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The Impact
Of Capital Market On Economic Growth Of Nigeria
ABSTRACT
Many efforts
have been made towards understanding the relationship between capital market
and the economic growth of Nigeria. The capital market of every economy is
setup for the attainment of specific objectives which includes economic growth
and stability, the contributions of the capital market towards the economic
development of Nigeria.Data was collected and analyzed using ordinary least
square analysis. The result of the study shows that the capital market has a
positive and significant impact on the country’s economic growth. It also
revealed the limited contribution of the market to the development of the
industrial sector as a result of the absence of some developing stimulating
subsectors. On the strength of this evidence, this work recommends that
government should introduce some tax incentives to motivate and encourage
investors. Finally, listing on the exchange should be made mandatory for
companies that have attained a given level of capitalization. If these
recommendations are efficiently implemented, the effectiveness of the Nigeria
stock exchange will be enhanced.
CHAPTER ONE
INTRODUCTION
Every economy seeks to
appropriate industrial base to move the economy from a traditional and low
level of production to a more automated and efficient system of mass processing
and the manufacturing of goods and services. For this level of development to
be attained, there must be a sound financial system which would serve as the
back bone of such an economy. If this is pursued, acquiring industrial
capabilities would be easily attained since it is considered as the economy
growth and development. As a result of the importance of the financial system
in developing industrial capabilities every economy seeks avenues to acquire
them. One of such avenues is raising funds through the capital market.
1.1 BACKGROUND OF THE STUDY
Business
firms as well as individual units often need to raise capital. On the other
hand, some individuals and firms, even governments have incomes that are
greater than their current expenditure, so they have funds available to invest.
But only few individuals and institutions are in the position to provide all
forms of financing needed for the funds investors to fund big businesses.
The
financial system is a frame work within which capital formation takes place. In
other words, it is the frame work within which the savings of some members of
the society (surplus spending unit) are made available to other members of the
society (deficit spending unit) for productive investments. It enables the
speedy transfer of funds from the surplus sector of the economy for profitable
investment. Put differently and clearly, the financial system provides the
economy, with the allocative sector through which scattered savings of the
masses in the society are first aggregated and then disaggregated among
economic unit. This service is rendered through the provision of financial
resources to meet the borrowing needs of individuals; business enterprise and
government to facilitate investment in saving funds, also to promote a sound
payment mechanism.
The
financial system therefore, consists of financial institutions, financial
instruments, rules and norms that facilitate and regulates the flow of funds
through the macro economy. The system itself is controlled by the government
through the agency of the central bank of Nigeria, which supervises the
activities of financial intermediaries and monitors adherence to the government
monetary and fiscal policies.
Within the
financial system is the frame work called the financial market which is
classified into two main categories; THE MONEY MARKET and the CAPITAL MARKET.
The money market deals with short and medium term financial instruments that is
readily convertible into cash and whose maturity ranges between a few days and
few year, it exists primarily as a means of liquidity adjustment and includes
treasury bills, treasury certificates, commercial papers etc.
On the other
hand, the capital market deals with instrument or long term securities with
maturity period longer than one year such as bonds, debentures and equity
stocks. The capital market in Nigeria has been a major source of finance to
the government, industries etc to meet
their longer term capital requirements such as financing for fixed investments
on buildings, plants, bridges etc. it has been in Nigeria’s existence since
1960 and has progressed steadily over the years. The use of the capital market
reduces over reliance on the money market, assist in promoting a solvent and
competitive financial sector as well as fostering a healthy stock market
culture. The importance of the capital Market cannot be under estimated, it is
the fundamental instrument of capital formation in any economy, no investment
takes place in a vacuum, capital is required. A well developed capital market
ensures the availability of capital funds for investment, and developing
project usually takes a long gestation period which the funds from the money
market cannot sustain. This implies that the absence of an efficient capital
market in an economy would result in shortage of long term funds and would harm
investment and hence militate against economic development.
1.2 STATEMENT OF THE PROBLEM
The
objectives of the capital market at any point in time are geared towards
attaining an appreciable development and growth in the economy and providing a
channel for engaging and mobilizing domestic savings for productive investment.
Apart from its fund mobilization function, it performs intermediary role by
making it possible for those who have surplus funds to be able to loan it out
to does in need of it for productive purpose.
Though the
Nigeria capital market has maintained an upward trend over the years, the
process of allocation of funds is influenced by the regulatory role of the
security market, this hinders the equitable distribution of the surplus funds
to the economic units of the economy.
The problems
therefore is stated thus: How do we articulate the impacts of the capital
market as an essential executor of changing funds from the surplus sector to
the deficit sector of the economy in other to raise long term capital to
finance fixed investment and stimulate industrial sectors as well as economic
development of the Nigerian economy? Though the capital market is very broad,
the study may be narrowed and limited to the Nigeria stock exchange – a market
that deals with the tradable securities. This study should be able to expose
how the stock exchange market impacts on the growth of the Nigeria economy will
be improved upon.
1.3 RESEARCH QUESTIONS
This study
is aimed at assessing the activities of the Nigerian stock exchange market and
the extent to which it has been able to achieve since it was established and
the study would also investigate and ascertain some of the criticism levelled
against the stock exchange. The following questions are therefore raised to
guide the study;
v Does the Nigerian stock exchange have
significant impact on the Nigerian economy?
v What are the possible problems and possible
solutions to the problem of Nigerian capital market?
v To what extent are the fundamental
recommendations that will assist policy makers to tailor economic reformation
to the path of capital market?
1.4 OBJECTIVES OF THE STUDY
The
objective of the study is to evaluate the contribution of the Nigerian
Stock
exchange to the growth of the Nigerian economy. The specific objectives are;
v To examine the impact of the Nigerian stock
exchange on the Nigerian economy.
v To identify the possible problems and
possible solutions to the problems of the Nigerian capital market.
v To articulate fundamental recommendations
which will assist policy makers to tailor economic reformation to the path of
capital market.
1.5 RESEARCH HYPOTHESIS
According to
Nwana (1998), “A hypothesis formulation is aimed at delimiting the direction of
searching for evidence everywhere, anywhere, anyhow”. It is based on the above
premise that the following research hypothesis is formed to guide this work.
Ho: b0 = 0
There is no significant relationship between the Nigerian stock exchange and
the economic growth of the country.
H1: b1 = 0,
There is a significant relationship between the Nigerian stock exchange and
economic growth of the country.
H0: b0 = 0,
There is no significant relationship between the capital market and Nigeria’s
economic growth.
H1: b2 = 0,
There is a significant relationship between the capital market and Nigeria’s
economic growth.
1.6 SIGNIFICANCE OF THE STUDY
The need of
a study of this magnitude cannot be over emphasized. Little attention has been
given to finding out the extent to which the Nigerian stock exchange market
impacts on the Nigerian economy. The result from this study is expected to be
of great importance to individuals, investors, business firms and the entire
economy as a whole. It will also help to enlighten the members of the public on
the meaning of stocks and shares, inculcating in them the savings and
investment habit.
This
research will be of significant to business firms and the government in the
sense that it is going to expose the usefulness of raising funds in the
Nigerian stock exchange market and other institutions in the capital market
with regards to reduction in risk and involvement of the public in economic
development. The study is also aimed at boosting investors to patronize the
stock exchange market in other to enhance their effect on the economy. This
study is also expected to identify some problems encountered in the capital market
by participants and suggest possible means of rectifying them. The
recommendations and findings of the study are also expected to be of great
assistance to future researchers, future market participant and future policy
makers.
1.7 SCOPE AND LIMITATION OF THE
STUDY
This study
covers the period between 1980 and 2009, this period is sufficient for the
market to significantly impact the economic growth. The focus of the study is
limited to the activities of the Nigerian stock exchange market as our anchor
point. This study has no doubt encountered problems in terms of both internal
and external validity. Like any other research study, this too has some
limitations. The problems encountered in the case of embarking on this research
are in two dimensions; finance and time.
Finance was
required to enable the researcher to travel from one place to the other to
obtain necessary data for the study and also to produce a readable copy. Time
was also another constraint as the researcher had to apportion her limited time
in ensuring the research becomes successful.
The Impact
Of Capital Market On Economic Growth Of Nigeria
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The Impact
Of Capital Market On Economic Growth Of Nigeria
ABSTRACT
Many efforts
have been made towards understanding the relationship between capital market
and the economic growth of Nigeria. The capital market of every economy is
setup for the attainment of specific objectives which includes economic growth
and stability, the contributions of the capital market towards the economic development
of Nigeria.Data was collected and analyzed using ordinary least square
analysis. The result of the study shows that the capital market has a positive
and significant impact on the country’s economic growth. It also revealed the
limited contribution of the market to the development of the industrial sector
as a result of the absence of some developing stimulating subsectors. On the
strength of this evidence, this work recommends that government should
introduce some tax incentives to motivate and encourage investors. Finally,
listing on the exchange should be made mandatory for companies that have
attained a given level of capitalization. If these recommendations are
efficiently implemented, the effectiveness of the Nigeria stock exchange will
be enhanced.
CHAPTER ONE
INTRODUCTION
Every economy seeks to
appropriate industrial base to move the economy from a traditional and low
level of production to a more automated and efficient system of mass processing
and the manufacturing of goods and services. For this level of development to
be attained, there must be a sound financial system which would serve as the
back bone of such an economy. If this is pursued, acquiring industrial
capabilities would be easily attained since it is considered as the economy
growth and development. As a result of the importance of the financial system
in developing industrial capabilities every economy seeks avenues to acquire
them. One of such avenues is raising funds through the capital market.
1.1 BACKGROUND OF THE STUDY
Business
firms as well as individual units often need to raise capital. On the other
hand, some individuals and firms, even governments have incomes that are
greater than their current expenditure, so they have funds available to invest.
But only few individuals and institutions are in the position to provide all
forms of financing needed for the funds investors to fund big businesses.
The
financial system is a frame work within which capital formation takes place. In
other words, it is the frame work within which the savings of some members of
the society (surplus spending unit) are made available to other members of the
society (deficit spending unit) for productive investments. It enables the
speedy transfer of funds from the surplus sector of the economy for profitable
investment. Put differently and clearly, the financial system provides the
economy, with the allocative sector through which scattered savings of the
masses in the society are first aggregated and then disaggregated among
economic unit. This service is rendered through the provision of financial
resources to meet the borrowing needs of individuals; business enterprise and
government to facilitate investment in saving funds, also to promote a sound
payment mechanism.
The
financial system therefore, consists of financial institutions, financial
instruments, rules and norms that facilitate and regulates the flow of funds through
the macro economy. The system itself is controlled by the government through
the agency of the central bank of Nigeria, which supervises the activities of
financial intermediaries and monitors adherence to the government monetary and
fiscal policies.
Within the
financial system is the frame work called the financial market which is
classified into two main categories; THE MONEY MARKET and the CAPITAL MARKET.
The money market deals with short and medium term financial instruments that is
readily convertible into cash and whose maturity ranges between a few days and
few year, it exists primarily as a means of liquidity adjustment and includes
treasury bills, treasury certificates, commercial papers etc.
On the other
hand, the capital market deals with instrument or long term securities with
maturity period longer than one year such as bonds, debentures and equity
stocks. The capital market in Nigeria has been a major source of finance to
the government, industries etc to meet
their longer term capital requirements such as financing for fixed investments
on buildings, plants, bridges etc. it has been in Nigeria’s existence since
1960 and has progressed steadily over the years. The use of the capital market
reduces over reliance on the money market, assist in promoting a solvent and
competitive financial sector as well as fostering a healthy stock market
culture. The importance of the capital Market cannot be under estimated, it is
the fundamental instrument of capital formation in any economy, no investment
takes place in a vacuum, capital is required. A well developed capital market
ensures the availability of capital funds for investment, and developing
project usually takes a long gestation period which the funds from the money
market cannot sustain. This implies that the absence of an efficient capital
market in an economy would result in shortage of long term funds and would harm
investment and hence militate against economic development.
1.2 STATEMENT OF THE PROBLEM
The
objectives of the capital market at any point in time are geared towards
attaining an appreciable development and growth in the economy and providing a
channel for engaging and mobilizing domestic savings for productive investment.
Apart from its fund mobilization function, it performs intermediary role by
making it possible for those who have surplus funds to be able to loan it out
to does in need of it for productive purpose.
Though the
Nigeria capital market has maintained an upward trend over the years, the
process of allocation of funds is influenced by the regulatory role of the
security market, this hinders the equitable distribution of the surplus funds
to the economic units of the economy.
The problems
therefore is stated thus: How do we articulate the impacts of the capital
market as an essential executor of changing funds from the surplus sector to
the deficit sector of the economy in other to raise long term capital to
finance fixed investment and stimulate industrial sectors as well as economic
development of the Nigerian economy? Though the capital market is very broad,
the study may be narrowed and limited to the Nigeria stock exchange – a market
that deals with the tradable securities. This study should be able to expose
how the stock exchange market impacts on the growth of the Nigeria economy will
be improved upon.
1.3 RESEARCH QUESTIONS
This study
is aimed at assessing the activities of the Nigerian stock exchange market and
the extent to which it has been able to achieve since it was established and
the study would also investigate and ascertain some of the criticism levelled
against the stock exchange. The following questions are therefore raised to
guide the study;
v Does the Nigerian stock exchange have
significant impact on the Nigerian economy?
v What are the possible problems and possible
solutions to the problem of Nigerian capital market?
v To what extent are the fundamental
recommendations that will assist policy makers to tailor economic reformation
to the path of capital market?
1.4 OBJECTIVES OF THE STUDY
The
objective of the study is to evaluate the contribution of the Nigerian
Stock
exchange to the growth of the Nigerian economy. The specific objectives are;
v To examine the impact of the Nigerian stock
exchange on the Nigerian economy.
v To identify the possible problems and
possible solutions to the problems of the Nigerian capital market.
v To articulate fundamental recommendations
which will assist policy makers to tailor economic reformation to the path of
capital market.
1.5 RESEARCH HYPOTHESIS
According to
Nwana (1998), “A hypothesis formulation is aimed at delimiting the direction of
searching for evidence everywhere, anywhere, anyhow”. It is based on the above
premise that the following research hypothesis is formed to guide this work.
Ho: b0 = 0
There is no significant relationship between the Nigerian stock exchange and
the economic growth of the country.
H1: b1 = 0,
There is a significant relationship between the Nigerian stock exchange and
economic growth of the country.
H0: b0 = 0,
There is no significant relationship between the capital market and Nigeria’s
economic growth.
H1: b2 = 0,
There is a significant relationship between the capital market and Nigeria’s
economic growth.
1.6 SIGNIFICANCE OF THE STUDY
The need of
a study of this magnitude cannot be over emphasized. Little attention has been
given to finding out the extent to which the Nigerian stock exchange market
impacts on the Nigerian economy. The result from this study is expected to be
of great importance to individuals, investors, business firms and the entire economy
as a whole. It will also help to enlighten the members of the public on the
meaning of stocks and shares, inculcating in them the savings and investment
habit.
This
research will be of significant to business firms and the government in the
sense that it is going to expose the usefulness of raising funds in the
Nigerian stock exchange market and other institutions in the capital market
with regards to reduction in risk and involvement of the public in economic
development. The study is also aimed at boosting investors to patronize the
stock exchange market in other to enhance their effect on the economy. This
study is also expected to identify some problems encountered in the capital
market by participants and suggest possible means of rectifying them. The
recommendations and findings of the study are also expected to be of great
assistance to future researchers, future market participant and future policy
makers.
1.7 SCOPE AND LIMITATION OF THE
STUDY
This study
covers the period between 1980 and 2009, this period is sufficient for the
market to significantly impact the economic growth. The focus of the study is
limited to the activities of the Nigerian stock exchange market as our anchor
point. This study has no doubt encountered problems in terms of both internal
and external validity. Like any other research study, this too has some
limitations. The problems encountered in the case of embarking on this research
are in two dimensions; finance and time.
Finance was
required to enable the researcher to travel from one place to the other to
obtain necessary data for the study and also to produce a readable copy. Time
was also another constraint as the researcher had to apportion her limited time
in ensuring the research becomes successful.
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