The Role of Capital Markets in the Development of Nigerian Economy

Abstract

Mobilization of resources for national development has long been the central focus of development economist. As a result of this, the centrality of saving and investment in economic growth has been given considerable attention. For sustainable growth and development, fund must be effectively mobilized and located to enable business and the economy harnessed their optimal output. The financial market enables governments and industry to raise long term capital for financing new project, expanding and modernizing industrial commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of the expansion of the economy often suffers. A unique benefit of both the money and capital market to corporate entities is the provision of equity securities and provision of long term, non-debt financial capital. Through the issue of equity securities, companies acquire perpetual capital for development. With the provision of equity capital, the market also enables companies to avoid over reliance on debt financing, the improving corporate debt to equity ratio.

According to Samuel (1996), Dam and Leume (1996), developed economics had explore the two channels through which resources mobilization affects economic growth and development (Money and Capital Markets). But, this is however not the case in developing economies where emphasis was placed on money market with little consideration for capital market.

Alile (1996) states that since the introduction of Structural Adjustment Programme (SAP) in Nigeria, the country’s capital market has grown very significantly. This is as a result of deregulation on the financial sector and the privatization exercises, which exposed investors and companies to the significance of the capital market. Equity financing according to Othereke (2004) is one of the cheapest and flexible sources of financing from the capital market and remain a critical element in the sustainable development of the economy. Though the financial market is growing, it is however characterized by complexities. The complexities arise from trends in globalization and increase variety of new instrument brings traded equity options, derivatives of various forms, index futures etc. However, the central objective of the financial systems worldwide remains the maintenance of the efficient market with attainable benefit of economic growth (Alile, 1997). The link between stock market performance and economic growth has often generated strong controversy among analysts based on their study of developed and emerging markets.

According to Nylon (1999), the financial structure of a firm, that is the debt and equity financing changes as economies develop. As economies develop, more fund are needed to meet the rapid expansion. The financial market, that is, the money and capital market serves as a veritable tool in the mobilization and allocation of saving among competing uses which are critical to the growth and efficiency of the economy (Alile, 1984). These functions serve the purpose of channeling funds lenders to borrowers. They hold money balance or borrow from individuals and other institutions in order to make loans available for other investments. In order words, they act as financial intermediaries for those who presently are short of fund and therefore need temporary financial accommodation.

The below average growth performance of several less developed countries (LDCs) have development. Consequently, a wide ranging set of reform have been implemented with the aim to liberate depressed growth inducing factors. Prominent among these set of reform is financial sector reform. It is argued that financial liberalization is the ingredient needed to promote growth.. thus, the need to understand the direction of the relationship between finance and growth is undoubtedly necessary. One view is that growth induces expansion of the financial sector. That is economic growth provides the means for the formation of growth. Promoting financial intermediaries in turns accelerate growth by enhancing the allocation of capital. The financial sector mobilizes and channel resources from savers to investors and thereby causing real growth. For instance, insufficient financial development has sometimes created a poverty trap and thus became a serve hindrance to growth even when a country has established other conditions for sustainable economic growth.

The focus of this empirical work is therefore decidedly broadened to investigating the strength of the link between capital market and long run economic development.

There have been a number of policies and programme enunciated to develop the Nigerian capital market. This study therefore tends to find out the impact of capital market in the development of the Nigerian economy.