ABSTRACT
This
study examines the relationships between stock market capitalization rate and
interest rate. Time series data obtained from Central Bank of Nigeria (CBN) and
Nigeria Stock Exchange (NSE) were analyzed using regression. Results showed
that the prevailing interest rate exerts positive influence on stock market capitalization
rate. Government development stock rate exerts negative influence on stock
market capita1ization rate and Prevailing interest rate exerts negative
influence on government development stock rate. The study further revealed information
as very important to capital market development. It was therefore recommended
that the operators of the Nigeria capital market should raise the level of
awareness so that investors will be abreast with the happenings in the market.
CHAPTER ONE
1.0 BACKGROUND OF STUDY
It
is a known fact that the investment that promotes economic growth and development
requires long term funds, far longer than the duration for which most savers are
willing to commit their fund. Capital market is a collection of financial
institutions set up for the granting of medium and long term loans. It is a market for
government security, for
corporate bonds, for the mobilization and utilization of long-term funds for
development-the long term end of the financial system. In this market, leaders
(investors) provide long term funds in exchange for long term financial assets offered
by borrowers. This market embraces both the new issues (primary) market and secondary
market. Such securities might be raised in an organized market such as the Stock Exchange.
In this sense, it involves consortium under writing, syndicated loans and project
financing. Thus, it is a mechanism whereby economic unit desirous to invest their
surplus funds, interact directly or through financial Intermediaries with those
who wish to procure funds for their businesses. In the Nigerian context, participants
include Nigerian Stock Exchange, Discount Houses, Development banks, Investment
banks, Building societies, Stock Broking firms, Insurance and Pension Organizations,
Quoted companies, the government, individuals and the Nigerian Stock Exchange
Commission (NSEC) The capital market is therefore very important to any economy
because it encourages savings and real investment in any healthy economic
environment. Through the market aggregate savings are channeled into real
investment that increases the capital stock and therefore economic growth of
the country.
Moreso,
the capital market synchronize the divergent preferences for portfolio managers
and financial institutions and those of
savers by mobilizing long - term funds for portfolio managers and financial
institutions while providing avenues for savers to invest when the need arises through
the secondary market, without affecting the operation of the firm, their
savings had earlier financed. In other words through the secondary market the
capital market converts long- term or perpetual investment enlarged and
economic growth accelerated.
By
far the greatest achievement of -the Central Bank of Nigeria since it was
established on July 1st, 1959 has been the gradual development of
the Nigerian financial system.
The
system consists primarily of the money for short term lending and borrowing.
The Nigerian Stock Exchange (formally called the Lagos Stock exchange) is the
pivot or the fulcrum around which the entire capital market rotates. It is the
market for the sale and purchase of the securities, stocks and shares; a market
in which those institutions and governments who have funds surplus to their
immediate requirements can employ them profitably. Its major significance is
that it is the machinery for the mobilization of the countries resources for
economic growth and development. Since its establishment in 1961, a major local
investment outlet has been provided for Nigerian investors. As a marketplace
where securities (stocks, bonds, shares) are bought and sold openly with
relative ease, the stock exchange is very important to the investors. The
existence of a stock exchange in a capital market helps to broaden the share
ownership base of firms and evenly distribute the nation's wealth by making it
possible for people in different locations to own shares in a firm in another
location by purchasing the shares, bond /stock through the simple mechanism of
the stock market.
For
the government therefore, the stock exchange provides the mechanism for
exchanging the mobilization of capital for creating goods and services for the
satisfaction and well being of the citizens. The stock exchange is not only crucial
but also central to the entire mobilization process . This is because it offers
an opportunity for continuous trading in securities.
1.2 PROBLEMS OR STATEMENT OF PROBLEM
The
capital or stock markets are feature of the economies of western Democracies.
They do not exist in communist or socialist countries for they have no business doing there, In the
western capitalist countries, they constitute the most institution for massive capital
formation geared towards the complexity of capitalist ideology resulted in the control and measures to put
the economy in equilibrium state. Factors such as capital market capitalization
rate, government stock rate, rate of interest charged on financial instruments amongst
others exert same impact on the development and growth of the economy.
Bakare
(2000:58) defines capitalization rate as the discount rate used to determine
the present value of future earnings. It is one of the major determinants of
the market size of any stock exchange The size of the market capitalization and
its growth rate pose a major influence on the growth and development of the
economy. The determination of this rate is based on the forces of demand and
supply of securities. On the other hand, interest rates along with monetary
aggregates form targets of monetary policy in Nigeria.
Within
the period chosen for this study, interest rates in Nigeria were directly
managed by the monetary authorities- the Central Bank-of Nigeria. This control
of rate of interest was based on the expert advice from financial gurus who perceived
that the economy, as at that period, lack a well developed financial market.
Under
this regime control, the federal government of Nigeria did set the deposit and
lending rates of the financial intermediaries at their prevailing levels. In
addition, the government did set the rates for lending to specified sector of
the economy With a view to encouraging (or discouraging) lending to these
sectors. If the rate of interest paid by banks to depositors is increased,
investors will patronize the bank the more and fewer investors will invest on
the capital market. This will lead to a decrease in capital investment in the economy.
Hence, economic growth and development will be lowered, because the allocation
of capital resources plays a crucial role in the determination of the rate of
the nation’s output. If capital resources are not provided to those in the
industries, or if capital is not made available to sectors which are capable of
increasing production and productivity, the rate of the country’s expansion
(growth) will be retarded. Thus, the disparity in the determination of interest
rate, capitalization rate by different forces must have influenced the
development and growth of the economy. The variation in the interest rate might
cause investors also to either go to the bank or buy government development stock
(bond), thereby helping in the development of the economy.
The
relationship between interest rate and government stock rate will also be generated
in the course of this work. The capital market is often accessed to strengthen
a company's capital base, diversify it shareholder's base, improve the debt equity
ratio and in some cases raise money to retire existing short-term liabilities.
However,
in spite of the myriad of ways through which corporate entities and government
may raise debt, preference or equity capital, all of which have their merits
and limitations, it becomes rather paradoxical that small scale investors are not
often counseled enough or exposed to the inherent, derivable benefits and
associated risks in electing to go for either equity financing or debt financing
in the capital market.
Anyanwu
(1993:204) identified ignorance as one of the problems of Nigerian Securities
and Exchange Commission (NSEC) and the capital market is still very low. Not many
of the small scale business or family-owned business, state and local
governments are aware or properly counselled by the issuing houses about the procedural
formalities of actualizing their full involvement in the capital market
activities.
The
problem of inability to expose the small-sca1e businesses, state and local
governments to tap the huge savings in the capital market to raise funds to
start, expand consolidate and modernize business has been the chief indictment
of issuing houses that play the
intermediary role between issuers and investors.
The
Nigerian Stock Exchange still has a long way to geo when compared with those in
some developed countries. For example,
up till date it has 7 branches (Lagos, Kano, Kaduna, Ibadan, Port Harcourt,
Onitsha and Abuja) with about 183 companies listed-on it. As at July, 1996, about
20 companies were listed on the second-tier securities market. This looks
shallow when compared with Indian Stock Exchange with about 4,344 companies or
The London Stock Exchange, with about 5,085 listed companies. It may seem
unfair to compare Nigerian Stock Exchange at 42 with those of Indian and London
that has existed for decades. All The same, it suggests the need for
accelerated development of the market.
1.3 OBJECTIVE OF STUDY
The
general objective of this study is to present an overview of the nation's
capital market in terms of raising finance to assist companies and government
on long term basis. The specific objectives of this study are:
i.
To critically examine the relationship between
stock market capitalization rate and interest rate
ii.
To identify the type of relationship
between stock market capitalization rate and government development stock rate.
iii.
To examine the relationship between
government development stock rate and interest rate.
1.4 HYPOTHESES
i.
There is a negative relationship
between stock market capitalization rate and prevailing interest rate.
ii.
There is a negative relationship
between stock market capitalization rate and government development stock rate.
iii.
There is a negative relationship
between government development stock rate and prevailing interest rate.
1.5 SIGNIFICANCE OF STUDY
This
study should be of immense benefit for companies to raise money. This allows
businesses to be publicly traded, or raise additional financial capital for
expansion by selling shares of ownership of the company in a public market. The
liquidity that an exchange provides affords investors the ability to quickly
and easily sell securities.
Central
banks tend to keep an eye on the control and behaviour of the stock market and,
in general, on the smooth -operation of financia1 system functions. Exchanges
also act as the clearing house for each transaction which means the collection
and delivery of the shares and payment guaranteed to the seller of a security.
This eliminates the risk to an individual buyer or seller that the counterparty
could default on the transaction.
1.6 SCOPE OF STUDY
This
study makes the Nigeria Financial system more efficient by making funds
available where they are needed. The study also covered such securities which
might be raised in an organized market such as stock Exchange which is very important
to the investors.
1.7 LIMITATION OF STUDY
This
study in the Nigeria context basically needs public enlightenment which should
be carried far and wide to arouse the
Interest of potential investing public who reside outside these major cities
and wish to avail themselves of the opportunities of investing in the companies
through shares and stocks.
Infrastructural
inadequacies are major hindrances affecting the pace of investment growth in
Nigeria simply because the dissemination of information as regards the
operations of (NSE) Nigeria stock Exchange is tactically low when compared to
developed countries.
1.8 OPERATIONAL DEFINITIONS OF
TERMS
Stock market:
Also know as -equity market. A public entity (a loose net work of economic
transaction) of company stock (shares) and derivatives are traded at an agreed
price. Are securities listed on a stock exchange.
Market capitalization:
A representation of the aggregate value of a company or stock. It is obtained
when the number of shares outstanding is multiplied by their current price per
share.
Stock Exchange:
The most important component of stock market and are part of a global market
for securities. Such securities to be traded are shares, issued by company,
unit trust, derivatives, pool investment products and bonds.
Nigeria stock Exchange:
A machinery for mobilization of the countries resources for economic growth and
-development It was formally created on the 2nd of December 1977 with three
trading floors at Lagos, Kaduna & PortHarcourt. Two additional
branches/trading floors have since commenced operations at Onitsha and Kano. It
offers an opportunity for continuous trading in securities.
Nigerian securities and Exchange
commission (NSEC): The apex regulatory body which is
empowered to regulate the Nigeria stock Exchange and its branches to which it
is also at liberty to delegate powers. NSEC registers all securities proposed
to be sold in the market.
CBN:
Central Bank of Nigeria serves as bank of issue. It enhances the development of
money and capital market. It helps to establish money, capital market
institutions, development banks in Nigeria and stock Exchange. Also introduces
new money and capital market instruments.
NDIC:
Nigeria Deposit Insurance Corporation, is an independent agency the federal
government of Nigeria. They protect depositors, and guarantee the settlement of
insured funds thereby helping to maintain financial system stability.
Capitalization:
The conversion of a company's cash reserves into new shares and issues them to
existing shareholders, which is also known as scrip issue or Bonus issue.
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