Impact of Nigerian Financial Markets on the Economic Growth

Transcription

1 International Journal of Financial Markets Vol. 1, No. 3, 2014, Impact of Nigerian Financial Markets on the Economic Growth B.O. Njogo 1, A. J. Ogunlowore 2 Abstract This paper examines the impact of capital market on economic growth in Nigeria. This study used a multiple regression analysis to compute the annual time series variables. Some of these variables are; Annual Market capitalization, the real gross Domestic Product (GDP), and the market Turnover covering a period of 22 years, that is from The study utilized data from secondary sources. The findings in this paper show that capital market turnover contributed positively to economic growth which implies that capital market contributed a lot to economic growth in Nigeria. As the results suggests, it becomes beneficial for Nigeria to develop the capital market and to also work on some impediments that hinders the market like tax, legal and regulatory barriers. This would improve the trading system and also increase the ease with which investors purchase and sell shares. Keywords: Annual Market Capitalization, Real Gross Domestic Product, Market Turnover 1. Introduction The Nigeria Financial Market is a market for short and long term funds. It is a market where funds are pooled from surplus unit to deficit unit Njogo (2010). The market is divided into money market and capital market. The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means of borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, etc. But the capital market is a market for long term loans. It is consists of two broad categories and they are the primary capital market and the secondary capital market. The primary capital market category consists of securities which are most freshly created. It is also a market where new securities are issued. That is to say, that these are any securities that have not yet been traded, bought, or sold. Securities that have been traded, bought, or sold are categorized under the secondary market. Primary capital market securities may be issued in several ways. Some of these include issuance of rights, sales offers, subscription offerings and private placements. But, in the secondary market, the exchange of existing securities takes place once they have initially been issued in the primary market, either privately or publicly. The market is regulated by Securities and Exchange Commission which strives to protect investors in the market as well as to make advancements toward socioeconomic improvement. In Nigeria, studying the role of financial market on economic growth of the Nigerian economy is a vital one considering the ups and downs in its financial sector. The Nigerian financial market witnessed boom in the early 2005, but in the later years of 2007, it started witnessing negative economic growth. This is as a result of the global financial crises that disturbed the world s financial market. The development of the capital market is one of the key factors necessary for economic growth of a nation especially for an emerging economy like Nigeria. The link between Market and growth has received 1 Department of Economics, Accounting and Finance, College of Management Sciences, Bells University of Technology, Ota, Nigeria. 2 Department of Economics, Accounting and Finance, College of Management Sciences, Bells University of Technology, Ota, Nigeria Research Academy of Social Sciences 77

2 B. O. Njogo & A. J. Ogunlowore much attention. Laura, Araeedam, Sebnem and Selin (2003) submit that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development. This main objective of this paper is to examine the impact of capital (stock) market on economic growth of the Nigerian Economy. The paper is divided into 5 sections. Section One introduces the paper. Section Two discusses the literature review, Methodology is in Section Three. While Section four presents analysis / discussion of results, and Section Five concludes the paper. 2. Literature Review A well-developed capital market portrays one of the common features of a modern economy and it is reputed to perform some necessary functions, which promote economic growth in any nation. Some see capital (stock) markets as markets that increase the economic activities in a nation while some see it as a catalyst for economic development. Randall and Jan (1999) submits, that higher growth may actually have to be observed in the market before it increases stock prices, and this brings development. Countries have a way of controlling their financial market to boost growth in a nation. Chelsey Walter ( 2007) stated that each country has its own way of controlling its money and capital markets and tha,t the developed countries are more proficient in their techniques and therefore function at a higher, more advanced and complex level. But numerous studies have provided evidence that the degree of development and efficiency of the banking system is a key contributor to overall economic growth (e.g King and Levine 1996, and jayaratne and strahan 1996).To support this argument, Samuel and Emeka (2009) opines that a high level of financial deepening is a necessary condition for accelerating growth in an economy. This is because of the central role of the financial system in mobilizing savings and allocating same for the development process. Thorsten and Asli (2009) asserts, that low and lower middle income countries have experienced an increase in remittance flows. In Nigeria with the economic financial crisis and the high corruption in the banking sector of recent, there has been low increase in remittance flows in the capital market. And this has affected the growth of the Nigerian economy of recent. According to Goerge, and Randall, (1996), they also mention that banks have a unique financial structure and a central place in the economy, however, problems at banking and financial institutions are widely believed to be more to spread quickly throughout the financial sector and then broadly throughout other sectors and the macro economy as a whole. But, Popiel (1990), conducted one of the most elaborate studies on financial deepening and according to him, financial markets are deep from a qualitative standpoint when, they offer savers and investors a broad range of financial instruments which differ in terms of liquidity, yields, maturities and degree of risk including, debt instruments, equity instruments and in between quasi instruments, they encompass a diversity of sub markets, trading in different financial instruments, mature, domestic financial markets are integrated into the international financial markets, finally, the markets are linked together through various financial institutions which function as market makers and financial intermediaries. Also, Tapen (2001), in examining why financial intermediation is important, discovered that there are important contributors by banks and other financial intermediaries on the economy. Stanly,( 2003) discussed the important of financial markets in the economic growth. He is of the view that financial markets do not only allow risk diversification on the part of savers, that they also facilitate risk diversification that offsets technological change. He further stressed that a sound and sophisticated financial system promotes the efficiency of investment and economic growth in a market economy. If there is no motivation for investors to invest in securities, most savers would then hold on to their funds in cash or bank deposit which guarantees that they would be able to meet the fundamental purpose of savings but not investment that brings economic growth. But the study of ologunde, Elumilade and Asaolu (2006) therefore, recommended that the operations of the Nigerian capital market should raise the level of awareness so that investors will be abreast with the happenings in the market. Empirically, Luca and Bassam (2005) found a positive effect on growth, in their study, the growth impact of bank development is reduced by the development of the stock market. Randall and Jan (1999) in 78

3 International Journal of Financial Markets their study, using a Granger causality tests found out positive and significant causal relationship between the stock market development and economic growth, particularly for less developed countries, This result is in line with Ake, and Dehuan (2010) that explored Granger causality test, to test for causality relationship between stock market proxies by market capitalization, total trade value, turnover ratio and economic growth (GDP and FDI). They found out that there is a positive link between the stock market and economic growth for some countries for which the stock market is liquid and highly active. However, the causality relationship is rejected for the countries in which the stock market is small and less liquid. Tokunbo (2001) in his study established a positive link between the stock market economic growth. And Caroline, (2004) in her findings supports the view that countries, which have a less sophisticated financial system tend to experience more of a demand following relationship where economic growth induces financial development. It is obvious that an increase in cross border earnings and debt issues has been concentrated in high-income countries, An extensive review by Laura, Victor, Delia, and Andreea (2008) on correlations between Capital Market Development and Economic Growth:- The case of Romania shows that using a regression function and VAR models shows that the capital market development is positively correlated with economic development, with feedback effect, but the strongest link is from economic growth to capital market, they suggested that financial development follows economic growth, and economic growth determines the change and development of financial institutions. Studying the FDI and Economic Growth-The role of local financial markets:- Laura, Areendam, Sebnem and Selin (2003) explored whether countries with better financial systems can exploit FDI more efficiently. Their empirical evidence suggests that the link between FDI and growth is causal, and that FDI promotes growth through financial markets. Finally, Caroline (2004) explained in her study on financial Development and Economic growth in Fiji using unit root and co-integration techniques within a bi-variate vector auto-regressive (bvar) framework found, that countries, with less sophisticated financial system tend to experience more of a demand following relationship where economic growth induces financial development. 3. Methodology In this paper, a multiple regression analysis was carried out in order to determine the impact of capital market on economic growth. In doing this, multiple regressions was used with the aid of SPSS: The variables in this study can be grouped in the following categories: Financial Market Variables: - Size variables: Market Capitalization - Liquidity Variables: Market Turnover Economic growth variables: - The Real Gross Domestic Product GDP In expressing the above indicators in a mathematical form we have: Real GDP = β 0 + β 1 MCAP + β 2 MTO Where: β 0 = Constant MCAP = Annual Market Capitalization MTO = Annual Market Turnover β 1 = coefficient of the annual market capitalization = Coefficient of annual market Turnover. β 2 79

4 B. O. Njogo & A. J. Ogunlowore In line with the above specification, the REAL Gross Domestic Product (GDP N'm) is the Dependent Variable while Annual Market Capitalization and Annual Market Turnover are Independent Variables. Sources of Data Secondary data were used for this study. The data were sourced from the Nigerian Stock Exchange year book and the bullion of the Central Bank of Nigeria. The data covered a period of 22years ( ) 4. Analysis / Discussion of Results Regression Results of Real Gdp on Stock market Capitalization (Mcap) and Market Turnover (Mto) Model Summary Model R R Square Adjusted R Std. Error of the Square Estimate Durbin-Watson 1.495(a) (b) a Predictors: (Constant), MCAP (N'm); b Predictors: (Constant), MCAP (N'm), MTO (N'm) c Dependent Variable: REAL GDP (N'm) Unstandardized Coefficients Coefficients Standardized Co-efficients T Sig. Co linearity Statistics Model B Std. Error Beta Tolerance VIF B Std. Error 1 (Constant) MCAP (N'm) (Constant) MCAP (N'm) MTO (N'm) a Dependent Variable: REAL GDP (N'm) Interpretation of the Result of Model 2 Coefficient Table The first part of the coefficient table gives estimates for these β values and these values indicate the individual contribution of each predictor to the model. If we replace the β values into our model 2, we find that we can define the model as below. Real GDP = β 0 + β 1 MCAP + β 2 MTO = MCAP MTO The β values tell us to what degree each predictor affects the outcome if the effects of all other predictors are held constant. Constant value of states that if there is no (0.002MCAP), and 0.226MTO then the Real GDP is N337, 415,958,000 per year. 80

5 International Journal of Financial Markets MCAP (β = ): This value indicates that as market capitalization increases by one unit, Real GDP decreases by units. Both Variables were measured in million naira, therefore, for every N1, 000, increases in the market capitalization (MCAP), a decrease of N200, would result in the REAL GDP. This interpretation is true only if the effect of the Market Turn over (MTO) is held constant. MTO (β = 0.226): This value indicates that as the Market Turn Over one, Real GDP increases by units. Therefore, every additional N1, 000, of Market Turn Over would lead to N226, increases in the Real GDP. This interpretation is true only if the effect of the Market Capitalization (MCAP) over is held constant. Model Summary Table The R 2 of shows that about 55.8% variations in Real GDP is explained by the independent variables. The adjusted R 2 of which is about 51.1% is close to the R 2, which shows that the R 2 reveals the true behaviour of the dependent variable according to change in the independent variables. 5. Summary and Conclusion Financial markets bring growth in an economy. If our Nigerian capital market is well developed, this will lure investors into the country, thereby creating jobs, and at the same time, help in eradicating poverty which is prevalent in our growing economy like Nigeria. AFM (2005) in his study discovered that growth reduces poverty. In the course of this study, it was shown that stock market turnover contributes positively to economic growth. The study therefore, recommends among others- the improvement of the trading system in the area of impediments to secondary stock market development in the form of tax, legal and regulatory barriers in order to increase the ease with which investors can purchase and sell shares. This would strengthen the capacity of the Nigeria s security and exchange commission to check the activities of stock market speculators. References A.F.M. (2005) Temporal Causality and Dynamics of financial development, trade openness and economic growth in Vector Auto Regression (VAR) for Bangladesh, Implication for poverty reduction. The journal of Nepalese business studies vol. 11 No 1 Dec 2005 Ake, B. and Dehuan, J. (2010), The Role Of Stock Market Development in Economic Growth: Evidence From Some Euronext Countries. International of Financial Research Vol. 1, December 2010 Caroline W, (2004) Financial Development and Economic Growth in Fuji. Working Paper 2004/03. December Economics Department Reserve Bank of Fuji. George,G. K.and Randall, S. K.(1996), :How should financial institutions and markets be structured? Analysis and options for financial system Design. Prepared for a safe and sound financial systems: what works for Latin America at Inter America Development Bank, Washington D C, September 27 28, King, R. and Ross, L.(1996), Finance and growth: Schumpeter might be right. Quarterly journal of Economics (August 1993): Laura, O., Victor, D., Delia, C. and Andreea, S. (2008), Correlations between Capital Market Development and Economic Growth: The Case Of Romania..Journal of Applied Quantitative Methods Vol.3 No 1 Spring Lauro Alfred, Areendam Chanda, Sebnem Kalemli Ozean, and Selin Sayek (2003), FDI Spillovers, Financial Markets, and Economic Development IMF Working Paper WP/03/

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