Academic journal article Journal of Financial Management & Analysis

Functional Relationship between Growth of Capital Market and Economic Development of Nigeria : Methodological Analysis

Academic journal article Journal of Financial Management & Analysis

Functional Relationship between Growth of Capital Market and Economic Development of Nigeria : Methodological Analysis

Article excerpt


Economic development requires long-term capital consistent with the terms and conditions of the capital market. Nigeria, a developing country with the target of rapid growth thus require an effective and efficient capital market. To develop the appropriate policy to accelerate the development processes, there is therefore a need to establish a long run relationship between economic development and the Nigerian capital market.

The study is to ascertain the long-run impact of the capital market on the economic development in Nigeria using equity market capitalization, stock market index, market capitalization, and new issues to proxy the capital market. Economic development is proxied by gross domestic product (GDP) and gross fixed capital formation (GFCF). It is recognized that other proxies such as access to infrastructure, social utilities and credit will be utilized for further studies when the new social survey data become available. Secondary data from 1986 to 2005 were used. The study used a co-integration approach in the analysis.


The Nigerian capital market in any economy is the fulcrum on which the fortunes of that economy turns. It provides the wherewithal for its growth and development programmes and serves as an indicators of the economy's liquidity and general performance. The importance of a properly functioning capital market cannot be overemphasised. As Briston puts it, the capital market is the environment for selling the world's capitalized values, it is also the citadel of capital and the temple of values. In order to effectively perform its major functions of funding the growth and development of the economy therefore, certain fundamental conditions must prevail. It must be allowed to operate free from all encumbrances, it must have both depth and breath, price continuity and liquidity. It is within this framework that it becomes necessary to analyse the performance of the Nigerian capital market using the indicators in relation to economic development of Nigeria1.

In Nigeria, the capital market which has a history dating back to 1946, has contributed meaningfully to the capital formation, the development of the nation's economy and the implementation of some major government policies. The capital market plays the following roles in economic development: a means of raising finance, allocating the nation's real and financial resources, providing liquidity, an economic barometer, providing current cost of capital through its pricing mechanism, and as a medium for broadening the ownership base of family dominated firms2. According to Olusola3, the role of the capital market is often assessed by its capability to efficiently mobilize and channel funds for projects development such as factory expansion and infrastructural facilities.

The Nigerian capital market has grown over the years but compared to major emerging markets, it still lacks depth and breadth. Total market capitalization which is applied as an index for assessing the size of the capital market increased from N5.0 billion in 1981 to N 23.1 billion in 1991 and to N2,113 billion in 2004. As a percentage of Gross domestic product (GDP), the ratio increased from 7.10 per cent in 1991 to 10.5 per cent in 2000 and further to 29.47 per cent in 2004. The stock market index has been bullish during most part of the last 10 years with the Nigerian Stock Exchange All Share Index moving from 100 points in 1984 to 783.0 in 1991, to 8,111.0 in 2000 and 23,844.5 in 2004. Trading Value which refers to the level of activity in the capital market increased from N332.1 million in 1981 to N 136.2 million in 1991 and to N225.8billion in 2004. New issues increased from N455.2 million in 1981 to Nl.87 billion in 1991 and to N195.42 billion in 2004. New issues to gross fixed capital formation ratio increased from 3.8 per cent in 1981 to 5.3 per cent in 1991 and to 5.7 per cent in 1999. Thus the capital market is not a significant contributor to the funding of the Nigerian economy. …

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