CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
In the last two
decades, studies on the capital market have received considerable attention
from contemporary finance and economics literature resulting from its role in
the provision of long-term, nondebt financial capital which enables companies
to avoid over-reliance on debt financing, thus improving corporate
debt-to-equity ratio and also in the mobilization of resources for national
growth.
According to Ndako
(2010), the capital market is viewed as a complex institution imbued with
inherent mechanism through which long-term funds of the major sectors of the
economy comprising households, firms, and government are mobilized, harnessed
and made available to various sectors of the economy. For sustainable economic
growth, funds must be effectively mobilized and allocated to enable businesses
and the economies harness their human, material, and management resources for
optimal output.
Hence, the capital
market is an economic institution, which promotes efficiency in capital
formation and allocation. The capital market contributes to economic growth
through the specific services it performs either directly or indirectly.
Notable among the
functions of the capital market are mobilization of savings, creation of
liquidity, risk diversification, improved dissemination and acquisition of
information, and enhanced incentive for corporate control. Improving the
efficiency and effectiveness of these functions, through prompt delivery of
their services can augment the rate of economic growth (Okereke-Onyiuke, 2000;
Levine and Servos, 2006; Obadan, 2005; McKinnon, 2003).
The capital market is a
highly specialized and organized financial market and indeed essential agent of economic growth
because of its ability to facilitate and mobilize saving and investment. To a
great extent, the positive relationship between capital accumulation real
economic growths has long affirmed in economic theories (Anyanwu, 2003).
Success in capital accumulation and mobilization for
development varies among nations, but it is largely dependent on domestic
savings and inflows of foreign capital. Therefore, to arrest the menace of the
current economic downturn, effort must be geared towards effective resources
mobilization. It is in realization of this that consideration is given to
measure for the development of capital market as an institution for the
mobilization of finance from the surplus sectors to the deficit sectors
(Obamiro, 2005).
The development of
capital market in Nigeria, as in other developing countries has been induced by
the government. Though prior to the establishment of stock market in Nigeria,
there existed some less formal market arrangements for the operation of capital
market.
It was not prominent
until the visit of Mr. J. B. Lobynesion in 1959, on the invitation of the
Federal government to advice on the role the Central Bank could play in the
development of local money and capital market. As a follow-up to this, the
government commissioned and a set up the Barback Committee to study and make
recommendations on the ways and means of establishing a stock market in Nigeria
as a formal capital market. Acting on the recommendation of the committee, the
Lagos Stock Exchange (as it was called then) was set-up in March 1960, and in
September 1961, it was incorporated under Section 2 cap 37, through the
collaborative effort of Central Bank of Nigeria, the Business Community and
Industrial Development Bank (Alile &Anao, 2000).
With the establishment
of the Central Bank of Nigeria in 1959 and the coming into existence of the
Lagos Stock Exchange in 1961 and Subsequently, the Nigeria Stock Exchange by an
Act in 1979, a sound foundation was laid for the operation of the Nigerian
Capital Market for trading in securities of long term nature needed for the
financing of the industrial sector and the economy at large.
After the incorporation
of the Lagos Stock Exchange, it was granted further protection under the law
and its activities was placed under some sort of control by the government,
hence the passing of the Lagos Stock Exchange Act. However, the Lagos Stock Exchange was only
operational in Lagos. By the mid 70’s, the need for an efficient capital market
system was emphasized and a review by the government of the operations of the
Lagos to promote the Nigerian economy (Al-faki, 2007).
Capital market was advocated. The review was carried
out to take care of the low capital formation, the huge amount of currency in
circulation which was held outside the banking system, the unsatisfactory
demarcation between the operation of Commercial Banks and the emerging class of
the Merchant Banks and the
extremely shallow depth of the capital.
In response to the problems mentioned above, the
government accepted the principle of decentralization but opted for a National
Stock Exchange, which will have branches in different parts of the country. On
December 2nd 1977, the memorandum and article of association creating the Lagos
Stock Exchange was transformed into the Nigerian Stock Exchange, with branches
in Lagos, Kaduna, Port-Harcourt, Yola and now in Federal Capital Territory
(FCT) Abuja and some other cities.
The history of Nigeria Capital Market could be
traced to 1946 when the British colonial administration floated a N600, 000
local loan stock bearing interest at 3¼% for the financing of developmental
projects under the Ten-Years Plan Local Ordinance (Nyong, 2003).
The loan stock, which had a maturity of 10-15 years,
was oversubscribed by more than N1 million, yet local participation of the
issued was terribly poor. Certainly, potential fund abound in Nigeria, but the
overriding consideration in this project is to examine the impact of the
capital market in harnessing and mobilizing these resources (fund) to generate
economic growth in the country and consequently economic development.
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