an unstable economy.3

Nigeria, Africa's largest economy by GDP, 4 presents a special case in point. The country's

economy has experienced periods of high growth as well as significant instability, attributed to

various factors, including fluctuations in oil prices, political instability, and inconsistent

economic policies.5 These factors have profound implications for the legal and regulatory

frameworks that underpin the debt capital markets. The Nigerian debt market has evolved over

1
M. Moreno Badia and Others, 'Debt Dynamics in Emerging and Developing Economies: Is R-G a Red Herring?'
(2021) IMF Working Papers, No. 2021/2291.
2
M. Tom, 'Startups increasingly turning to debt financing despite dangers' (2017)
<https://pitchbook.com/news/articles/startups-increasingly-turning-to-debt-financing-despite-dangers> accessed 1
April 2024.
3
C. Zhang and N. H. B. Nik Azman, 'The Impact of Debt Financing on Startup Profitability' (2023) 14(1) Business
and Management Studies, 1.
4
African Development Bank Group, 'Nigeria becomes largest economy in Africa with $509.9 billion GDP' (2014)
<https://www.afdb.org/en/news-and-events/nigeria-becomes-largest-economy-in-africa-with-509-9-billion-gdp-
12981> accessed 1 April 2024.
5
D. O. Olayungbo, 'Effects of Oil Export Revenue on Economic Growth in Nigeria: A Time Varying Analysis of
Resource Curse' (2019) 64 Resources Policy <https://doi.org/10.1016/j.resourpol.2019.101469> accessed 1 April
2024.

1
the years, with the introduction of various instruments and reforms aimed at deepening the

market and enhancing its efficiency.6 Nevertheless, the market's development has been somewhat

asymmetrical, with certain segments maturing faster than others, and regulatory challenges

persisting.

Startups in Nigeria often face a complex set of challenges when attempting to navigate the

debt capital markets. While debt can provide a critical source of funding without diluting

ownership, it also imposes financial obligations that can be burdensome for companies still in

their infancy.7 The legal and regulatory environment within which these startups operate can

either facilitate or impede their access to and use of debt capital. Understanding the nuances of

this environment, particularly against the backdrop of an unstable economy, is essential for

policymakers, investors, and the startups themselves.

The legal framework governing debt capital markets in Nigeria is anchored by several key

legislations and regulatory bodies. The Companies and Allied Matters Act, 8 Securities and

Exchange Commission (SEC) Rules and Regulations, Central Bank of Nigeria (CBN)

Guidelines, and the rules of the Nigerian Stock Exchange (NSE) play instrumental roles in

shaping the operational landscape for debt issuance and compliance for entities within the

country. These frameworks aim to ensure market integrity, protect investors, and foster a

conducive environment for capital formation.

The regulatory framework, while designed to safeguard the interests of various

stakeholders, must strike a delicate balance between stringent oversight and the promotion of

6
A. Yusuf and Others, 'The Impact of Government Debt on Economic Growth in Nigeria' (2021) 9(1) Cogent
Economics & Finance <https://doi.org/10.1080/23322039.2021.1946249>accessed 1 April 2024.
7
B. I. Gumel and B. B. Bardai, 'Barriers to Accessing Financial Institutions Funding for Nigerian SMEs' (2021)
10(6) International Journal of Business and Economics Research, 219.
8
Companies and Allied Matters Act, 2020.

2
market dynamism. For startup companies, which may lack the resources and scale of larger

corporations,9 navigating this legal terrain requires a nuanced understanding of the various

provisions and their implications for business strategy and survival.10

In light of these considerations, this study aims to dissect and assess the legal and

regulatory framework of debt capital markets in Nigeria, with a specific focus on startup

companies operating within the context of an unstable economy. The analysis will not only

examine the current state of affairs but will also provide insights into the effectiveness of the

existing frameworks and offer recommendations for improvement.

1.2 STATEMENT OF THE PROBLEM

The landscape of debt capital markets in Nigeria presents a complex environment for

startup companies. The ideal scenario for any burgeoning economy is to have a robust legal and

regulatory framework that fosters the growth and stability of startups through accessible

financing avenues.11 Ideally, these frameworks should provide clear guidelines for debt issuance,

ensure investor protection, and promote transparency and efficiency within the markets. The

facilitation of debt capital would serve as a catalyst for startups, encouraging innovation,

employment, and contributing to the overall economic development of the nation.12

9
N. Okonkwo, 'Funding woes: Why Nigerian SMEs struggle to access capital' (2023)
<https://www.thecable.ng/funding-woes-why-nigerian-smes-struggle-to-access-capital/amp/> accessed 1 April
2024.
10
E. Maureen, 'Navigating Legal Considerations For Startup Success' (2023)
<https://www.mondaq.com/nigeria/corporate-governance/1397414/navigating-legal-considerations-for-startup-
success> accessed 1 April 2024.
11
A. O. Hassan and Others, 'Cybersecurity in Banking: A Global Perspective with a Focus on Nigerian Practices'
(2024) 5(1) Computer Science & IT Research Journal, 41; R.C. Asogwa, 'Domestic Government Debt Structure,
Risk Characteristics and Monetary Policy Conduct, Evidence from Nigeria' (2005)
<http://www.imf.org/external/np/res/seminars/2005/macro/pdf/asogwa.pdf> accessed 1 April 2024.
12
I. Adofu and M. Abula, 'Domestic Debt and the Nigerian Economy' (2010) 2(1) Current Research Journal of
Economic Theory, 22.

3
 In an ideal scenario, the Nigerian debt capital market would be characterized by a well-

defined legal and regulatory framework that is harmonized with international best practices. This

framework would offer a conducive environment for startup companies to thrive by availing

them of diverse debt financing instruments tailored to their needs. It would encompass detailed

provisions for the issuance of corporate bonds, commercial papers, and other credit instruments,

alongside tax incentives designed to spur the investment appeal of startups to both domestic and

international investors.13

A comprehensive legal system would provide a structured and efficient approach to

company registration, securities issuance, and market conduct. Regulatory bodies such as the

Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) would

operate with marked efficiency, offering clear-cut rules that mitigate risks associated with debt

capital markets. The Central Bank of Nigeria (CBN) would also play a pivotal role, ensuring

monetary policies that support credit availability and affordability for startups. 14

Contrary to the ideal, the current scenario in Nigeria reveals a debt capital market

grappling with challenges that hinder startup companies' access to debt financing. The legal and

regulatory framework, while existent, is fraught with complexities and inefficiencies that create

barriers to entry for startups seeking to leverage debt capital markets for growth. Startups in

Nigeria face cumbersome registration and issuance processes, stringent eligibility criteria, and a

lack of tailored financial instruments that recognize their unique operational dynamics. 15

13
J. Alison, Key Issues for Analyzing Domestic Debt Sustainability (Debt Relief International Publication, 2003).
14
'The Role of Microfinance Banks in the Economic Development of a Nation' Being the text of a paper delivered
by Alhaji Umaru Ibrahim, Mni, Fcib, at the second North-East Economic summit, 2013 held on 3rd and 4th
December, 2013 at the Government House Banquet Hall, Gombe.
15
L. Ronen, 'Policy Dynamics: Steering Startup Valuation' (2023) <https://www.finrofca.com/news/policy-
dynamics-steering-startup-valuation?format=amp> accessed 1 April 2024.

4
 Furthermore, the Nigerian economy's instability, characterized by currency volatility,

inflation, and regulatory uncertainties, has compounded the difficulties faced by startups. This

economic climate has led to a cautious approach from investors and a tightening of credit, which,

in turn, affects the availability and cost of debt capital for startups. These challenges are

exacerbated by the limited scope of financial literacy among startup founders regarding the

intricacies of capital markets and the options available to them.16

The Nigerian debt capital market's legal framework is encapsulated in several statutes and

regulations, such as the Companies and Allied Matters Act, 17 the SEC Rules and Regulations,

and the CBN Guidelines. However, these are often criticized for not being sufficiently adapted to

the evolving needs of startups, thereby stymying their ability to utilize debt capital markets

effectively. The regulatory bodies, while proactive, are yet to fully streamline processes and

provide the supportive ecosystem necessary to encourage startup participation in these markets. 18

To address the challenges faced by startups in the debt capital markets, Nigeria has

implemented several measures aimed at creating a more conducive environment for these

companies to thrive. Notably, the Securities and Exchange Commission (SEC) of Nigeria has

been proactive in developing policies that are supportive of startups seeking to access debt

financing. One significant step was the introduction of a regulatory sandbox framework, which

allows for fintech startups to test their products in a controlled environment with regulatory

oversight, thus fostering innovation while ensuring consumer protection.19

16
E. J. Idolor, 'Bank Frauds in Nigeria: Underlying Causes, Effects and Possible Remedies' (2010) 6(2) African
Journal of Accounting, Economics, Finance and Banking Research, 62.
17
Companies and Allied Matters Act, 2020.
18
I. A. Akhanolu and Others, 'The Effect of Public Debt on Economic Growth in Nigeria: An Empirical
Investigation' (2018) 12(6) International Business Management, 436.
19
M. Bisi-Afolabi, 'The Central Bank of Nigeria is launching a Regulatory Sandbox. Here’s what to know!' (2022)
Paystack <https://paystack.com/blog/operations/cbn-regulatory-sandbox> accessed 1 April 2024.

5
 The Nigerian government has sought to enhance the legal and regulatory framework for

debt capital markets through the enactment of the Companies and Allied Matters Act, 20 which

replaced the CAMA 1990.21 The CAMA 2020 introduced provisions that are more attuned to

modern corporate practices and includes simplified processes for company registration and

restructuring, thereby reducing the bureaucratic burden on startups. Also, the Central Bank of

Nigeria (CBN) has been instrumental in stabilizing the financial system by implementing

monetary policies that are conducive to investment and by setting prudential guidelines for

financial institutions. These measures are designed to ensure the stability and robustness of the

financial markets, which is crucial for building investor confidence and facilitating access to debt

capital for startups.22

Despite these measures, the problem of accessing debt capital markets remains persistent

for startups in Nigeria. One of the principal challenges is the high interest rate environment,

which makes debt servicing burdensome for startups that are already grappling with the nuances

of an unstable economy. The high cost of borrowing can be prohibitive and often deters startups

from pursuing debt financing.23 The regulatory measures, while well-intentioned, have not fully

bridged the gap between the needs of startups and the operational dynamics of the debt capital

markets. Startups often find themselves entangled in regulatory red tape, which can impede their

ability to respond swiftly to market opportunities. The complexity of compliance requirements

20
Companies and Allied Matters Act, 2020.
21
Companies and Allied Matters Act 1990 Cap. C20, Laws of the Federation of Nigeria, 2004.
22
Central Bank of Nigeria, 'The Conduct of Monetary Policy' (2021)
<https://www.cbn.gov.ng/monetarypolicy/conduct.asp> accessed 2 April 2024.
23
K. A. Adeyemo and Others, 'Mandatory Adoption of the Central Bank of Nigeria’s Cashless and E-Payment
Policy: Implications for Bank Customers' (2020) 15(2) Banks and Bank Systems, 243.

6
and the lack of tailored financial products for startups in the debt market further exacerbate the

problem.24

In addendum, the Nigerian economy has been characterized by volatility due to

fluctuating oil prices, foreign exchange instability, and political uncertainties, which have led to

investor apprehension. This economic instability undermines the efforts made to strengthen the

debt capital market, as investors are more inclined to allocate their capital towards less risky

ventures or more stable economies.25 The persistent issues within Nigeria's legal and regulatory

framework for debt capital markets exert a profound impact on the economic landscape,

particularly on startup companies. These effects are multifaceted and far-reaching. Firstly, there

is a significant curtailment of access to capital for startups. The World Bank's report highlights

that Nigeria ranks relatively low in terms of ease of obtaining credit, which is a clear indicator of

systemic challenges within the financial markets. 26 This difficulty is further compounded in an

unstable economy, where investor wariness is heightened and lending criteria are more stringent.

Moreover, the lack of a robust legal and regulatory structure exacerbates the cost of

borrowing. Startups, often perceived as high-risk ventures, face exorbitant interest rates, which

impede their growth and scalability. According to a study, the prohibitive cost of capital in

Nigeria stifles the innovative potential of new enterprises, as a significant portion of their

revenue is channelled towards servicing debt. 27 The regulatory ambiguities and bureaucratic red

tape also lead to extended delays in the issuance of debt instruments, further hampering the

24
C. Agabi and V. Onehi, 'How Start-Ups Will Survive Economic Hardships – Experts' (2016) DailyTrust
<https://dailytrust.com/how-start-ups-will-survive-economic-hardships-experts/> accessed 2 April 2024.
25
A. M. Alabi and Others, 'Risk Management in Africa's Financial Landscape: A Review' (2023) 5(8) International
Journal of Advanced Economics, 239.
26
World Bank, Doing Business 2020 (World Bank Publications, 2019).
27
M. E. Agwu, 'Financing Women Entrepreneurs and Employment Generation – A Case Study of Microfinance
Banks' (2016) 52(1) European Journal of Social Sciences, 112.

7
financial agility of startups. The inefficiencies and complexities within Nigeria's regulatory

environment create an undue administrative burden on emerging companies, deterring foreign

investment and stifling domestic entrepreneurial initiatives.28

In the same breadth, the economic instability, characterised by volatile currency exchange

rates and inflation, undermines the predictability of financial planning for startups, complicating

debt servicing and repayment schedules. This was evident in the research by Ajilore and Obiyo

(2020), who contended that economic volatility in Nigeria has a detrimental effect on business

confidence, investment, and long-term strategic decision-making. The rationale behind

conducting this research is to critically evaluate and provide an empirical analysis of the legal

and regulatory framework governing debt capital markets in Nigeria, with a specific focus on its

influence on startup companies amid an unstable economy. This investigation is crucial as it will

illuminate the underlying impediments that startups in Nigeria face in accessing and utilizing

debt capital for sustainable growth. The insights gained from this research can inform

policymakers, regulatory bodies, and stakeholders in the financial market on the urgent need for

reforms that are conducive to startup prosperity and economic stability.29

Despite the existence of some scholarly work on the general financial landscape in

Nigeria, there is a conspicuous gap in literature specifically addressing the intersection of legal

and regulatory frameworks with the realities faced by startups in the debt capital market within

an unstable economy. The existing literature often overlooks the nuanced challenges that startups

encounter, such as the disproportionate impact of regulatory deficiencies and economic

28
U. Backes-Gellner and A. Werner, 'Entrepreneurial Signaling via Education: A Success Factor in Innovative
Start-Ups' (2007) 29(1/2) Small Business Economics, 173.
29
B. C. Akinwolere, 'The Impact of Exchange Rate Volatility on Economic Growth in Nigeria: A Dynamic
Econometric Approach' (2021) African Journal of Business and Economic Development.
<https://doi.org/10.46654/ajbed.1533> accessed 2 April 2024.

8
fluctuations on these fledgling companies. This research seeks to bridge this gap by providing a

comprehensive assessment of the practical implications of the current frameworks and

suggesting actionable improvements. The conclusion drawn from this statement of the problem

is that there is a pressing need for a detailed study that not only scrutinizes the existing legal and

regulatory structures but also proposes strategic measures tailored to the unique needs of startups

in Nigeria's turbulent economic terrain.

1.3 RESEARCH QUESTIONS

In order to critically evaluate the legal and regulatory framework governing debt capital

markets in Nigeria, particularly in relation to startup companies operating within an unstable

economy, the following research questions have been formulated:

1. What are the key legal provisions and regulatory requirements that govern the issuance and

management of debt capital by startup companies in Nigeria?

2. How do existing legal and regulatory frameworks in Nigeria facilitate or impede startup

companies' access to and utilisation of debt capital markets?

3. In what ways does economic instability affect the operations and strategies of startup

companies seeking to raise debt capital in Nigeria?

4. What role do credit rating agencies play in the debt capital market, and how does their

operation impact startups in Nigeria, especially amidst economic volatility?

5. How effective are the current consumer protection measures in the Nigerian debt capital

market, and what impact do they have on the confidence and participation of startup companies?

1.4 OBJECTIVES OF THE STUDY

The objectives of this study are succinctly outlined to direct the research and they are to:

9
1. Identify and analyse the principal legal statutes and regulatory guidelines that impact startups'

ability to raise debt capital in Nigeria.

2. Examine the extent to which the Nigerian legal and regulatory environment supports or

hinders the participation of startups in debt capital markets.

3. Assess the implications of economic instability on startups' strategic decisions regarding debt

capital raising in Nigeria.

4. Evaluate the influence of credit rating agencies on the accessibility of debt capital for startups

and their significance in an unpredictable economic landscape.

5. Critically review the adequacy of investor and startup protection mechanisms within the

Nigerian debt capital market and their effect on market trust and startup engagement.

1.5 JUSTIFICATION OF THE STUDY

The investigation into the legal and regulatory framework governing debt capital markets

in Nigeria, particularly in the context of startup companies operating within an unstable

economy, is a study of considerable significance. This research is predicated on the

understanding that the availability of capital is a critical factor in the establishment and growth of

startups, which are widely recognised as engines of economic growth and innovation. The

importance of this study is multifaceted, and it can be justified on several grounds.

Firstly, the study addresses a critical gap in the current academic literature by offering a

comprehensive analysis of Nigeria's debt capital market structure from the perspective of

emergent businesses. While there has been some scholarly attention given to capital markets in

Nigeria, there is a paucity of research that specifically focuses on debt financing for startups in

the context of economic volatility. This research, therefore, provides new insights into an

10
underexplored area, contributing to academic discourse and potentially informing policy

decisions.

Secondly, this research is of practical importance to policymakers, regulators, and market

participants. By assessing the effectiveness of the existing legal and regulatory frameworks, the

study can highlight areas where reform may be needed to foster a more conducive environment

for startup growth and access to debt capital. In doing so, it has the potential to influence the

development of policies that promote financial stability, investor confidence, and entrepreneurial

activity, which are crucial for economic diversification and sustainable development in Nigeria.

Thirdly, the justification for this study extends to the startup community itself. By

identifying the challenges and opportunities within the current legal and regulatory environment,

startups can better navigate the complexities of accessing debt capital. The findings of this

research could serve as a valuable resource for startup founders and financial managers,

equipping them with the knowledge to make informed decisions regarding financing strategies

and compliance.

Additionally, the study bears relevance in light of the global economic landscape, where

financial markets are increasingly interconnected. Understanding how startups in emerging

economies like Nigeria can leverage debt capital markets amidst economic instability provides a

template for similar economies facing comparable challenges. Consequently, the research may

have broader implications beyond the Nigerian context, offering lessons that are applicable to

other emerging markets.

Lastly, considering the dynamic nature of financial markets and the ongoing evolution of

legal and regulatory structures, this study is timely. It captures the current state of affairs and

anticipates future trends, which is critical for stakeholders aiming to remain agile and responsive

11
to changes. The research outcomes may reveal the need for continuous monitoring and adaptive

regulatory mechanisms to support the growth of startups and protect the interests of various

market participants.

In sum, the justification for this study lies in its potential to bridge gaps in academic

knowledge, inform policy, aid startups in acquiring critical funding, contribute to economic

resilience, and provide actionable insights in a rapidly evolving financial landscape. It is

anticipated that this research will yield findings that are not only academically rigorous but also

of tangible benefit to a wide array of stakeholders within Nigeria and potentially in other

jurisdictions facing similar economic conditions.

1.6 RESEARCH METHODOLOGY

The research methodology for this study is rooted in a doctrinal approach, which is typical

in legal research. This methodology involves a systematic examination of statutes, case law,

regulations, and legal principles to understand the legal framework governing debt capital

markets in Nigeria, particularly as it pertains to startup companies operating within a volatile

economy. The primary sources of information for this study will include legislation such as the

Companies and Allied Matters Act, 30 rules and guidelines issued by the Securities and Exchange

Commission (SEC), and directives from the Central Bank of Nigeria (CBN). These legal

documents provide the bedrock for understanding the current regulatory climate startups must

navigate when seeking debt financing.

In addition to primary sources, the study will also draw upon secondary sources to enrich

the analysis and provide context. Secondary sources will encompass academic articles,

textbooks, reports from financial and regulatory institutions, and expert commentary on the

subject. These materials will offer insights into the practical application of the laws, the
30
Companies and Allied Matters Act, 2020.

12
experiences of startups in the debt capital market, and the effectiveness of the current regulatory

framework. Furthermore, secondary sources will be instrumental in identifying the gaps in the

literature and understanding the broader economic and legal implications of debt capital markets

in Nigeria.

1.7 SCOPE OF THE STUDY

The scope of this research is aimed at critically examining the legal and regulatory

frameworks governing debt capital markets in Nigeria, with a particular focus on their influence

and impact on startup companies operating within an unstable economy. The study will cover an

array of legislations, regulations, and guidelines that dictate the procedures and requirements for

debt issuance, servicing, and compliance for startups. It will scrutinise the roles of regulatory

authorities such as the Securities and Exchange Commission (SEC), the Central Bank of Nigeria

(CBN), and the Nigerian Stock Exchange (NSE), exploring how their policies shape the

accessibility of debt capital for emerging businesses. Furthermore, the research will encompass

an analysis of the various financial instruments available within the debt capital markets,

including but not limited to corporate bonds, debentures, and commercial papers, assessing how

these tools can be harnessed by startups to foster growth and stability.

The investigation will be contextualised within the Nigerian economic environment,

which is characterised by fluctuations and uncertainties that pose unique challenges to startups

seeking to leverage debt capital markets. It will address the specific economic factors that

influence the operations of the debt capital markets, such as interest rates, inflation, and currency

volatility, and how these factors affect the attractiveness and viability of debt financing for

startups. The study will not cover other forms of financing or markets outside the specified realm

13
of debt capital markets and will maintain a focus on the legal and regulatory aspects rather than

the broader economic conditions not directly related to regulatory frameworks.

The period under review will be recent enough to reflect the current state of affairs but

will also consider historical trends where relevant, to provide a comprehensive understanding of

the evolution of the legal and regulatory landscape. This temporal boundary ensures that the

research is both current and informative, offering insights into the challenges and opportunities

that have emerged over time. Additionally, while the research will reference comparative case

studies from other jurisdictions to draw lessons and best practices, its primary concentration will

remain on the Nigerian context, offering targeted analysis and recommendations that are

pertinent to Nigeria's unique market conditions.

By delineating these boundaries, the study aims to provide an in-depth assessment of the

legal and regulatory environment as it pertains to startup companies' use of debt capital markets

in Nigeria. The findings of this study will be expected to contribute to the existing body of

knowledge, providing a platform for future research and policy development that can enhance

the efficacy and accessibility of debt capital for startups in Nigeria, particularly in the face of

economic instability.

1.8 LIMITATIONS OF THE STUDY

The research on the legal and regulatory framework governing debt capital markets in

Nigeria, with a focus on startup companies within an unstable economy, is a complex and

multifaceted endeavour. This study faces certain limitations that may affect the breadth and

depth of the analysis presented. Firstly, the study is constrained by time, as the period allocated

for the research is limited, which means that not all relevant aspects can be explored in

exhaustive detail. Additionally, access to data is a significant limitation, given the proprietary

14
nature of financial information and the sensitivity surrounding legal and regulatory documents.

This may lead to reliance on publicly available data and information, which may not provide a

complete picture of the current market dynamics and regulatory environment.

Another limitation is the geographical focus on Nigeria, which, while providing a detailed

local context, may not fully capture the broader implications of global trends and influences on

debt capital markets and startups. The legal and regulatory systems in Nigeria are also ever-

evolving, with new policies and reforms being introduced, which could outpace this study's

findings. This highlights a limitation in the temporal relevance of the research, as the situation

may change post-publication. Furthermore, the study is subject to the availability and willingness

of industry experts and professionals to contribute their insights, which is critical for an in-depth

assessment but not guaranteed.

The study is also limited by the scope of its theoretical framework, which, despite its

comprehensive nature, may not entirely account for the nuances and practical realities faced by

startups in Nigeria's debt capital markets. The theoretical models used to guide this research

provide a structured approach to understanding the complexities of financial markets; however,

they are based on general principles that may not be entirely reflective of the unique Nigerian

context. Finally, the study's findings are influenced by the researcher's interpretation of data and

literature, which, despite efforts to remain objective, may introduce unintentional bias. It is

important to note that these limitations do not diminish the value of the research but rather define

the boundaries within which the findings should be understood.

1.9 ORGANIZATION OF THE STUDY

15
 The structure of this research is meticulously planned to provide a coherent and

comprehensive analysis of the legal and regulatory framework governing debt capital markets in

Nigeria, with a specific focus on startup companies operating within an unstable economy.

Chapter one lays the foundation, presenting the context and rationale behind the study, as well as

outlining the research questions, objectives, and methodology. This introductory chapter sets the

stage for a detailed exploration of the subject matter, establishing the parameters within which

the study will be conducted.

Subsequent chapters are organized to build upon each other, creating a logical flow of

information and argumentation. Chapter two delves into the necessary conceptual and theoretical

underpinnings, offering a robust literature review that identifies the current state of knowledge

and research gaps. Definitions of key terms are provided to ensure clarity and a common

understanding of the study's primary concepts. This is followed by a theoretical framework that

guides the analytical perspective of the research, incorporating a range of economic and legal

theories relevant to debt capital markets and startup financing.

The third chapter is dedicated to a detailed examination of Nigeria's legal and regulatory

landscape as it pertains to debt capital markets. It provides a critical assessment of the prevailing

statutes, regulations, and oversight mechanisms that shape the environment in which startups

must operate to secure debt financing. This includes a review of the roles played by regulatory

bodies, the challenges faced by startups in complying with legal requirements, and the impact of

these regulations on their ability to thrive in an unstable economy.

The fourth chapter analyses the practical impact of debt capital markets on startups and

evaluate the effectiveness of the legal and regulatory frameworks in place. Through the use of

case studies and comparative analysis, this chapter aim to draw meaningful insights into how

16
startups can best leverage debt capital markets for growth, and how legal and regulatory

structures can evolve to better support economic development and innovation. The fifth chapter

evaluates the legal and regulatory frameworks and their effectiveness, encompassing a critical

analysis of the regulatory mechanisms, the efficacy of regulatory oversight in protecting

stakeholders. The sixth chapter succinctly summarises the key findings and offers policy

recommendations, ultimately contributing to the body of knowledge on startup financing in

challenging economic conditions.

17
 CHAPTER TWO

CONCEPTUAL, THEORETICAL FRAMEWORK AND LITERATURE REVIEW

2.1 CONCEPTUAL CLARIFICATIONS

In the pursuit of research, it is fundamental to commence with the elucidation of the

essential concepts that form the backbone of this research. The debt capital markets represent a

pivotal segment of the financial system, facilitating the efficient allocation of resources and the

transfer of risk.31 However, within the context of an emerging economy such as Nigeria, the

dynamics of these markets are influenced by distinctive legal and regulatory frameworks, as well

as by the inherent volatility of the economic environment.

2.1.1 Definitions of Key Terms

To navigate the complexities of the debt capital markets, one must first be versed in the

language that delineates its components and mechanisms. Herein, we shall endeavour to

demystify the terminologies that are germane to our discourse.

2.1.1.1 Definition of Debt Capital

Debt capital is a term utilised to describe the funds that a company raises by selling debt

instruments to investors, as opposed to equity capital which is obtained through selling shares of

company stock. Debt capital may manifest in various forms, including but not limited to, bonds,

notes, debentures, and commercial paper. The quintessential characteristic of debt capital is the

obligation of the borrower to repay the principal amount along with interest, which represents the

cost of borrowing. The intricacies of debt capital are encapsulated in the seminal work that

expounded upon the principles of fixed income securities and their role in corporate finance. 32

31
A. Hayes, 'Financial Markets: Role in the Economy, Importance, Types, and Examples' (2023) Investopedia
<https://www.investopedia.com/terms/f/financial-market.asp> accessed 1 April 2024.
32
F. J. Fabozzi, Fixed Income Analysis (Wiley, 2018).

18
 In the framework of the Nigerian economy, debt capital assumes an even greater

significance as it provides a complementary avenue for startups and established enterprises to

access necessary funds for expansion and operational sustenance. The Central Bank of Nigeria,

in its Financial Markets Activity Reports, provides empirical data on the trends and volumes of

debt instruments within the country, underscoring the pivotal role of debt capital in the financial

landscape.33

The definition of debt capital is not merely an academic exercise but is intrinsically tied to

the practical realities of market operations. By delineating the boundaries of what constitutes

debt capital, one can better understand the regulatory requirements, fiscal implications, and the

risk profiles that are inherent within this domain of finance.34

In light of the above, debt capital is the lifeblood that allows companies to thrive in the

competitive marketplace. However, it comes with strings attached, such as the legal obligations

of repayment and the potentially onerous burden of interest payments, especially within an

unstable economy where currency volatility and inflation can exacerbate the cost of borrowing. 35

2.1.1.2 Definition of Startups

The term 'startup' has garnered significant attention in the business lexicon, especially

within the sphere of entrepreneurship and innovation. Despite its widespread usage, the

33
Central Bank of Nigeria, 'Financial Markets Activity Reports'
<https://www.cbn.gov.ng/Documents/fmdactivityreports.asp> accessed 1 April 2024; The Central Bank of Nigeria's
Financial Markets Activity Report gives an empirical overview of the debt capital market activities within Nigeria,
which is crucial for understanding the current study's context.
34
D. Àkos & D. Istvàn, 'Public Debt and Economic Growth: What do Neoclassical Growth Models Teach Us?'
(2019) Applied Economics, 51(29), pp. 104–121
35
Ibid.

19
definition of what constitutes a startup is not cast in stone; rather, it is contextually fluid and can

vary based on different perspectives.36

At its core, a startup can be described as a newly established business venture that is

typically characterized by its innovative nature, scalability potential, and a focus on addressing a

market need through a unique product or service. Startups are often associated with the

technology sector due to their propensity for rapid growth and the disruptive impact they can

have on existing markets. However, the concept transcends the confines of technology, as

startups can emerge in any industry.37

The British entrepreneur and author, Eric Ries, who is widely respected for his

contributions to the entrepreneurship community, provides a more nuanced definition when he

described a startup as "a human institution designed to create a new product or service under

conditions of extreme uncertainty."38 This definition underscores the inherent risks and the

dynamic nature of startups, as they navigate uncharted waters with the potential for high reward.

Another perspective comes from Paul Graham, co-founder of the influential startup

accelerator Y Combinator. Graham emphasizes the growth aspect in his definition: "A startup is

a company designed to grow fast." 39 The emphasis on growth is pivotal, as it distinguishes

startups from small businesses that may not have the same aspirations for rapid expansion.

In the context of the Nigerian economy, startups play a crucial role in fostering

innovation, driving economic growth, and creating employment opportunities. The National

36
M. Grant, 'What a Startup Is and What's Involved in Getting One Off the Ground' (2023) Investopedia
<https://www.investopedia.com/terms/s/startup.asp> accessed 1 April 2024.
37
D. Didia and P. Ayokunle, 'External Debt, Domestic Debt and Economic Growth: The Case of Nigeria' (2020)
8(2) Advances in Economics and Business, pp. 85.
38
E. Ries, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful
Businesses (Crown Business, 2011).
39
P. Graham, 'Startup = Growth' (2012) <http://www.paulgraham.com/growth.html> accessed 1 April 2024.

20
Policy on Micro, Small and Medium Enterprises (MSMEs) of Nigeria defines startups within the

scope of MSMEs but with a particular emphasis on companies that have operated for less than

five years and exhibit a high potential for job creation and economic growth.40

The uniqueness of startups lies in their lifecycle, which typically involves stages such as

ideation, development, market entry, growth, and, in some cases, an exit via an acquisition or an

initial public offering (IPO). During these stages, startups often rely on various forms of capital

to fuel their growth, with a significant focus on venture capital, angel investments, and

increasingly, debt capital markets.41

In conclusion, while there is no universally accepted definition of a startup, it is widely

recognized as a newly formed, high-growth-potential company that operates under conditions of

uncertainty with the aim of bringing innovative solutions to market. The legal and regulatory

framework surrounding startups, therefore, needs to be flexible enough to accommodate their

unique needs and growth trajectories, particularly in the context of Nigeria's evolving economic

landscape.

2.1.1.3 Definition of Unstable Economy

An unstable economy is characterized by significant fluctuations in macroeconomic

variables such as GDP growth rates, inflation, employment levels, currency exchange rates, and

political or social instability, which can lead to unpredictability in economic conditions and

hinder economic planning and growth. In the context of Nigeria, an unstable economy may be

marked by volatile oil prices, given the country's heavy reliance on oil exports for revenue, as

well as by internal challenges like political unrest, infrastructural deficiencies, and inconsistent

40
National Policy on Micro, Small and Medium Enterprises (MSMEs), Federal Republic of Nigeria, (2015).
41
J. O. Babu, 'Effect of Domestic Debt on Economic Growth in the East African Community' (2015) 3(9) American
Journal of Research Communication, 73.

21
policy directions.42 Economic instability in Nigeria has been closely tied to the fluctuations in the

global oil market, which directly impact the nation's revenue and foreign exchange earnings.

They observe that oil price volatility leads to uncertainty in government spending, investment

decisions, and overall economic planning.43

Moreover, the impact of economic instability on the Nigerian business environment is

profound. The unpredictability associated with an unstable economy can deter investment, both

domestic and foreign, and pose challenges to the survival and growth of startups, which are

typically more vulnerable to adverse economic conditions. According to the World Bank's

annual reports, Nigeria has shown fluctuating rankings in the ease of doing business, which

reflects the ongoing challenges in creating a stable and conducive environment for

entrepreneurial ventures.44

A study also highlights the importance of a stable economy for business creation and

expansion, indicating that macroeconomic volatility can disproportionately affect small firms

and startups due to their limited access to finance and less diversified business activities. 45

In addressing the instability in economic conditions, the Central Bank of Nigeria (CBN)

has a critical role in implementing monetary policies aimed at stabilizing the currency and

controlling inflation. The CBN's Monetary Policy Reports provide insights into the various

measures adopted to manage economic instability, such as adjustments to the Monetary Policy

42
A. E. Akinlo and T. Egbetunde, 'Financial Development and Economic Growth: The Experience of 10 Sub-
Saharan African Countries Revisited' (2010) 2(1) The Review of Finance and Banking, 17.
43
Ibid.
44
World Bank Group, 'Doing Business Reports' <http://www.doingbusiness.org/reports/global-reports/doing-
business-2017> accessed 2 April 2024.
45
R. Aterido and Others, Does Expanding Health Insurance Beyond Formal-Sector Workers Encourage
Informality?: Measuring the Impact of Mexico’s Seguro Popular (The World Bank, 2011).

22
Rate (MPR), Cash Reserve Ratio (CRR), and Liquidity Ratio. 46 However, the effectiveness of

these measures in achieving a stable economic environment remains a subject of debate among

economists and policymakers.

2.1.1.4 Definition of Legal Framework

A legal framework comprises the structured and codified set of legal norms and

regulations that govern the operation and conduct of individuals, entities, and institutions within

a jurisdiction. In the context of debt capital markets, the legal framework is instrumental in

establishing the rules and obligations that underpin the issuance, trading, and settlement of debt

securities.47 It encompasses a range of legislative acts, statutory regulations, case law, and

standards that collectively ensure the market's integrity, protect the rights of stakeholders, and

promote fairness and efficiency.48

One of the cornerstones of a legal framework for debt capital markets is the existence of a

comprehensive set of laws that address the creation and execution of contractual obligations

between debt issuers and investors. These laws must clearly outline the rights and duties of each

party, including the issuer’s obligation to repay the principal along with any agreed-upon

interest, and the investor's right to receive such payments in a timely manner.

In Nigeria, the Companies and Allied Matters Act (CAMA), 49 as well as the Securities

and Exchange Commission (SEC) rules and guidelines, constitute the primary legal backbone for

the governance of debt securities. CAMA provides a statutory basis for the incorporation,

regulation, and winding up of corporate entities, and by extension, their capacity to issue debt.
46
Central Bank of Nigeria, 'The Conduct of Monetary Policy' (2021)
<https://www.cbn.gov.ng/monetarypolicy/conduct.asp> accessed 2 April 2024.
47
O. Akinlo, 'Determinants of capital structure: Evidence from Nigerian panel data' (2011) 9(1) African Economic
and Business Review, 1.
48
Ibid.
49
Companies and Allied Matters Act 2020.

23
The SEC, as the apex regulator of the Nigerian capital market, enforces compliance with

securities laws, and its rules and guidelines are designed to protect investors and ensure fair

practices in the capital market.

Moreover, the Investment and Securities Act,50 serves as a fundamental piece of

legislation that governs the operation of the securities and investment sector in Nigeria. The ISA

establishes the SEC's powers and functions, and it contains specific provisions relating to the

issuance and regulation of securities, including debt securities.

The legal framework also includes regulations concerning the role and operation of credit

rating agencies, which assess the creditworthiness of debt issuers. The SEC's Code of Corporate

Governance for Public Companies51 outlines the requirements for the governance structures of

entities that issue debt, thereby influencing their credit ratings and the perceived risk associated

with their debt securities.52

An efficacious legal framework for debt capital markets must address the need for

transparency and disclosure. In Nigeria, the SEC mandates the disclosure of comprehensive and

accurate information in the prospectus of debt offerings, which is critical for informed decision-

making by investors. Such disclosures include the issuer’s financial condition, the terms of the

debt security, and risk factors associated with the investment.53

Internationally, the legal frameworks of debt capital markets draw from various sources,

including the principles set forth by the International Organization of Securities Commissions

50
Investment and Securities Act, 2007.
51
Securities and Exchange Commission,"Code of Corporate Governance for Public Companies, 2011.
52
Ibid.
53
S. A. Owolabi, & U. E. Inyang, 'International pragmatic review and assessment of capital structure determinants'
(2013) 2(6) Kuwait Chapter of Arabian Journal of Business and Management Review, 82.

24
(IOSCO),54 which promotes high standards of regulation to maintain just, efficient, and sound

markets.

In conclusion, the legal framework for debt capital markets in Nigeria is an amalgamation

of various laws, regulatory guidelines, and standards that aim to foster a secure and robust

environment for debt financing. By mandating transparency, enforcing market conduct, and

protecting the interests of stakeholders, the legal framework serves as the bedrock upon which

the trust and efficacy of the capital market rest.

2.1.1.5 Definition of Regulatory Framework

The term 'regulatory framework' pertains to the assemblage of laws, regulations,

guidelines, and procedures established by governing bodies and regulatory agencies to oversee

activities within a specific domain, which in this context is the debt capital market. It

encapsulates the principles, requirements, and mechanisms that institutions and participants must

adhere to when engaging in the issuance, trading, and management of debt securities. 55

In the context of the Nigerian debt capital market, the regulatory framework is designed to

ensure market integrity, protect investors, and foster an environment conducive to the efficient

mobilization and allocation of capital. It comprises a comprehensive set of legal directives put

forth by the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN),

and the Nigerian Stock Exchange (NSE) amongst others, all aimed at controlling and facilitating

the operations within the market.56

54
International Organization of Securities Commissions, Objectives and Principles of Securities Regulation, 2010.
55
M. L. Barnett, 'Stakeholder Influence Capacity and the Variability of Financial Returns to Corporate Social
Responsibility' (2007) 32(3) Academy of Management Review, 794.
56
T. O. Adedeji, & C. S. Oboh, 'An Empirical Analysis of Tax Leakages and Economic Growth in Nigeria' (2012)
31(2) Journal of Applied Business Research (JABR), 609.

25
 One of the seminal regulatory documents in Nigeria is the Investment and Securities

Act,57 which provides the foundational legal structure for the regulation of securities and

protection of investors. The SEC, as empowered by the ISA, serves as the primary regulatory

body for the Nigerian capital markets, overseeing the registration and issuance of securities,

market operators, and ensuring compliance with market rules. The SEC's Consolidated Rules and

Regulations as amended, provides detailed provisions on the requirements, procedures, and

guidelines for the operations of debt capital markets in Nigeria.58

Furthermore, the CBN issues guidelines that affect the operations of financial institutions

in the debt market, particularly in relation to monetary policy implications, foreign exchange

regulations, and anti-money laundering provisions. The Nigerian Stock Exchange also has its

rules governing the listing and trading of debt instruments on its platform. The regulatory

framework is designed to address several objectives: maintaining confidence in the financial

system, promoting understanding of the financial products and services, ensuring financial

stability, and protecting consumers. For instance, the regulatory provisions on transparency and

disclosure are intended to minimise information asymmetry, a situation where one party in a

transaction has more or superior information compared to the other. This is crucial for the debt

capital market, as it ensures that all market participants can make informed decisions. 59

In assessing the effectiveness of the Nigerian regulatory framework for debt capital

markets, a study offerred insights into the interplay between regulatory policies and market

growth. The study underscores the significance of a robust regulatory system in fostering an
57
Investment and Securities Act, 2007.
58
A. I. Asuquo, 'Environmentally friendly policies and their financial effects on corporate performance of selected
oil and gas companies in Niger Delta Region of Nigeria' (2012) 2(1) American International Journal of
Contemporary Research, 168.
59
H. Akmese, S. Aras, & K. Akmese, 'Financial performance and social media: A research on tourism enterprises
quoted in Istanbul stock exchange (BIST)' (2016) 39 Procedia Economics and Finance, 705.

26
environment that is attractive to both issuers and investors. 60 Moreover, the World Bank's report

which measures regulatory quality and efficiency, serves as a benchmark for gauging the

conduciveness of Nigeria's business environment including aspects related to getting credit and

protecting minority investors, which are pertinent to the debt capital market. 61

In conclusion, the regulatory framework is a crucial element in the functioning of the

Nigerian debt capital market. It ensures that the market operates in a transparent, fair, and

efficient manner, balancing the needs of startups seeking capital to grow and investors seeking

profitable and safe investment opportunities. Continuous assessment and evolution of this

framework remain paramount to adapt to the ever-changing market dynamics and technological

advancements that could impact the efficiency and integrity of the market.

2.1.1.6 Definition of Capital Markets

Capital markets are quintessential for the economic development of any nation, serving as

a critical conduit through which savings are channelled from investors to entities that require

funding for productive activities. They encompass a broad spectrum of financial instruments and

marketplaces, catering to the long-term allocation of capital. In essence, capital markets are the

platforms where savings and investments are transformed into longer-term funding for projects

or enterprises, including governments, corporations, and other institutions.62

The architecture of capital markets is bifurcated into the primary and secondary markets.

The primary market is the domain where new issues of financial instruments, such as stocks and

60
A. E. Etim and Others, 'Social media usage and firm performance: Reflections from the Nigerian
telecommunication sector' (2018) 4(6) International Journal of Management Science and Business Administration,
7.
61
World Bank Group, 'Doing Business Reports' <http://www.doingbusiness.org/reports/global-reports/doing-
business-2017> accessed 2 April 2024.
62
C. Flammer, 'Corporate social responsibility and shareholder reaction: The environmental awareness of investors'
(2013) 56(3) Academy of Management Journal, 758.

27
bonds, are sold to initial buyers, typically involving underwriting processes. The secondary

market, conversely, is the arena for trading previously issued securities among investors,

providing liquidity and determining the market value of those securities. This dichotomous

structure ensures both the efficient dissemination of capital and the fluidity of trading for

investors.63

Within the ambit of capital markets lies the debt capital market (DCM), which is

specifically concerned with the trading of debt securities, often referred to as bonds. The DCM is

a pivotal element of the financial sector, enabling governments, municipal authorities, and

corporate entities to borrow money from a pool of investors by issuing debt instruments with an

obligation to return the principal along with agreed interest payments.64

The functioning of capital markets, particularly in emerging economies such as Nigeria, is

underpinned by a robust legal and regulatory framework. This framework is designed to

safeguard market integrity, ensure the protection of investors, and foster confidence in the

financial system. The Securities and Exchange Commission (SEC) serves as the apex regulator

of the Nigerian capital market, enforcing compliance with the Investment and Securities Act

(ISA), which provides the legal basis for all capital market operations within the country. 65

The strategic role of capital markets, especially in a developing context, is irrefutable.

They serve as a barometer for the economy, reflecting the collective assessment of future

prospects and risk.66 The deepening of capital markets is often correlated with economic growth,

63
Ibid.
64
U. Rilwanu and C. Daniel, 'Role of Capital Market on Economic Development in Nigeria' (2020)
<https://www.researchgate.net/publication/342145799_Role_of_Capital_Market_on_Economic_Development_in_N
igeria> accessed 3 April 2024.
65
Investment and Securities Act No. 29 2007.
66
J. E. Stiglitz, & M. Uy, 'Financial Markets, Public Policy, and the East Asian Miracle' (1996) 11(2) World Bank
Research Observer, 249.

28
as they provide a platform for risk management, enable the diversification of funding sources,

and facilitate the efficient allocation of resources.67

In the case of Nigeria, the capital market has been instrumental in mobilizing long-term

capital for both public and private sector development projects. Despite the challenges posed by

economic instability, such as currency devaluation and inflationary pressures, the Nigerian

capital market has shown resilience and adaptability. 68 Furthermore, the Nigerian Stock

Exchange (NSE), now known as the Nigerian Exchange Group (NGX), has been pivotal in this

financial ecosystem, offering a trading platform that adheres to international best practices. 69

In summary, capital markets, and more specifically, debt capital markets, are

indispensable for the maturation of an economy, providing a mechanism for the allocation of

financial resources to where they are most efficiently utilised. The legal and regulatory

framework governing these markets in Nigeria is a testament to the country's commitment to

establishing a conducive environment for economic growth and stability.

2.1.1.7 Distinction Between Debt and Equity Capital

Understanding the distinction between debt and equity capital is essential for grasping the

financial underpinnings of corporate financing. Debt capital refers to the funds a company

borrows and must repay, often with interest, whereas equity capital is raised by issuing shares of

the company, representing ownership interests.70

67
R. Levine, 'Stock Markets, Growth, and Tax Policy' (1991) 46(4) The Journal of Finance, 1445.
68
E. Adegbite, 'Corporate Governance Regulation in Nigeria' (2012) 12(2) Corporate Governance: The
International Journal of Business in Society, 257.
69
M. Ojong and Others, 'Banking Sector Reforms in Nigeria: A Regulatory Imperative for a Sustainable Banking
Industry' (2014) 5(13) Research Journal of Finance and Accounting, 166.
70
C. B. Bhattacharya, D. Korschun, & S. Sen, 'Strengthening stakeholder–company relationships through mutually
beneficial corporate social responsibility initiatives' (2009) 85(2) Journal of Business Ethics, 257.

29
 Debt capital is typically manifested in the form of loans or bonds. When a company takes

out a loan, it incurs a debt to the lender and agrees to pay back the principal amount along with

interest over a specified period. Bonds operate on a similar principle, with the company issuing

debt securities to investors, who in return provide the company with the capital necessary for its

operations or expansion. The issuers are obligated to repay bondholders the principal (the face

value of the bond) at maturity and to make periodic interest payments (coupon payments). 71

Conversely, equity capital does not require repayment and does not incur interest. When a

company issues stock, it sells pieces of its ownership to investors in exchange for capital.

Shareholders potentially benefit from dividends—a share of the company's profits—and capital

gains, should the value of the shares increase. However, they also assume the risk of losing their

investment if the company's value declines The distinction between debt and equity capital can

be observed in their respective impact on a company's balance sheet. Debt increases the

company’s liabilities, representing a claim on its assets by external parties. In contrast, equity

increases the shareholders' equity section of the balance sheet, reflecting the ownership stake in

the company.72

Debt capital is often preferred by companies seeking to retain control, as it does not dilute

ownership. It also presents tax advantages; interest payments on debt are typically tax-

deductible. However, high levels of debt increase a company's financial risk, particularly through

fixed obligations irrespective of the business's performance.Equity capital, while diluting

ownership, does not impose an obligation to return funds to investors, thus providing a cushion

71
D. Campbell, P. Shrives, & H. Bohmbach‐Saager, 'Voluntary disclosure of mission statements in corporate annual
reports: signaling what and to whom?' (2001) 106(1) Business and Society Review, 65.
72
D. Cormier, & M. Magnan, 'Corporate governance and information asymmetry between managers and investors'
(2010) 1(2) Corporate Governance: The International Journal of Business in Society, 34.

30
during periods of financial difficulty. It is a testament to the belief of the investors in the long-

term potential of the company.73

A study asserted that in an efficient market, the value of a company is determined by its

earning power and the risk of its underlying assets, and is independent of the choice between

debt or equity finance, provides a theoretical foundation for understanding the dynamics between

debt and equity capital.74 However, the real-world implications of their theorem are affected by

factors such as taxes, bankruptcy costs, agency costs, and information asymmetries, leading to a

divergence in the optimal debt-equity structure for companies.

In the Nigerian context, the Companies and Allied Matters Act (CAMA) 2020 provides

the legal framework for companies to raise capital through debt and equity. The Securities and

Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE), now known as the

Nigerian Exchange Group, regulate the issuance of debt and equity securities, ensuring the

protection of investors and the integrity of the markets. 75 Understanding the nuances between

debt and equity capital is crucial for startups in Nigeria, as the choice of financing has significant

implications for their growth, control, and financial stability, particularly in an unstable economy

where access to capital is challenging.

2.2 THEORETICAL FRAMEWORK

73
F. P. Adekanmbi and W. Ukpere, 'The Impact of Innovative Work Behavior, Perceived Leadership 4.0, and
Corporate Social Responsibility on Sustaining Banking Industry Performance in Nigeria within the 4IR Era' (2023)
18(4) Banks and Bank Systems, 1.
74
F. Modigliani, F., & M. H. Miller, 'The Cost of Capital, Corporation Finance, and the Theory of Investment'
(1958) American Economic Review, 261.
75
Nigerian Exchange Group, 'Rules and Regulations Governing Dealing Members' NGX Regulation Limited.
<https://ngxgroup.com/regulation/rules-and-regulations/> accessed 3 April 2024.

31
 The theoretical framework of a research study provides a robust scaffolding from which

the study's methodology, data collection, and analysis processes derive their foundational logic

and direction. In the context of the legal and regulatory frameworks governing debt capital

markets in Nigeria, particularly as they relate to startup companies operating within an unstable

economy, several theories can be invoked to underpin the analysis.

2.2.1 Financial Intermediation Theory

The financial intermediation theory postulates that financial intermediaries, such as banks

and other financial institutions, exist to bridge the gap between savers and borrowers, thereby

overcoming the limitations of direct financing. According to this theory, intermediaries can

reduce transaction costs, facilitate risk management, and mitigate information asymmetries

between parties.76 They play a crucial role in the allocation of capital and liquidity within the

economy, which is particularly pertinent when considering the debt capital markets in Nigeria.

Proponents of financial intermediation theory argue that intermediaries are capable of

providing economies of scale, which can be beneficial for startups that lack the resources to

directly access capital markets.77 Moreover, these intermediaries often have the expertise to

assess credit risk more accurately than individual investors, leading to a more efficient capital

allocation.78

However, critics of the theory highlight the potential for moral hazard and adverse

selection, which can arise when intermediaries engage in risk-taking behaviour without bearing

the full consequences, or when they serve clients of varying creditworthiness without adequate
76
R. C. Merton, 'Financial Innovation and the Management and Regulation of Financial Institutions' (1995) 19(3-4)
Journal of Banking & Finance, 461.
77
D. W. Diamond, 'Financial Intermediation and Delegated Monitoring' (1984) 51(3) Review of Economic Studies,
393.
78
R. T. S. Ramakrishnan, & A. V. Thakor, 'Information Reliability and a Theory of Financial Intermediation' (1984)
51(3) Review of Economic Studies, 415.

32
discrimination.79 Additionally, in an unstable economy, the role of intermediaries may be

compromised by macroeconomic volatility, which can affect their stability and capacity to lend

to startups.

This dissection of financial intermediation theory reveals both its utility and its limitations

within the context of Nigeria’s debt capital markets. While it underscores the importance of

intermediaries in facilitating access to capital for startups, it also necessitates a critical

examination of the risks and inefficiencies that may be exacerbated in an uncertain economic

milieu. The interplay between these factors is complex and necessitating a nuanced analysis,

particularly when considering the efficacy of existing regulatory frameworks and their capacity

to foster an environment conducive to the sustainable growth of startups through access to debt

capital.

2.2.2 Market Microstructure Theory

Market microstructure theory delves into the intricate workings of how trades are

executed and prices are determined in financial markets. This field of finance scrutinizes the

processes through which the myriad of diverse trading desires of market participants translates

into transactions, effectuating the amalgamation of information into asset prices. It is a study that

contemplates the role of trading mechanisms, the behavior of market participants, and the overall

efficiency of financial markets.

Proponents of market microstructure theory argue that understanding the nuances of

trading processes and market design is essential for elucidating the dynamics behind price

formation and liquidity in markets. O’Hara80 posits that the structure of a market can

significantly influence the speed and manner in which information is impounded into prices. For
79
J. E. Stiglitz, & A. Weiss, 'Credit Rationing in Markets with Imperfect Information' (1981) 71(3) The American
Economic Review, 393.
80
M. O’Hara, Market Microstructure Theory (Blackwell Publishers, 1995).

33
instance, the existence of market makers or specialists who are ready to buy and sell securities

ensures liquidity and facilitates tighter spreads between bid and ask prices, which could enhance

market efficiency.81

Critics of market microstructure research, however, point out that the theory sometimes

overemphasizes the technical aspects of trading at the expense of broader market trends and

fundamental values of securities. In addition, empirical testing of market microstructure models

can be challenging due to the complexity and variegated nature of financial markets. The theory's

focus on the minutiae of market mechanics might obscure more substantial issues such as

macroeconomic influences or long-term investment strategies.82

The role of information asymmetry is central to market microstructure theory. A study

illustrates how information imbalances can lead to market failure. In a market where sellers have

more information than buyers about the quality of a product, poor quality products ('lemons')

could drive out good quality ones due to pricing inefficiencies. This principle can extend to

financial markets, where information asymmetry can lead to adverse selection and moral hazard,

thus affecting trading behavior and market outcomes.83

Market microstructure theory also takes into account the impact of order flow on price

discovery. Kyle’s model describes how informed traders can affect prices through their trading

strategies and how this can impact the liquidity provided by uninformed traders or market

makers. The asymmetric information model postulated by Kyle has been influential in market

81
Ibid.
82
G. A. Akerlof, 'The Market for "Lemons": Quality Uncertainty and the Market Mechanism' (1970) 84(3)
Quarterly Journal of Economics, 488.
83
Ibid.

34
microstructure literature, highlighting how informed and uninformed traders interact within a

market.84

Furthermore, the theory acknowledges the regulatory environment as a key component

influencing market microstructure. For instance, the imposition of transaction taxes or

regulations like the Sarbanes-Oxley Act can have a profound effect on trading behavior and

market liquidity. A study) suggested that the legal and regulatory framework within which a

market operates significantly influences the level of investor protection, which in turn affects the

cost of equity and the functioning of capital markets.85

In the context of the Nigerian debt capital market, the application of market

microstructure theory could be pivotal in understanding how market illiquidity and price

volatility arise, particularly in an unstable economic environment. The efficacy of market

regulators such as the Securities and Exchange Commission of Nigeria (SEC) and the Nigerian

Stock Exchange (NSE) in crafting rules that foster transparency and efficiency could be assessed

through the lens of market microstructure.86

To foster a well-rounded discourse, it is imperative to consider both the merits and

limitations of market microstructure theory. While it provides a granular view of market

dynamics, it must be harmonized with other financial theories to fully grasp the complexities of

financial markets. Moreover, empirical research in this domain should be rigorous and context-

specific, considering the unique characteristics of the market under study.87

84
A. S. Kyle, 'Continuous Auctions and Insider Trading' (1985) 53(6) Econometrica, 1315.
85
R. La Porta and Others, 'Legal Determinants of External Finance' (1997) 52(3) The Journal of Finance, 1131.
86
O. Ashiru, and Others, 'Financial Innovation and Bank Financial Performance: Evidence from Nigerian
Deposit Money Banks' (2023) Research in Globalization, 100120.
87
Ibid.

35
 In conclusion, market microstructure is a fundamental component of financial theory that

elucidates numerous aspects of trading and price formation. Its application to the Nigerian debt

capital market can yield insights into the specific challenges and opportunities within an

emerging market context, thereby contributing to more informed policy-making and market

regulation.

36