Abstract
The purpose of the study is to criti¬cally examine and evaluate the impact of the Nigeria Capital Market on the Nigerian economy, ef¬forts would be made to identify and appraise the strengths and weaknesses of the capital Market and attempts made to remedy such. This would be examined from the past, pres¬ent and forecast into the future. Hence this research work is set to examine the impact of the capital market on the Nigerian econo¬my.
CHAPTER ONE
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  According to the Microsoft Encarta dictionary;
Capital Market is a financial market involving institutions that deal with securities with a life of more
than one year. In other words Capital market is a collection of
financial institutions set up for the granting medium and long term loans. In
this market, lenders (investors) provide long term funds in exchange for long
term financial assets offered by borrowers. The market encompasses both new
issues (primary) market and secondary market. Such securities might be raised
in an organized market such as the Nigerian Stock Exchange.
The Nigerian Stock Exchange was estabÂÂÂlished in 1960
as the Lagos Stock Exchange. In 1977 it became The Nigerian Stock Exchange,
with branches established in some of the major commercial cities of the country
with Lagos as the head office of the Nigerian Exchange and an office in Abuja.
The Exchange started operations in 1961 with 19 securities listed for trading.
Presently, there are 201 listed equities while the all-share index and market
capitalization stands at 40,819.72 basis
points and 13.478 trillion respectively as at September 26, 2014.
The importance of capital market lies in its financial
intermediation capacity to link the deficit sector with the surplus sector of
the economy. The absence of such capacity robs the economy of investment and
production of goods and services for societal advancement. Funds could thereby
be idle at one end, while being sought at the other end in pursuit of
socio-economic growth and development (Akingbohungbe, 1996).
The market has in place a tested network of
Stockbrokerage Firms, Issuing Houses (Merchant Banks), practicing corporate law
firms and over 50 quality firms of auditors and reporting accountants (most
with interÂÂÂnational links). The Stock Exchange and most of the nation’s stock
broking firms and issuÂÂÂing houses are staffed with creative financial analyst
that can compete anywhere in the World. Therefore, the market has in place a
network of intermediating organizations that can effectively and creditably
meet the challenges and growing needs of investors in Nigeria. Integrity is the
watchword of The Stock Exchange. Market operators subscribe to the code “Our
word is our bondâ€ÂÂ. Thus, public trust in the Nigerian stock market has grown
tremendously, with over five milÂÂÂlion individual investors and hundreds of
institutional investors including foreign quoted comÂÂÂpanies using the
facilities of The Exchange. However, the global financial meltdown in 2008
affected the confidence level of investors immensely.
The call over trading system being replaced with the
Automated Trading System (ATS), with bids and offers now matched by
stockbrokers on the Trading Floors of The Stock Exchange through a netÂÂÂwork of computers,
making transactions fast and easily accessible. This is done every busiÂÂÂness
day from 11.00 a.m. till all bids and offers have been executed (about 1.30
p.m. on the average). This time period has been extended by 2 hours recently as
a strategic approach to enhanced efficiency in the market. Prices of new issues
are determined by issuing houses/stockbrokers; while on the secondary market
prices are made by stockbrokers only. The market/quote prices, along with the
All- Share Index, are published daily in The Stock Exchange Daily Official
List, The Nigerian Stock Exchange CAPNET (an intranet facilÂÂÂity), The Nigerian
Stock Exchange website, newspapers and on the stock market page of the Reuters
Electronic Contributor System. Pricing and other direct controls gave way to
indirect controls by the regulatory bodies (Securities and Exchange Commission
and The Stock Exchange) following the deregÂÂÂulation of the market in 1993.
Deregulation has improved the competitiveness of the marÂÂÂket, in addition to
making it more investor-friendly. The All-Share Index: The Exchange maintains
an All-Share Index formulated in January 1984 (January 3, 1984 = 100). Only
common stocks (ordinary shares) are includÂÂÂed in the computation of the index.
The inÂÂÂdex is value-relative and is computed daily. Clearing, Delivery and
Settlement: Clearing, Settlement and Delivery of transactions on The Exchange
are done electronically by the Central Securities Clearing System Limited
(CSCS), a subsidiary of The Stock Exchange. The CSCS Limited (“the Clearing
Houseâ€ÂÂ) was incorporated in 1992 as part of the efÂÂÂfort to make the Nigerian
stock market more efficient and investor-friendly. Apart from clearing,
settlement and delivery, the CSCS Limited offers custodian services. (See the
write-up on the Central Securities Clearing System Limited for more about
clearing, deÂÂÂlivery and settlement on The Exchange.)
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The Nigerian
Capital Market of Nigerian Stock Exchange is a major player in the market for
long-term funds. The inÂÂÂstruments or securities traded in the capital market are
known as capital market instruÂÂÂments. However, the capital market has both
securities based segment (i.e. the stock exÂÂÂchange) and non-Securities based
segment (market for long term loans). Capital market instruments can be
categorized into 3 major groups of securities: preference shares, orÂÂÂdinary
shares and debt instruments. Some of the other principal and active market opÂÂÂerators
in the Nigerian Stock Market include Stockbrokers, Investment Advisers, Issuing
houses, Registrars, Fund Managers, Financial Advisers et cetera.
The Nigerian
Stock exchange is the cenÂÂÂter point of the Nigerian Capital Market. It provides
a mechanism to mobilize private and public savings as well as making such funds
available for productive purposes. The Nigerian Stock Exchange also assists in
the allocation of the nation’s capital resources amongst numerous competitive
alternatives. The stock exchange can also be a mechanism, which can measure and
detect the symptoms of an impending economic boom or decline long before the predicted
prosperity or deÂÂÂcline actually occurs provided the market is either in the
semi-strong or strong form of efficiency level. It is good to distinguish the
capital market from the Stock Exchange in the sense that the capital market is
much wider and bigger than the Stock Exchange. The Stock Exchange is just a
participating inÂÂÂstitution in the capital market albeit it is the most active
of all the participants. The activÂÂÂity of the Stock Exchange in the capital marÂÂÂket
is reflected by the Stock Exchange, which measures the activities on the
capital market.
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The main
objectives of the Nigerian Stock Exchange as enunciated in the Memorandum of
Association of the company is to create an appropriate mechanism for capital
formation and provide efficient allocation of resources among competing
alternatives. It is also exÂÂÂpected to provide special financing strategies for
projects with long term gestation periods. In addition, it helps to maintain
discipline in the capital market as far as the participants and the investors
are concerned and as such, assists to broaden the share ownership in the market
by providing the enabling enviÂÂÂronment and to provide and maintain fair prices
for securities. The overriding objecÂÂÂtive of any financial system is the
provision of a conducive atmosphere for the transfer of funds from the surplus
sector of the econoÂÂÂmy to the deficit sector. The Capital Market, in the
process of carrying out its function is faced with many challenges such as the
effect of economic trends, financial restructuring and reforms by government,
industrializaÂÂÂtion, and technology etc. the Capital Market is thereby required
to adapt to the constantly changing trends in the economy.
The market in
Nigeria has been deÂÂÂscribed as being shallow; this is due mainly to the market
float that is very small and is measured by the ratio of securities in the
market to the total listed securities outstandÂÂÂing. The challenge that lies
ahead is to be able to increase and retain as many of our domesÂÂÂtic individual
and institutional investors as possible and simultaneously attract foreign ones
to the Nigerian Capital Market. This can be achieved by being dynamic,
innovative, and having an open mind so that new ideas can be absorbed and put
productively in use. The market must be in a position to provide a spectrum of
investment alternatives, new trading instruments with which investors can hedge
their risk, as well as an environÂÂÂment which is honest, has sufficient strucÂÂÂtures
and where policies are flexible enough to accommodate different investment
needs.
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The Capital
market has also been charÂÂÂacterized by a number of market failures, one of
which is asymmetric information, a situation in which one party to a transacÂÂÂtion
has less information than the other parÂÂÂty. The pervasiveness of this
phenomenon greatly undermines the efficiency of finanÂÂÂcial markets as
mechanisms for allocating resources. Because geography and cultural distance
complicate the acquisition informaÂÂÂtion, asymmetric information is particularly
prevalent globally. While the revoluÂÂÂtion in information asymmetric are
lessened but not eliminated, therefore they are prone to the sharp investor
reactions, unpredictÂÂÂable market movements and financial crisis that can occur
when information is incomÂÂÂplete and financial markets behave erratiÂÂÂcally
(Eichengreen and Musa 1998). Thus, in the absence of complete information,
invesÂÂÂtors tend to rush in and out of the markets on rumor.