1.1 BACKGROUND TO THE STUDY
The capital market is a subset of the financial system that serves as the engine of growth in modern economies. It is that part of financial system that is involved in providing long-term funds for productive use. The role of long-term capital in economic development of a nation cannot be over emphasized. Most economic managers recognize that a well organized capital market is crucial for mobilizing both domestic and international capital. In many developing countries like Nigeria, however, capital has been a major constraint in economic development. The domestic capital has so far fallen short of expectations inspite0 of great potentials for financing development.
These countries have thus resorted to external borrowing that has brought those very excruciating foreign debt problems and inability to raise additional funds from international financial markets. Thus, the capital market provides option for the construction of bridges, schools, factories and equipments. This compares with the money market, which represents the short-end of financial system that provides facilities for claims and obligations whose maturity vary one day to one year. The capital market provides government at all levels an effective way of financing public projects. It has been shown that internally generated revenue and statutory allocation are not sufficient to finance recurrent and capital expenditures.
This perhaps explains the high incidence of abandoned projects in Nigeria. There are many advantages that accrue to Federal, State and Local Governments that patronize the Capital Market. First, more capital projects can be completed as more resources are available for government capital expenditures. Secondly, there will be better accountability for use of funds as financial report must be produced regularly on projects funded by capital market. Thirdly, raising funds from the capital market releases government subventions for socials projects. Finally, the tendency to spend money on “white elephant projects” will be curtailed as only economically viable projects could be financed from the capital market.
1.2 STATEMENT OF THE PROBLEM
Many factors affect the development of the capital market which tends to have a resultant effect on the finance of development in the Nigerian economy.
The identified problems are as follows:
1) Inadequate implementation of the monetary, fiscal and debt management policies which have significant impact on the cost and availability of credit in the market.
2) Lack of long-term capital which invariably discourages investment in long-term projects and thereby impedes economic development.
3) Inability of Government to mobilize long-term capital for economic development of the country.
4) Inadequate development of both primary and secondary markets, which helps companies raise capital in the form of initial public offerings or by issuing seasoned stocks and bonds to investors.
In the light of the above, financing economic development cannot but respect the truth in the dictum that “investment is equal to savings”. Though engineering the right environment for the investment required for development is necessary condition for economic development, it is not by itself a sufficient condition. The right environment must also be created for the formation and flow of savings required funding such investments.
1.3 SCOPE OF STUDY
This study basically covers the period of (1970-2003) with emphasis on the evaluation of the contribution capital market to development financing in Nigeria. Development Finance
The choice of the period of study is to enable the researcher have a broad coverage of capital market behaviour in terms of log-run and short-run estimates and how they affect the values which represents the contribution of capital market financing. Development Finance
1.4 OBJECTIVES OF THE STUDY
The main objective of this study is to evaluate the contribution of capital market to development finance in Nigeria. Other objectives include:
1) Identification and analysis of the negative factors that impinge on the development of the capital market in Nigeria.
2) Evaluation of the structure of the Nigerian Capital Market.
3) Identification of the benefits of capital market and how it contributes to financing development in Nigeria.
4) Evaluation of the options for effective capital market development.
5) To make policy recommendations that will promote effective development of the Nigerian Capital Market.
1.5 SIGNIFICANCE OF THE STUDY
1) To enable us examine the environment and how capital market contributes to financing development.
2) To enable the researcher have a vivid knowledge of the factors pertaining to capital market which affects economic development financing in Nigeria.
3) To offer policy makers and analysts, the dynamic nature of capital market in a developing country like Nigeria where the financial system, markets, etc, is still highly underdeveloped.
1.6 HYPOTHESES OF THE STUDY
H0 : capital market does not provide local opportunities for borrowing and lending for long-term purposes.
H1 : capital market provides opportunities for borrowing and lending for long term purposes.
H0 : capital market does not enable government to mobilize long-term capital for economic development of Nigeria.
H¬1¬ : capital market enables government to mobilize long-term capital for the economic development of Nigeria.
1.7 RESEARCH QUESTIONS
1) What are the negative factors that impinge on the development of the Nigerian Capital Market?
2) What are the benefits of capital market to the Nigerian economy?
3) What are the factors that inhibit government from mobilizing long-term capital for economic development of the Nigerian economy? Development Finance
1.8 RESEARCH METHODOLOGY
In testing for the empirical validity of this study and stationarity of the variables, the Augmented Dickey Fuller (ADF) test will be carried out after which a cointegration test using the Engle and Grangers two stage approach will be used. This method will be based on the model specification in chapter three of this study.
1.9 SOURCES OF DATA
For the purpose of this study, only secondary data are used. Which are gathered from already processed data from various statistical and financial institutions, such as the CBN annual report, CBN Economic and Financial Review, CBN Bullion and Economic and Social Statistics Bulletin published by the Federal Office of Statistics. Development Finance