ABSTRACT
This research work was embarked upon with a view to determine the impact of the financial (economic) meltdown on the Nigeria capital market (1990-2016). The capital market was set up to achieve specific objectives which would boost the economy such as encourage domestic insider trading and shareholders and increasing the quantity and quality of investments. The capital market offers access to a variety of financial instruments which are very essential for government and other institutions in need of long term funds. The data was obtained from the CBN Statistical Bulletin (1990 – 2016) and analyzed using ordinary least square analysis. The result shows that share prices and insider trading has a positive and significant impact on the capital market. Improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology like automated trading and settlement practice, electronic fund clearance and eliminate physical transfer of shares was recommended.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The present financial meltdown is a world-wide financial and business situation that is characterized by sudden sustained and alarming credit squeeze, tumbling stock market prices, shrinking demand, substantial job losses and rising prices and interest rates. According to Osaze (2009), financial meltdown is the continuous and dramatic drop in all economic indices over a relatively short period of time leading to corporate failures. There is no doubt that stock market all over the world are somewhat interrelated in that developments especially in major markets throughout the world, often have implications for and often reverberates in others (Agbonifoh and Evbayiro-Osagie, 2011). One may wonder why shocks in European and American stock markets have impact on the Nigerian stock market? This is due to integration. According to Tella (2009), contagion issues are being concerned with the transmission of financial variable movement from one country to another. Dornbusch, Park and Claessens (2000) describe contagion, as a significant increase in cross-market linkages after a stock to an individual country or a group of countries. According to Tella (2009), the increasing global integration in the financial market, including the capital market is providing some ground for the stock markets in both developed and developing countries to influence each other in both positive and negative ways.
According to Sanusi (2009a), “the world economy has been hit by the repercussion of the financial meltdown that started with the sub-prime mortgage meltdown in the United States of America and spread to Europe and other parts of the world”. The growing inability to differentiate the current meltdown from either an economic problem, a political quandary or an ideological clash even makes the situation more worrisome. The pace at which the meltdown is affecting economic activity around the world is staggering.
Most Organization of Economic Co-operation and Development (OECD) countries are already in recession, and economic growth in Africa is perhaps slowing more rapidly than at any time since 1990 (Summers, 2006) as cited in Olawale, (n.d.). Predicting and estimating the magnitude of the meltdown has shaken the very foundations of international financial markets. The uncontrollable force of globalisation which has torn apart all economic boundaries has not only ravaged all regulatory and protectionist powers of the state, but has actually out spaced and created doubts about the ability of the IMF to contain the meltdown (World Bank, 2008). As the world economists independently and jointly reveal their country’s survival plans, policies and programmes has shown that the continued reign and existence of capitalist ideology is seriously threatened. Unfortunately, the meltdown is further complicated by issues of global concern like climatic change, volatile food and energy prices (Commission for Social Development, 2009).
The capital market is a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds in the economy. The market affords business firms and governments the opportunity to sell stocks and bonds, to raise long-term funds from the savings of other economic agents. The capital market is a highly specialized and organized financial market and indeed an essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. The sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).
The capital market effectively started operations in Nigeria on 5th June, 1961 under the provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock Exchange in December 1977 as a result of the review of the Nigerian financial system (CBN, 2007). The Securities and Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from Capital Issues Commission, which was established in 1973. Since then, various forms of financial instruments have been issued in the capital market by new and existing business to finance product development, new projects or general business expansion.
The capital market, no doubt, is pivotal to the level of growth and development of the economy. Chinwuba and Amos (2011) note that capital market is one of the major institutions that acts in propelling a prostrate economy for growth and development. Nyong (1997) sees it as a complex institution imbued with inherent Mechanism through which long-term funds of the surplus sectors of the economy are mobilized, harnessed and made available to deficit sectors of the economy. Osaze and Anao (1999), assert that capital market is the cornerstone of any financial system since it provides the funds needed for financing, not only business and other economic institutions, but also the programs of government as a whole. Ilaboya and Ibrahim (2004), stress that capital market functions as an economic barometer for galvanizing economic activities.
The Nigerian money market institutions enjoyed robust financial growth in recent years that strengthened their balance sheets. Sound economic policies were important factors as was the favourable external support in the form of debt relief and higher credit inflows,” (IMF, 2009). But the food and fuel prices shock of 2007-2009 that preceded the current global financial meltdown weakened the external position of net importers of food and fuel, caused inflation to accelerate, and dampened growth prospects. The global financial meltdown greatly compound the policy challenges confronting Nigeria policy makers as it strives to consolidate its economic gains and meet the Millennium Development Goals (MDGs).
Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long term growth capital formation. It is crucial in the mobilization of savings and channelling of such savings to profitable self-liquidating investment. The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu, 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun, 2005). Okereke – Onyiuke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in eternity, funds to state and local government without pressures and ample time to repay loans.
The capital market is a market for raising funds by organizations and sale of securities. It is the main source of long-term funds to finance investment. Major studies have identified that viable projects have collapsed due to the mismatch of funds utilized. The capital market which is an arrangement that facilitates the mobilization and allocation of medium and long-term funds through the issuance and trading of financial instruments affords projects with long gestation period an avenue to raise appropriate long term funds. The capital market which is a segment of the financial markets facilitates the raising of long term capital through equities and bonds. Equities represent ownership stake in a company which issued them while bonds are debt instruments with the principal and interest usually payable to the holder at pre-specific periods.
The primary market segment is for raising funds through the issuance of new securities while the secondary market segment provides facilities for trading in already issued securities. As the major source of appropriate long-term funds, the capital market is obviously crucial to any nation’s economic development. Specifically, the capital market facilitates economic growth by, among other things, mobilizing savings from numerous economic units such as governments, individuals and institutional investors for users such as governments and the private sector. It also improves the efficiency of capital allocation through a competitive pricing mechanism (Donwa and Odia (2010).
The financial crisis ravaging the global economy is naturally a serious cause for concern to policy makers. Developed economies like USA, Germany, and England among others were injecting liquidity into the stock market to safeguard the financial system from crashing. The former governor of Central Bank of Nigeria Prof. Charles Soludo was busy campaigning that Nigerian investors should not panic, and that the Nigerian financial system is insulated from the global financial crisis. The former governor of Central Bank’s position deceived most Nigerian and also afforded foreign investors the opportunity to exit the market at its prime which is as a result of the economic meltdown which brought economic challenges to the Nigeria.
However, there have been reports that some of the causes of the collapse of the capital market were as a result of the nefarious act perpetrated by the market regulatory body as well as the market players. Some of these unprofessional conducts of these market actors ranges from price-fixing and overvaluation of shares to manipulation of initial public offers. These corrupt practices of the market actors and the eventual global economic meltdown bounced heavily on the capital market and impacted negatively on the market and the economy in general.
However, this research work tends to study the impact of financial (Economic) meltdown on the Nigeria Capital Market.
1.2 Statement of the Problem
The Nigerian capital market is in shambles. It earned the unenviable accolade as one of “the world’s worst performing stock market in 2008, after losing N5.4trn in market capitalization and 54 percent in the All share index” just a year after it had emerged as the world’s best performing stock market in 2007 with a return of 74.9 percent (Okpo, 2009).
Investors have lost confidence in the Nigerian capital market. There are some individuals and institutions that are worried and wary of losing even more than they have already lost. Many individuals are swearing to never have anything to do with the stock market again once they are able to “comfortably” bail out. It has become difficult for companies to raise fresh fund through the capital market. It is believed that the supervisory body (SEC) is not performing its oversight function effectively.
This study therefore seeks to find the impact of the financial meltdown on the Nigerian capital market.
1.3 Objectives of the Study
The main objective of this study is to examine the impact of financial meltdown on the Nigerian capital market. Other specific objectives include:
- i) To determine if there is any significant relationship between the economic meltdown and the Nigerian Capital Market.
- ii) To determine the impact of share prices manipulation on the Nigerian capital market
iii) To examine the effects of insider trading on investor’s confidence in the Nigerian capital market.
1.4 Research Questions
To achieve the foregoing objectives, the following research questions are posed:
- i) Is there any significant relationship between the economic meltdown and the Nigerian Capital Market?
- ii) Is there any relationship between share prices manipulation and the Nigerian capital market crash?
iii) To what extent does insider trading affects investor’s confidence in the Nigerian capital market?
1.5 Statement of Hypotheses
The following hypotheses are formulated to guide this study.
H01: There is no significant relationship between the economic meltdown and the Nigeria Capital Market.
H02: Manipulation of share prices does not significantly affect the Nigerian capital market crash
H03: Insider trading is not a significant factor in destroying investor’s confidence in the Nigerian capital market.
1.6 Scope of the Study
The financial meltdown is believed to have impacted various sectors of the Nigerian economy ranging from the Government, Banking, Insurance, Shipping, and Manufacturing industries etc. It is a very vast topic. For a proper research to be conducted and to be effective, this project will limit it findings and investigations on the impact of the global financial meltdown on the Nigeria’s capital market.
1.7 Significance of the Study
The importance of the capital market to any economy (developed or emerging) cannot be overemphasized. It has been discovered that there is a direct linkage between the capital market of a nation and its economic growth (Olowookere and Osunubi, 2007; Kalu, 2009; Nwachukwu, 2009) as cited in Okpo, 2009).
It is a noted fact that for any meaningful economic transformation of a country to take place, her capital market must be effectively active. It has also been an identified fact that economic strength of any nation is measured according to how active her capital market is/ or performing its supposed functions.
This study will therefore be useful in the following areas.
- i) This study will be of a significant interest to government and the Securities and Exchange Commission as they are aware of the problem confronting the Central Bank Nigeria and remedies to grappling these problems.
- ii) The study will also be significant to institutional operators of the market especially the Nigeria Stock Exchange (SEC) as the study provides detail causes of the problem and ways to correct the existing abnormalities.
iii) The study will also be beneficial to researchers who want to go into further research in this area as it will serve as a good reference material
- iv) This study will be of interest to investors who have been at the receiving end of the financial economic crises as this study will enlighten them on the causes of the problem and the efforts of SEC in protecting their investments.
