THE ROLE OF CAPITAL MARKET IN A DEVELOPING ECONOMY

1.0 Introduction

1.1 Overview Of The Study

The capital market is the market for dealings (that is lending and borrowing) in longer-term loanable fund. The market is the source from which industry obtains its capital for establishment, expansion and modernization and from which the government borrows on long-term basis for development purpose.

It offers access to variety of financial instruments that enables economic agents to pool, price and exchange risk. Through assets with affricative yields, liquidity and risk characteristics, it encourages savings in financial form. This is very important for government and other institutions in need of long-term funds and for suppliers of long-term funds who, because of the nature of their liabilities, undertake to maintain part of their assets in the relatively liquid form (Ekezie 19997).

According to Kanu N.O.N (2004) capital market refers to that market for the mobilization of medium and long term founds from the surplus units for allocation to the deficit units of the economy. The market provides opportunities for the issuance and resale of government securities, corporate bonds, stock, shares and, mortgage loan.

A broad definition of the term capital market according to Alile (1986) includes the entire financial system, commercial banks and other financial institutions providing short, medium and long term loans to finance both consumption and investment while an intermediate definition would include only those institutions which are concerned with providing long-term credits however, the narrow definition of capital market rulers to it as involving the problem and prospects of equity investment. The relates to the issue and market of shames, bonds, debentures, and other long-term securities using the service of brokers, dealers and underwriter.

A sketch of a capital market.

• The presidency
• Federal ministry of finance
• Securities and Exchange Commission
• Capital markets (Participants NSE, investment bank, merchant banks, discount house etc.)
• Nigerian stock exchange
• Stock brokers and issuing House

Instruments

It is important we know that the capital market was not in existence before the independence in 1960, rather, what was in existence was a financial system. Which was totally monopolized by expatriate commercial banks. The absence of a capital market in Nigeria within that period, hindered economic development. The non-existence of this market meant that Nigerians who had surplus founds had no such market to invest them in the country. As a result of this, they repatriated such funds for investment overseas especially in London thus, resulting to export of capital which would have been used in the economic development of Nigeria.

In addition, it resulted to lack of a market where Nigerian industrialist and businessmen could raise capital for the operation and construction of their business. On the side of the government, there was no effective tool for monetary policy and control.

With the above situation, there was on obvious need to provide a local market for the borrowing and lending of long-term funds for the economic development of Nigeria. To achieve this objective the central bank of Nigeria went into operation on 1st July 1959. In that same year the Nigeria stock exchange was established and the actual operations started in 1961 with 19 securities lists for trading.

Today, there are over 300 securities listed on the exchange and most of the listed companies have foreign / multinational affiliations and represent a cross section of the economy ranging from agriculture through manufacturing to service,

Following the deregulation of the capital market in 1993, the federal government in 1995 internationalized the capital market with the abolition of laws that constrained foreign participation in the Nigeria capital market. Foreigners can now participle in the Nigeria capital market both as operators and investors with this, the stock exchange has linked up with the Reuerts Electronic contributor system for on line global dissemination of stock market information like trading statistics, all share index etc. all these have contributed immensely to the development of the economy

1.2 Statement Of Problems.

Although the capital market has contributed significantly to the growth and development of the Nigeria economy, certain lingering problems still constrains its optional operations. They include:

Infrastructural Inadequacies:

This has resulted to delays in effecting transactions between issuing houses brokers, dealers, registrars, investors and their bank. The drag in the delivery service discourages many investors who sometimes view with distrust their registrars and brokers when share certificates are undelivered or proceeds of share sold not delivered promptly. Also infrastructural limitations insulate many investors especially those in the rural areas from broker dealer thereby, trading in securities which would have aided development.

• Ignorance also on the part on most members of the Nigerian public as to the meaning of shares and stocks as well as benefits derivable from market operations
• Reluctance of the Nigerian businessmen to go to the public for the fear of losing control of family business.
• Macro-economic instabilities and high cost of raising funds in the market
• Political instability which makes returns and premiums uncertain and thereby discouraging prospective investors both local and foreign.

1.3 Objective Of Study

Having the above problems in mind as militating against the development of capital market, vie stock exchange market, the purpose of this study is to determine

1. Contributions of the capital market to economic growth
2. The possible strategies to enhance the efficiency of the capital market
3. The relevance of usefulness of Nigerian stock market in the developing economy.

1.4 Research Questions

1. Does the lick of public awareness militate against the realization of the potential of the stock market in found mobilization?
2. Does the capital market play any role for the development of a country?
3. Political instability, does it influence the development of a country capital market?

1.5 Scope Of The Study

This research work revolves on the Nigerian stock exchange and how it aids the capital market in a developing economy like ours.

It is important to note that the capital market is not a single entity; rather it is a network of specialized financial institutions that in various ways brings together suppliers and users of capital which will be fully emphasized in this study. It will also examine the various regulatory bodies of the capital market especially the Nigeria stock exchange.

Thus, the scope will cover the Nigerian stock market, its operations and impact in the economy generally

1.6 Significance Of The Study

This study will be of importance to individuals, private and public companies, financial institution, government parastatals, as it will enable them to understand the role which capital market plays in a developing economy. The part of stock exchange in mobilizing the funds needed for investment by them. Ti is important also because it will encourage the investors to invest into the stock market with the full assurance that their investments are intact.

1.7 Limitations Of The Study

In the cause of this research I encountered few constraints; The reluctance of some respondents to volunteer information because they did not believe the assurance given them that the data collected were purely for academic purposes. Other limitations include financial and time constraint as this report writing was combined with attending of lectures. Also the reference materials I used in writing this project is gotten from different authors and various institution related to this project. Gathering these facts proves a bit difficult.

1.8 Definitions Of Terms

Some terms or concepts have various meanings depending on who or how it is used. The one in thus study are used in the following context.

Stock Market:

It is used interchangeable with the capital market which is an integral part of the countries financial system where money securities are bought and sold.

Share Holder:

A shareholder is one who holds a share certificate, who has a legal title to shares. It is also called or referred to as stock holder

Share Index:

It is made up of a number of bonds, stocks or share selected from a list of various trades or business with their market price added together

Speculation:

It is the buying and selling of goods with the object of gaining from differences in prices.

Stag:

One who speculates on the stock exchange by subscribing to a new issue with the hope of selling his allotment at a profit as dealings.

Bear:

An individual who sells securities has does not own or which he does not want to deliver in the hope that they can be repurchased at a profit before delivery has to be made.

Common Stock:

It is a term for equity or common stock.

Broker:

An intermediary who buys or sells shares on behalf of a client.

Securities:

They refer to various promissory documents adopted as evidence of claim in the market.

Primary Market:

It is where securities are offered for sale in the public from the issuer for the first time.

Secondary Market:

It is where people or investors can buy or sell previously quoted securities and get their money back for alternative uses.