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TOPIC : EVALUATING THE ROLE OF NIGERIAN STOCK EXCHANGE IN CAPITAL FORMATION
IN NIGERIA (1986– 2015)
TO THE STUDY
The rapid economic development of any economy depends,
among other things, on ready access of adequate financial
resources (Alile and Anao, 1990; Adeusi, et al 2013).
Ibe and Osuagwu (2016) note that the deficiency of capital
has been cited as the most serious constraint to sustainable
economic growth. The desire to develop financial market
in an economy is intimately connected with the objective
of accelerating industrial and agricultural development.
Among this financial market is the Stock Exchange, which
deals with the mobilisation of both medium and long-term
capital funds (Sule and Momoh, 2009; Okodua and Ewetan,
2013). Besides, mobilisation of savings, the Stock Exchange
also enhance creation of liquidity, risk diversification,
and incentive for corporate control (Brown and Nyeche,
The mechanism of Stock Exchange came into existence
to enable investment, which were inherently illiquid
to become liquid through re-conversion into cash at
the decision of the investor without inconveniencing
the company (Olowe, 1997). According to Okodua and Ewetan
(2013), the stock market provides equity and a direct
form of finance to potential investors for economic
purposes. According to them, this role enables it to
function as a critical long-term lubricant in the economic
growth process. Ngerebo-A and Torbira (2014) note that
capital market activities synchronize the divergent
preferences of portfolio managers and financial institutions
and those of savers by mobilizing long-term funds for
portfolio managers and financial institutions while
providing avenue for savers to divest through the secondary
market and converting perpetual investment into liquid
assets for investment purposes.
Jibril, et al (2015) argue that despite the size and
illiquid nature of stock market in developing countries,
its existence and development could have important implications
for economic activities so much so that stock markets
are able to mobilize domestic savings and able to allocate
funds more efficiently. Today, in many developing counties,
Nigeria inclusive, the activities and performance of
the Stock Exchange have much wider implication and these
arise partly because of the growing influence of ideas
and structures associated with the concept of democracy.
The question of the ownership of a country’s assets
and means of production can no longer be ignored. This
was very obvious during the implementation of the Nigerian
Enterprises Promotion Decree 1988 and the Exchange Control
Act of 1962. Today, words like globalization have become
familiar in economic and finance parlance and fast growing
inter-dependence of economies and financial markets
cannot be ignored.
The development of the capital market in Nigeria dates
back to 1946, when the first government securities was
floated; the institutional facilities for the operation
was however absent and did not commence until fifteen
years later, when the Lagos Stock Exchange (now The
Nigerian Stock Exchange) was established in 1961 (Alile
and Anao, 1990; Adeusi, et al 2013). Consequently, in
1953, the Federal Government set up a committee under
Professor R.H. Barback to advise on ways and means to
fostering a shares market in Nigeria. The report of
the committee was published in 1959 and it recommended
among other things:
1. The creation of facilities for dealing in shares.
2. The establishment of rules regulating transfer and;
3. Measures to encourage saving and issue of government
and other organizations.
As a follow up to this report, the then Lagos Stock
Exchange now Nigerian Stock Exchange was incorporated
on 15th September, 1960 through the collective encouragement
of the business community, the Nigerian Industrial Development
Bank Limited (NIDB) and the Central Bank of Nigeria.
On the 5th June, 1961, the Lagos floor of the Stock
Exchange was officially opened and trading activities
commenced with 19 securities listed (Alile and Anao,
The need for government recognition and protection led
to the passing of the Lagos Stock Exchange Act 1961,
and the Act restricted the business of stock-brokering
in Nigeria in relation to quoted securities only to
members of the Exchange. Activities during the first
ten years of the exchange was dull, only 14 companies
were listed as at the end of 1971, security transactions
by volume and value stood at 952 and N18.1 million respectively
during the same year. Government securities dominated
the market in terms of value, accounting for 90.1 percent
of the total, while industrial securities accounted
for 78.6 percent of trading value. Over the years, the
listing has increased tremendously.
In order to meet the aspiration of the users, the Lagos
Stock Exchange was changed on the 2nd December, 1977
to the Nigerian Stock Exchange (Alile and Anao, 1990;
Adeusi, et al 2013). At present, the Exchange has a
number of branches in major cities in the country: the
branch in Lagos was opened in 1961, Kaduna 1978, Port
Harcourt 1980, Kano 1989, Onitsha February, 1990 and
Ibadan August 1990. The latest additions include: Abuja,
Benin, Uyo, Bauchi among others.
OF THE PROBLEM
Given the number of years since the Nigerian Stock Exchange
has been established and the substantial financial resources
available in the country, coupled with the existing
institutions, one can claim that the entire spectrum
of the capital market has not been sufficiently active,
especially when compared with the capital unit of similar
or lesser aged units in other developing countries.
The factors responsible for this could be identified
to include: High cost of transaction, lack of transparency,
poor economic performance etc.
Also, Ekesiobi et al. (2016) note that Nigeria and other
developing nations in Africa are characterized by inadequate
capital formation due to the vicious cycle of low productivity,
low income and low savings. They reveal that per capita
incomes are usually low in developing countries and
the propensity to consume is very high, which leads
to low desire to save and invest and this has had negative
implications for private capital formation in Nigeria.
The performance of The Nigerian Stock Exchange was overcast
in 2009 by the global financial and economic crisis,
which was precipitated in August 2007 by the collapse
of the sub-prime lending market in the United States.
The crisis led to the crash of most other sectors and
markets across Europe with consequent effect on developing
economies especially oil-export dependent countries
The spiral effect of the global economic crisis on The
Nigerian Stock Exchange continued in 2009 with the exorbitant
lending rate mounting pressure on the stock market as
a result of massive borrowed fund in the market. The
rush by stock investors to liquidate their investment
to repay their loans in order to avoid the excessive
lending rate caused the Nigerian stock market to crash.
Sere-Ejembi (2008) notes that it is not the global financial
crisis and the speculative subprime mortgage bubbles
and bust alone that is responsible for the crash of
the stock market, other contributory factors lent support.
Some of these, namely: margin lending by the Deposit
Money Banks (DMBs), stock price appreciation that had
no correlation with the fundamentals in the quoting
companies and local investors' opting to invest in foreign
capital markets to take advantage of the low stock prices.
The market had barely recovered from the 2008/2009 crash
when crude oil price began to fall at the international
market in mid 2014. This, to a large extent, affected
the oil revenue of the government as it fell by 43.7%
from N6.8 trillion in 2013 to N3.8 trillion in 2015
(CBN, 2015). The finance of government was adversely
affected because oil revenue accounted for about 70%
of the government revenue. Consequently, most sectors
of economy were affected and several companies began
to record sales loss with several others shut down due
to acute dollar shortage, high exchange rate, and low
patronage. Available data on the market indicated that
bearish sentiments prevailed between 2014 and 2016 as
major market indicators trended downwards. The development
was attributed to the combined effect of several macroeconomic
developments and steady divestment from the Nigerian
market by foreign investors, following increased currency
risk. This study intends to evaluate the performance
of the Nigeria Stock Exchange in terms of its trading
activities and determine the extent to which its contributes
to the capital formation process of the economy if at
all there is causation between them.
OF THE STUDY
This study is primarily aimed at examining critically,
the activities and performance of the Nigerian Stock
Exchange. The study will also inquire further on the
extent to which the Stock Exchange helps in the mobilization
and allocation of national capital resources in the
light of the privatization process.
The study will examine the following questions:
1. What is the rate of new issues on the stock exchange
2. To what extent does the Nigerian Stock Exchange stimulate
capital formation in the country?
The method of analysis to be used in this study shall
be the Ordinary Least Square (OLS) technique i.e regression
analysis. The relationship between the operations of
the Stock Exchange and the level of capital formation
in the country shall be examined using a multiple regression
analysis. The gross capital formation (gcf) shall be
the dependent variable while the indicators of the operations
of the Stock Exchange shall be the independent variables.
The estimation period will cover between 1986 and 2015
due to non-availability of the all the necessary data
The hypothesis that would be tested in this study is
H0: That the Stock Exchange does not stimulates capital
formation in Nigeria.
H1: That the Stock Exchange stimulates capital formation
The data for this study would be obtained mainly from
secondary sources, particularly from the publications
of the Nigerian Stock Exchange (NSE), Central Bank of
Nigeria (CBN) and that of the National Bureau of Statistics
and relevant journals and financial newspapers.
OF THE STUDY
The economy is a large component with lot of diverse
and sometimes complex parts. This research work will
only look at a particular part of the economy i.e the
financial sector. This study will not cover all the
facets that make up the financial sector, but shall
focus only on the stock market and its activities as
it impacts on the Nigeria capital formation. The empirical
investigation of the role of the stock market in capital
formation in Nigeria shall be restricted to the period
between 1986 and 2015 due to non-availability of the
all the necessary data to date.
OF THE STUDY
This study shall consist of six chapters. Chapter one,
which is the introductory part contains the background
of the study, the statement of the research problem,
objectives of the study, research questions among others.
Chapter two will deal be dedicated to the literature
review. Chapter three examines the Nigerian Stock Exchange.
The methodology analysis will be examined in chapter
four. This will also include models specification. Data
presentation, analysis and interpretation will be covered
in chapter five while the concluding part of the research
work will be chapter six where the summary, conclusion
and the recommendations will be discussed.
Alile, H. I. and Anao, R. A (1990) The Nigerian
Stock Exchange in Operation. Lagos: Academy Press.
Brown, E. D. and Nyeche, E. W. (2016) The Imperative
of Stock Market on Economic Growth in Nigeria: “The
Endogenous Growth Model”. Business and Economics
Journal. Vol. 7, iss. 1, pp. 1-5.
Central Bank of Nigeria (2015) Statistical Bulletin.
Abuja: Central Bank of Nigeria.
Ekesiobi, C. S.; Ifebi,
O. E.; Ezeanyeji, C. I. and Agu, A. O. (2016) “Analysis
of Savings and Private Capital Formation in Nigeria”.
Research on Humanities and Social Sciences.
Vol. 6, no. 12, pp. 104-110.
Ibe, S. O. and Osuagwu,
N. C. (2016) Impact of Capital Formation on the Economic
Development of Nigeria. In: Fifth International
Conference on Global Business, Economics, Finance and
Social Sciences, April 1-3. Chennai-India.
Jibril, R. S.; Salihi, A. A.; Wambai, U. S.; Ibrahim,
F. B.; Muhammad S. and Ahmad, T. H. (2015) “An
Assessment of Nigerian Stock Exchange Market Development
to Economic Growth”. American International
Journal of Social Science. Vol. 4, no. 2, pp. 51-58.
Ngerebo-A, T. A. and Torbira, L. L. (2014) “The
Role of Capital Market Operations in Capital Formation”.
Journal of Finance and Investment Analysis.
Vol. 3, no. 1, pp. 21-33.
Olowe, R. A. (1997) Financial Management: Concepts,
Analysis and Capital Investment. Lagos: Brievly
Jones Nigeria Ltd.
Okodua, H. and Ewetan, O. O. (2013) “Stock Market
Performance and Sustainable Economic Growth in Nigeria:
A Bounds Testing Co-integration Approach”. Journal
of Sustainable Development. Vol. 6, no. 8, pp.
Sere-Ejembi, A. A. (2008) “Nigerian Stock Market
Reflection of The Global Financial Crisis: An Evaluation”.
Central Bank of Nigeria Bullion. Vol. 32, no.
4, pp. 4-11.
Sule, K. O. and Momoh, C. O. (2009) “The Impact
of Stock Market Earnings on Nigerian Per Capita Income”.
African Journal of Accounting, Economics, Finance
and Banking Research. Vol. 5, no. 5, pp.77-88.
- Fifteen Thousand Naira (Non-Negotiable)
Regression Data and Results are included
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