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1.1 The Background of the Study
Currently, Nigeria is tagged a developing nation even though she is blessed with numerous
natural resources. The problem of Nigeria can be resolved if resources are properly
mobilized, resulting in efficiency in all sectors and aid proper development. As the case is
today in Nigeria, various sectors remain undeveloped, and for economic progress there must
be development in various sectors of the economy, including the capital market.
The development of the capital market, and apparently the stock market, provides
opportunities for greater funds mobilization, improved efficiency in resource allocation and
provision of relevant information for appraisal (Inanga and Emenuga, 1997). Stock market
promotes efficiency in capital information and allocation. It enables individuals and
government to finance new projects which are capable of increasing productive capacity of a
nation (Ohiomu and Enabulu, 2011). Adamopoulos (2009) stock market has contributed to
the mobilization of domestic savings by enhancing the set of financial instrument available to
savers to diversify their portfolios and provide an important source of investment capital at a
reduced cost. The role of stock market has been very significant. According to Mala and
White (2006) stock market is an important component of any financial sector of any
economy. It is viewed as a complex institution imbued with inherent mechanism through
which long-term funds of the major sectors of the economy such as households, firms, and
government are mobilized, harnessed and made available to various sectors of the economy
(Nyong, 1997). The stock market plays an intermediation function. Riman, Esso and Eyo
(2008) provide evidence of the relationship between stock market development and economic
growth. Large, liquid and efficient capital market can ease savings mobilization and by
mobilizing savings, capital markets enlarge the set of feasible investments projects. Since
worthy projects require large capital injection and some enjoy economies of scale, capital
markets that ease resource mobilization can boost economic efficiency and accelerate long
run economic growth (Idowu and Babatunde, 2011).
Investment remains the major catalyst to economic growth, while resource mobilization and
allocation forms a vital pre-requisite to investment, the role of financial intermediary like
stock exchange market in securing liquidity for long term investors cannot be undermined.
These assist profitable investors in expanding their portfolio investment. However despite the
performance of Nigerian stock market, there has been a large downturn in economic activity
particularly in the real sector. Most productive activity will prefer long term borrowing
relative to short term and the major objective of stock exchange market is to buy and sell
securities by harnessing surplus public and private savings from actors and this is further
invested optimally in real sector to facilitate economic growth.
The Nigerian Stock Exchange was incorporated on 5 September 1960 as the then Lagos
Stock Exchange, under the Lagos Act of 1961, but operation fully took-off on 5 July 1961.
The establishment of Lagos Stock Exchange was because of the Barback committee which
was set up in 1958 by the Federal Government mainly to consider the ways and means of
promoting stocks, bonds and shares in Nigeria. It is a non-profit making organization. To be
able to meet the aspiration of its services, the Lagos Stock Exchange was transformed into
Nigerian Stock Exchange on 2 December 1977 and governed by the Memorandum of
While the Capital Market in Nigeria was informally started as far back as 1946, the basic
institutional framework for the operation of the capital market (Issue of Share etc.) did not
begin any operation until the establishment of the Lagos Stock Exchange. The major function
of the market is dealings (i.e. lending and borrowing) in long-term loanable funds I.e. periods
ranging over 3 years. It is an institutional market for transferring funds from surplus
economic units to deficit economic units.
In Nigeria, one major problem business enterprises face is the problem of financing their
activities unlike what we observe in developed worlds. Through the stock exchange market,
funds for long-term projects can be provided, but the commercial banks cannot provide such
The Nigerian Stock Exchange (NSE) is the center point of the Nigerian Capital Market. The
NSE provides a mechanism for mobilizing private and public savings, and makes such funds
available for productive purposes. The Exchange also provides a means for trading existing
securities. It also encourages large-scale enterprises to gain access to public listing. The NSE
operates the main exchange for relatively large enterprises, the Second tier Securities Market)
where listing requirement are less stringent for small and medium scale enterprises.
The Capital Market is the long-term end for financial market. It is made up of market and
institutions, which facilitate the issuance and secondary trading of long-term financial
instruments. Unlike the Money Market, which functions basically to provide short term
funds, the Capital Market provides funds to industries and governments to meet their longterm capital requirements, such as financing for fixed investments – buildings, plants, bridges,
The Nigerian Capital Market (NCM) is made up of the Nigerian Stock Exchange and a host
of other institutions. The NSE being a part of the NCM would have some role to play in the
development of the NCM, which would have an impact on the economy.
1.2 Statement of the Problem
There is abundant evidence that most Nigerian business lack long term capital. The business
sector has depended mainly on some short term financing such as overdrafts to finance even
long term capital. Based on maturity matching concept, such financing is risky. All such
firms need to raise an appropriate mix of long and short term capital (Demirgue-Kunt &
Levine 1996). Most recent literature on the NCM has recognized the tremendous
performance the market has recorded in recent times. However the vital role of capital market
in economic growth has not been empirically investigated thereby creating a research gap in
this area. This study is to examine the contribution of the capital market in the Nigerian
economic growth and development. Also there are some misconceptions on the NSE
(Nigerian Stock Market), some think it is the same as the NCM (Nigerian Capital Market)
and this study intends to make it clear that they are different.
1.3 Objectives of the Study
a) To evaluate the performance of the NCM in relation to economic development and
growth in Nigeria.
b) To make recommendations as to how the operation of the market could be improve to
boost economic growth and development in Nigeria.
1.4 Research Questions
This study intends to provide answers to the following questions:
a) Is there any relationship between the Nigerian Capital Market and the Nigerian
b) Does Nigerian Capital Market perform to expectation?
1.5 Hypothesis of the Study
The hypothesis to be tested in this study is:
H0: The capital market has no impact on economic development and growth in Nigeria.
H1: The capital market has an impact on economic development and growth in Nigeria.
1.6 Significance of the Study
The study explored the impact or effectiveness of capital market instruments on Nigerian
economic growth. Though the scope of the study was limited to the capital market, it is hoped
that the exploration of this market will provide a broad view of the operations of the capital
market. It will contribute to existing literature on the subject matter by investigating
empirically the role, which the capital markets play in the economic growth and development
of the country. 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.
1.7 Scope of the Study
The study uses data within the period of (1992-2011) spanning 19 years from the Nigerian
Bureau of Statistics. The study is limited to the contributions of the Nigerian Capital Market
on the economic development and growth. Its only focus is Nigeria.
1.8 Limitation 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 facets 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 was restricted to a period of1992-2011 due to non-availability of some
important data.
1.9 Organisation of the Study
Chapter One: introduces the research consisting of the background of the study needed for
the study, its purpose and relevant. The research questions were raised to guide the conducts
of the research and appropriate hypotheses were also formulated.
Chapter Two: Considers the theoretical and conceptual framework of the study. Relevant
empirical literatures were also reviewed.
Chapter Three: Discuses the research methodology employed in the study. The research
design, population and sample size were also considered here.
Chapter Four: Focuses on presentation of gathered data, its analysis and interpreted in
findings from the study were discussed and the formulated hypothesis also tested.
Chapter Five: Consists of the summary of major findings from the study, recommendations,
drawn from findings, and suggestions for further studies.
1.10 Definition of Terms
a. NSE: Nigerian Stock Exchange
b. NCM: Nigerian Capital Market.
c. CAPITAL MARKET: a financial market for buying and selling of long term debt and
equity-backed securities.
d. STOCK MARKET: the market in which shares of publicly held companies are issued
and traded either through exchanges or over the counter market.
e. GDP: The gross domestic product measures the total value, of all final productions in
a country.
f. ECONOMIC GROWTH: an increase in the capacity of an economy to produce goods
and services, compared from one period of time to another.
g. ECONOMIC DEVELOPMENT: it’s the progress in an economy or qualitative
measures of this.


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