1.1 Background of the Study
Finance has been identified as the underlying requirement for input factor in economic development and also regarded as an engine of growth in any economy (Onoh, 2002). In an economy like ours which is in a hurry to develop despite serious constraints, much attention is therefore placed on the financial system and its components for the mobilization of funds for economic growth (Ogiriki&Andabai, 2014).The economic agents that are responsible for such transfers are called financial intermediaries and the process through which it is done is called financial intermediation (Umoh, 2005). Ogiriki&Andabai(2014) pointed out that financial intermediaries have become an engine of growth and development by the process of financial intermediation. Okereke (2005) stressed that; channeling of funds from surplus to deficit units of the economy will encourage productive innovation even though it is also risky.
The financial system plays a key role as it makes savers’ funds more liquid, while it invests a portion of the funds into illiquid long-term investments. Furthermore, Levine (1997; 2005) explains that economic growth is closely linked to the liquidity provision function of the financial system. The link arises because some high return projects require a long-term commitment of capital, but savers do not like to relinquish control of their savings for long periods. As one of the empirical evidence linking liquidity provision and economic growth, Levine (2005) noted that isolating this liquidity function from the other financial functions performed by banks, however, has proven prohibitively difficult. Nzotta (2004) posited that, the banking sector is the dominant sector in the Nigerian financial service industry. He also described it as the most vibrant component and whatever difficulties it passes through affects the entire economy greatly. Generally, activities of the deposit money banks impact on the soundness and stability of the financial system hence the special attention accorded them by the regulatory authorities (Umoh, 2005)The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies (Donwa and Odia, 2010). This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy ,and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile, 1997).
However, the capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies (Donwa and Odia, 2010). This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy ,and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile, 1997).
According to Ogbulu (2009), the capital market is a network of special institutions that in various ways bring together suppliers and users of capital. The capital market is therefore, the long-term end of financial market, which is made up of market, and institutions, which facilitate the issuance, and secondary trading of long-term financial instruments.
Capital market is also seen as a collection of financial institutions set up for the granting of medium and long term loans and a market for government securities, for corporate bonds, for the mobilization and utilization of long-term funds for development – the long term end of the financial system (Ologunde, Elumilade and Asaolu, 2006).
Donwa and Odia (2010) assert thatthe 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).
Over the years, many corporate concerns have gone public in Nigeria. It represents a conscious effort to access greater quantum and diversified funds for investment in various sectors of the Nigerian economy. The capital market has continued to grow as evidenced by the entry of substantial new investors. Also, various business combinations involving corporate mergers and acquisitions have occurred. Further, the second tier market has also developed to accommodate quotation of less capitalized firms on less stringent terms and conditions. It is evident that some firms have listed additional securities in order to achieve diversified funding necessary to achieve lower cost of funds. As business opportunities continue to expand in modern day free enterprise economy, identification and implementation of varied investment programmes will continue to grow and deepen in various sectors of the Nigerian economy (Nwakanma and Nnamdi, 2012).
Okoye, Nwisienyi and Eze (2013) posit that as a result of the desire of the federal government to ensure a rapid growth in the industrial sector, the SEC decree No 71 of 1979 was promulgated which established the SEC to regulate the activities of the Nigerian capital market with the activities of SEC the Nigerian capital market has grown considerably over the years, market capitalization has grown from 1.6 billion in 1980, 1.3 trillion in 2003, 5.1 trillion 2006 and currently 6.9 trillion.
According to Li, Iscan and Xu (2007), stock markets arenotoriously sensitive to changes inmonetary policy. But this sensitivity mayvary across different economies. On theother hand, Rigobon and Sack (2001) upholdthat movements in the stock market can have significant impact on macro economy and are therefore likely to be an important factor in the determination of monetary policy.
Accordingly, monetary policy could be expressed as the process by which the monetary authority of a country controls the supply of money. The official goals usually include relatively stable prices and low unemployment level. In the words of Okpara (2010), monetary policy is a measure designed to influence the availability, volume and direction of money and credits to achieve the desired economic objectives. Actually, monetary policy attempts to achieve a set of objectives that are expressed in terms of macroeconomic variables, such as inflation, real output and unemployment (Abaenewe and Ndugbu, 2012).
However, the relationship between money and capital market has been linked to the transmission mechanisms of monetary policy. On its own, stock market encourages capital formation and generates liquidity for the expansion of industries, the impact which is seen in the real output of a country. According to Durham (2001), financial economists have given reasons why changes in the discount rate affect stock returns. He posits that discrete policy rate changes influence forecasts of market determined interest rates and equity costs of capital. Waud (1970) stressed that changes in the discount rate possibly affect expectations of corporate profitability.
The Nigerian capital market has continued to play great role since deregulation in mobilizing money to the borrowers who are mostly quoted industries.
1.2 Statement of the Problem
The Nigerian financial system comprises of various institutions, markets and operations that are in the business of providing financial services. These institutions can be broadly categorized into money and capital markets while money market is a market in which short term financial instrument are traded, the capital market on the other hand deals with long term transactions. The major players in the money market are the financial institutions
The intermediation role of financial institutions such as banks ensures the mobilization of idle funds from the surplus units to the deficit sector. Just like the money market, the capital market is a major channel for mobilizing long-term funds. The main institutions are the Securities and Exchange Commission (SEC) which is the apex regulatory body, the Nigerian Stock Exchange (NSE), the issues houses, stock broking firms and the registrars, (Olofin and Udoma, 2008).
However, the capital market is not void of problems: the limited numbers of available instruments traded in the market were discriminated in favour of large firms; the problems of unclaimed dividends among others have been able to hinder or draw back the swift/ function of the capital market in Nigeria. Also, considering the underdeveloped state of the Nigerian Stock Exchange, what could be done to position it strongly as its western counter parts
Based on the above-identified problems, this study will therefore bring to fore the money market and capital market channels to financial intermediation in the growth of the Nigeria economy..
1.3 Objectives of the Study
The main aim of this study is to analyzemoney and capital market channels to financial intermediation in Nigeria.
The specific objectives are;
1. To ascertain the role of the money market and capital market towards the growth of the Nigerian economy .
2. To examine whether the establishment of capital market in Nigeria is justifiable.
3. To identify the causes of the recent Nigeria capital market melt down .
1.4 Research Questions
The study will aim at finding answers to the following questions:
(1) What are the role of the money market and capital market towards the growth of the Nigerian economy?
(2) Is the establishment of capital market in Nigerian Justifiable?
(3) What are the causes of the recent Nigerian capital market melt down?
1.5 Research Hypotheses
The following hypotheses have been postulated to guide the study.
i. H1: The role of money market and the Nigerian capital market is to mobilize long term funds, create wealth and generate employment .
H0: The role of money market and Nigerian capital market is not to mobilize long term funds, create wealth and generate employment .
ii. H1: The establishment of capital market in Nigeria is justifiable.
H0: The establishment of capital market in Nigeria is not justifiable.
iii. H1: The recent capital market melt down in Nigeria was as a result of inadequate infrastructural facilities and high production costs .
H0: The recent capital market melt down in Nigeria was not as a result of inadequate infrastructural facilities and high production cost .
1.6 Significance of the Study
The research is geared towards alerting the investors and entire public on the current trend of the economy with the introduction of deregulation.
It also gives an insight on current issues concerning the development of the Nigerian capital market and as such capital market operations will benefit. This study will also enlighten investors on ways to invest at the market and the various business opportunities offered by the market.
At present the financial authorities are embarking on another round of financial reform measures for the banking sector, this study will help provide a policy pathway for the authorities in achieving their monetary policy goals for the banking system.
Shortcomings in the market will be revealed to assist government and regulatory authorities in making policies to correct these shortcomings and make the market more efficient and relevant in the aftermath of the global financial crises.
A successful completion of the study will contribute to existing literature and help scholars in future research study.
1.7 Scope and Limitations of the Study
This study was restricted only to money and capital market channels to financial intermediation in Nigeria.
There was some constraint encountered in the course of this work which hindered flow of information on this research.
i. Lack of comprehensive data: the availability of necessary data cannot be assured in a developing country like Nigeria where bureaucratic inertia is the order of the day.
ii. Financial constraint: hence, it is pertinent that nothing moves without money insufficient fund to carry out this research work like transportation in research of materials was pertinent.
iii. Time Factor: this research is something that has a limited time for it completion sufficient time available would have enchased a proper and thorough research.
1.8 Organization of the Study
The study will be structured into chapters and consists of five chapters. Chapter one will introduce the study with background, statement of problem, objectives of study, research questions, research hypothesis, significance of the study, scope and limitation, definition of terms and organization of the study. Chapter two will provide a review of related literatures. Chapter three will share the research methodology. Chapter four dwells on presentation, analysis and interpretation of data and Chapter five summarizes the findings with conclusion and recommendations.
1.9 Operational Definition of Terms
- Capital Market: This refers to a market for long-term funds. It provides a mechanism for lenders to provide long-term fund in exchange for financial assets issued by borrowers or traded by holders of outstanding negotiable debt instruments.
- Economic Growth: This is the increase of per capital gross domestic product (GDP) or other measures of aggregate income.
- Money Supply: This is the total volume of money stock held by banks and other financial institutions as well as those in circulation.
- Primary Market: This is the market for first hand instruments. It is a market where new shares are bought and sold.
- Secondary Market: This is the market were old or already existing shares are bought and sold.
- Monetary Policy: Monetary policy are those policies and measures designed to regulate and control the volume, cost availability and direction of money and credit with a view to achieving some specified macroeconomic objectives growth..