The Capital Market And The Challenges Of Real Sector Financing In Nigeria.
[A STUDY OF THE PERIOD 2000-2009]

CHAPTER ONE

1.0 INTRODUCTION

The capital market is central to the economic stability, sustainable growth and development of any economy. Sustainable growth and development in an economy has a direct bearing to the viability of the productive sector. To achieve this, it is essential that the capital market through the use of financial instruments mobilizes and allocates funds to meet the funding needs of the productive sector. The capital market trading institution in Nigeria is the Nigerian Stock Exchange (NSE). Thus the NSE should develop a variety of financial instruments capable of providing diverse investments outlets and opportunities for both the investors and borrowers in the market. In the recent past, the Nigerian economy has been saddled with the challenges of a declining productive sector following the inability of the sector to get adequate funds to meet its needs from both the money and capital market. On the part of the capital market, the challenge has been lack of a variety of investment tools, low savings capacity of investors for the 2 market as well as the market capitalization which is stewed above 50% in favour of services sector of the economy that is, banks, insurance companies etc. Following the above assertion, this study aims at investigating the impact of the capital market on the productive sector of the economy: A study of the Nigerian Stock Exchange and Selected Quoted Stocks from 2000 to 2009. The instruments of study will consist of Equities, Debentures, Preference Shares, and development stocks.

1.1 OBJECTIVES OF THE STUDY

The purpose of this study is to evaluate the effectiveness of the capital market in the mobilization and allocation of funds to the productive sector of the economy; A study of the Nigerian Stock Exchange and Selected Quoted Stocks (2000 to 2009). The process involves a comprehensive study of the capital market in Nigeria from 2000 to 2009. This includes the investigation of the laws, regulatory mechanism and instruments of the market and their impact on development of the productive sectors of the economy.

The specific objectives are as follows: 3

(i) To find out the extent the capital market has contributed to the development of the productive sector of the Nigerian economy.

(ii) To find out the various financial instruments employed by the capital market for selected companies in the productive sectors of the economy and how these instruments have contributed to their growth and that of the economy.

(iii) To examine the dept of equity financial instruments in the market and their contribution to economic development.

(iv) To find out if their exist deficiencies in the legal regulatory framework of the Nigerian capital market.

(v) To find out the depth of equity financial instruments, especially in the productive sector firms quoted on the Nigerian Stock Exchange, and their contribution to economic development.

(vi) To find if any relationship exists between the prices of equity as well as the value and market capitalization of the Stock Exchange in relation to GDP. (i.e. the GDP is the index of productivity in the economy).

(vii) To analyse the growth of each tool (that is, Equity and Fixed interest debt instrument) in the Nigerian Stock Exchange in relation to growth of the companies and the economy.

1.2 STATEMENT OF THE PROBLEM

The Nigerian capital market which before now was described as one of the fastest growing stock market in Africa witnessed serious crises and loss of value following price crashes especially in the banking sector equities that constituted more than 50% of the market capitalization. As a result of this, the market capitalization which in 2008 was about N12.5 trillion fail and is presently at N5.5 Billion (source: Stock Exchange weekly activities summary 19/2/2010). The confidence of investing public dropped, especially, as it relates to investing in equities financial instruments. Thus, there exists the need to create a variety of financial instruments that can assist the market provide:

(i) Investment windows for the market participants such as;

     (a) Equities investment tools

     (b) Fixed debt investment tool (corporate bodies)

     (c) FG Development Stock

     (d) State Government Development Stock

      (e) Local Government/Municipal Stock

     (f) Mortgage Based Financial Tools

     (g) Derivative Financial Tools

(ii) The availability of these financial instruments will help deepen the market and attract additional investment funds from both local and foreign private investors.

(iii) Create the required choice for firms who want to raise money from the market.

(iv) Create a viable productive sector of the economy.

This research therefore is concerned with the slow growth in the productive sector of the economy and how the capital market can be used to facilitate growth, especially, in the productive sectors of Brewing, Food and Beverages as well as construction sectors. The problem of the research is to find how best to analyze, examine and proffer solution to the factors that affect the capital market especially the market instability, low productive sector activities as well as declining market capitalization. These 6 factors of market instability, low productive sector activities and declining market capitalization impact sometimes positively or negatively on economic development of Nigeria. Also, to investigate the impact of inadequate operational tool in the Nigerian Capital Market, inadequate savings for investment, lack of market transparency, political and economic instability as well as infrastructure deficiency is to be undertaken.

1.3 STATEMENT OF HYPOTHESIS A statement of hypothesis is a tentative statement about phenomena whose validity is usually unknown. It is best described as a statement of probability; such a statement so far is not supported by relevant information or data. Statement of hypothesis is often stated to highlight the perceived relationship between a dependent and our independent variable. There are various types of hypothesis for the suppose of this research, we will consider the Null Hypothesis and the Alternative Hypothesis Null Hypothesis, this is the reverse of the research hypothesis. It is normally stated in the negative form. 

Alternative Hypothesis, this is the working hypothesis. It is usually derived from researcher’s theory about some observed phenomena on the subject under research.

1HYPOTHESIS NULL HYPOTHESIS (HO): Capital Market operation does not enhance the productive sector development in Nigeria ALTERNATE HYPOTHESIS (HI): Capital Market operation enhance the productive sector development in Nigeria Hypothesis

2 Ho: (Null Hypothesis): The growth in the value and volume of equity financial instrument for productive firms quoted on the Stock Exchange does not contribute to economic development.
Hi: (Alternative Hypothesis): The growth in the value and volume of equity financial instrument for productive firms quoted on the Stock Exchange contributes to economic development.