THE NIGERIAN CAPITAL MARKET AND IT’S CONTRIBUTION TO THE ECONOMY

Abstract
This paper examines the impact of the capital market on the Nigerian economy from 1981-2011. For this study,
the Nigerian economy was viewed in terms of economic growth, while the performance of the stock market is an
impetus for the growth and development of the Nigerian economy. The economic growth was proxy by Gross
Domestic Product (GDP), while the capital market variables considered were; Market capitalization (MCAP),
Total New issues (TNI), Value of Transactions (VLT), and Total Listed Equities and Government Stocks
(LEGS). Johansen co-integration and Granger causality tests were applied. The result shows that the Nigerian
capital market and economic growth are co-integrated. This indicates that a long run relationship exist between
capital market and the growth of the Nigerian economy. The result shows the clear relative positive impact the
capital market plays the economic growth and invariably on the economy. It is recommended that all the tiers of
government should be encouraged to fund realistic developmental programs through the capital market for it t
serve as a leeway to freeing resources, of the economy and there is need for availability of more investment
instruments such as: derivatives, convertibles, future and swaps options in the market, the regulatory authority
should be more proactive.
Keywords: Capital Market, Economy, Economic Growth, Cointegration, Causality, Nigeria.

INTRODUCTION
There is a fair agreement in the literature that economic reforms, especially what came to be tagged Structural
Adjustment Programme (SAP), have almost always been mounted in response to national financial distress
whose foundation could be traced to macroeconomic distortions (World Bank 1986). While such distress
manifest mainly as deep economic deterioration (stagflation and huge external debts), distortions are often
evident in the pursuit of unsustainable fiscal, monetary and exchange rates policies in addition to widespread
government intervention in enterprises that can best be handled by the private sector. In general, several analysts
believe that economic mal-adjustment is associated with policy pursuits which depart from free market pricing
policies (Chiber, et al 1986; Ray 1986). Economic reforms are therefore seen as pursuits of fiscal reforms and
market liberalisations, which focus on extensive privatization of state owned enterprises as well as liberalizations
of financial and foreign exchange markets, with the government limited to provision of the right enabling
environment for a private sector led growth.
There is a consensus in the literature that at the heart of economic reforms is the need to address a twofold task: restructure or get policy incentives right as well as restructure key implementation institutions.
Financial sector reforms is that aspect of economic reforms which focus mainly on restructuring financial sector
institutions (regulators and operators) via institutional and policy reforms. There have been other economic
reforms since the commencement of SAP. The first is the financial systems reforms of 1986 to 1993 which led to
deregulation of the banking industry that was hitherto dominated by indigenized banks that led to over 60 per
cent Federal and State governments’ stakes. During this period, government at both federal and state levels
invested heavily in industry especially in agro- and allied sectors, electricity and petroleum refining. This period
saw in addition to credit, interest rate and foreign exchange policy reforms. The second phase began in the late
1993 to 1998, with the re-introduction of regulations. During this period, there was a lot of distress in the
financial sector which necessitated another round of reforms, designed to manage the distress. The third phase
began with the advent of civilian democracy in 1999 which saw the return to liberalization of the financial
sectors, accompanied with the adoption of distress resolution programmes. The fourth phase began in 2004 to
date and it is informed by the Nigerian monetary authorities who asserted that the financial system was
characterized by structural and operational weaknesses and that their catalytic role in promoting private sector
led growth could further be enhanced through a more pragmatic reform.
The Nigerian capital market is an important component of the Nigerian financial system. According to
Anyanwu (1993), the financial market is a complex mechanism made up of procedures, instruments and
institutions through which efficient economic units (the users of funds, e.g. government, corporate bodies) and
the surplus economic units (i.e. suppliers of funds/savings) are brought together to transact business with each
other. Nzotta (2004) stated that the capital market is a mechanism for lenders to provide long term funds in
exchange for financial assets issued by borrowers or traded by holders of outstanding negotiable debt
instruments. Despite the existence of studies on capital market (Arestis, Demetriades and Luintel, 2001;
Fase and Abma, 2003; Iimi, 2003; Khan, Qayyum and Sheikh, 2003), little exist on financial reforms and capital
market development in Nigeria. The objective of this paper is to examine the impact of financial reforms on the

development of the Nigerian Capital Market from 1986 to 2010. The paper is subdivided into five sections.
Section 1 is the introduction, section 2 is reviews related literature, section 3 explains the methodology, section 4
is analyses and interprets the data, and finally, section five is on summary and concluding remarks.

STATEMENT OF THE PROBLEM
Despite the popular belief that democracy promotes economic activities which in turn engenders
economic growth, the growth of the capital market in Nigeria is still very small in relation to the
size of the economy. CBN (2007) has it that a comparative analysis of equity market
capitalization of the Nigerian capital market with some countries in North and South America,
Asia, Europe and Africa shows that the Nigerian market is relatively very small. Worse still is

the attendant ugly consequences of the capital market meltdown, characterized by the crash of
the market capitalization from a high record of N13.5 trillion in early 2008 to less than N4.5
trillion in the corresponding period of 2009. This development necessitated an investigation by
the House of Representatives, through its committee on Nigerian capital market, of the
circumstances surrounding the 2009 crash of the Nigerian capital market, and this investigation
is otherwise known as the capital market probes
However, given these scenario, one begin to wonder if the Nigerian capital market has really
fared well in terms of its impact on the growth of the Nigerian economy since the return to
civilian administration in Nigeria. Suffice it to re-state here that no past focused on this very
important period (beginning from 1999), which this study intend to cover. What is seen in other
related works is a combination, in varying degrees, of periods of military and civilian rule.
OBJECTIVE OF THE STUDY
The broad objective of this study is to assess the impact of capital market on economic growth in
Nigeria. To achieve this, the study will empirically analyze the effects of market capitalization,
all share index and total value of transaction on the gross domestic product during the period
under review.
HYPOTHESIS OF THE STUDY
Ho: capital market has no significant impact on economic growth in Nigeria.
REVIEW OF RELATED LITERATURE
THEORETICAL FRAMEWORK
In capital market literature, the major concept that dominates discussions is efficiency. The
concept of efficiency is central to any segment of the financial market. It refers to any one of the
three types namely. Operational efficiency, allocation efficiency and pricing efficiency.
However, the theoretical explanation on the nexus between capital market and economic growth
is well expanciated using the Efficient Market Hypothesis (EMH). The Efficient Market
Hypothesis, according to Fama (1965) is an academic concept which provides a framework for
examining the efficiency of the capital market.
According to the EMH, financial markets are efficient or prices on traded assets, have already
reflected all known information and therefore are unbiased because they represent the collective
beliefs of all investors about future prospects Olawoye (2011)
In other words the EMH states that all relevant information are immediately and fully reflected
in a security’s market price. Previous test of the EMH have relied on long range dependence of
equity returns. It shows that past information has been found to be useful in improving predictive
accuracy. This assertion tends to invalidate the EMH in most developing countries.
Using Egyptian data, Mecagni and Sourial (1999), applied the GARCH estimating methodology
to show that four of the popular stock market indices did not conform with the efficient market
hypothesis. Osei (2002), using Ghanaian data, explored the character of asset pricing and the
response to earning announcement on the Stock Exchange. He found that abnormal and
cumulative abnormal returns of selected securities were not efficient with respect to annual.

DISCUSSION OF FINDINGS
Our findings show that total market capitalization all share index and total value of stock are all
joint predictor of economic growth provide by GDP, though insignificantly. The total market
capitalization and all share index exert insignificant positive influence on GDP growth rate while
the total value of stock has insignificant negative effect on economic growth.
The implication of the result is that an increase in market capitalization and all share index will
insignificantly increase GDP, and this is supported by Osinubi and Amaghionyeodiwe (2003),
Abu (2009), Agarwal (2001), Chinwuba and Amos (2011) and Ewah et al (2009), who in their
different studies, found that capital market has positive impact on economics growth in Nigeria.
Ewah etal (2009) made it abundantly clear that although capital market exerts positive influence
on economic growth, it has not contributed meaningfully (significantly) to the growth of the
Nigerian economy.
This position, conversely, slightly disagrees with Obamiro (2005) and kolapo and Adaramola
(2012), who argue that the positive impact of capital market on economic growth is significant.
However the positive coefficients (0.04554 and 0.1161), show that total market capitalization
and all share index respectively if increased, have the capacity to trigger economic growth.
Another implication of our result is that the total value of stock exert an insignificant negative
influence on GDP growth rate. This confirms the position of Ilaboya and Ibrahim, (2004), that
the insignificant effect suggest that majority of key investor prefer to invest in other sectors of
the economy other than the capital market.
Furthermore, the coefficient of determination (R2
) of 14.8%shows that about 15% vari9ation in
GDP growth rate are explained by change in capital market variables, while about 85%are
accounted for by variables outside our model. Therefore, the model is not a good fit for the
relationship.