CAPITAL MARKET AND THE PERFORMANCE OF NIGERIA INDUSTRIAL SECTOR

                                   CHAPTER ONE

                                 INTRODUCTION

1.1 Background of the study

The study access the performance of Nigeria industrial sector, growth and development of the capital market which can be traced back to 1946 with the floating of N600,000 (more than 300,000 pounds sterling) worth of government stocks. However, despite these drives for industrialization, the efforts have seemed not to be yielding fruitful results as the share of industrial sector in total output remained unimpressive (Udoh and Udeaja, 2011).  The capital market is a highly specialized and organized financial market and indeed essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. To a great extent, the positive relationship between capital accumulation real economic growths has long affirmed in economic theories (Ayanwu,1996).

For example, manufacturing sub-sector which is at the heart of industrial sector has continued to perform poorly over the years. Research has proven that manufacturing share of the GDP has increased from 7.17 per cent in 1970 to 10.4% in 1980 before declining steadily to 5.50 per cent in 1990. By 2000, the manufacturing share of total GDP has declined to 3.67 per cent before declining consistently to 1.89 per cent in 2010. As at 2012, the manufacturing share of GDP had fallen drastically to 1.88 per cent (CBN, 2012). The development of capital market in Nigeria, as in other developing countries has been induced by the government .Though prior to the establishment of stock market in Nigeria; there existed some less formal market arrangements for the operation of capital market. It was not prominent until the visit of Mr. J.B. Lobyneson in 1959, on the invitation of the federal government, to advice on the role the central bank could play in the development of local money and capital market. As a follow-up to this, the government commissioned and set up the Barback committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal capital market. Acting on the recommendation of the committee, the Lagos stock exchange (as was called then) was set-up in march 1960, and in September 1961, it was incorporated under section 2 cap37, through the collaborative effort of the central bank of Nigeria, the business community and industrial development bank (Alile & Anao, 1990). With the establishment of the central bank of Nigeria in 1959 and the coming into existence of the Lagos stock exchange in 1961 and subsequently, the Nigeria stock exchange by an act in 1979, a sound foundation was laid for the operation of the Nigerian capital market for trading in securities of long term nature needed for the financing of the industrial sector and the economy at large. After the incorporation of the Lagos stock exchange, it was granted further protection under the law and its activities was placed under some sort of control by the government, hence the passing of the Lagos stock exchange act. However, the Lagos stock was only operational in Lagos. By the mid 70’s, the need for an efficient financial system for the whole nation was emphasized, and a review by the government of the operations of the Lagos stock exchange market was advocated. The review was carried out to take care of the low capital formation, the huge amount of currency in circulation which was held outside the banking system, the unsatisfactory demarcation between the operation of commercial banks and the emerging class of the merchant banks, and the extremely shallow depth of the capital. In response to the problems mentioned above, the government accepted the principle of decentralization but opted for a national stock exchange, which will have branches in different parts of the country. On December 2nd 1977, the memorandum and article of association creating the Lagos stock exchange was transformed into the Nigeria stock exchange, with branches in Lagos, Kaduna, port-Harcourt, yola and now in federal capital territory (FCT) Abuja and other cities. The history of Nigeria capital market could be traced to 1946 when the British colonial administration floated a ₦600,000 local loan stock bearing interest at 31/4% for the financing of developmental projects under the ten-years plan local ordinance. The loan stock, which had a maturity of 10-15 years, was oversubscribed by more than ₦1 million, yet local participation of the issued was terribly poor. Certainly, potential fund abound in Nigeria, but the overriding consideration in this study is to examine the impact of the capital market in harnessing and mobilizing these resources (fund) to generate economic growth in the country and consequently economic development. However, given the undeveloped and shallow nature of capital markets in developing countries, it is debatable whether capital markets in developing countries in general and capital market in Nigeria in particular has led to industrial sector development. More than that, this study contributes to the ongoing debate on whether capital market in Nigeria has aided industrial development.

1.2 STATEMENT OF THE PROBLEM

The effect of capital market on the development of an economy cannot be over-emphasized. The Nigerian capital market has been inefficient due to its inability to provide sufficient funding to aid industrial growth in Nigeria and the inequitable price mechanism of the Stock Exchange causing the fluctuation in the price of securities and the fortunes of firms listed on the exchange. This inefficiency has made it difficult for a lot of corporations and industries to go to the capital market to raise funds and be enlisted on the stock exchange floor for various reasons which hinders the industrial and most importantly the economic growth of the nation. Hence, among the reasons given for this discrepancy is the low depth of exploitation of the capital market by both users and owners of funds coupled with the global financial crises resulting almost to the verge of collapse of the market and leading to decrease in price of stocks and shares. Unfortunately, even though there exists opportunities in the capital market, only a few Nigerians care to take advantage of the promising goldmine. Therefore, this poses a problem to the researcher and consequently brings about the needed window and desire to conduct this research. Thus, this study among others would review the performance of the capital market in Nigeria, also carry out a trend analysis of the market with a view of making necessary suggestions for its improvement.

1.4 Objectives of the Study

The main objective of the study is to examine the capital market on the performance of Nigeria industrial sector. However, the following specific objectives were raised.

1. Determine the relationship between the manufacturing industry and the performance of the Nigerian Capital Market.
2. Examine the relationship that exists between the mining industry and the performance of the Nigeria capital market.

iii. Investigate the impact of the Nigeria capital market on the performance of the utilities sector.

1.4 Hypotheses of the Study

Based on the research questions and the objectives, the following null hypotheses were formulated

H₀: There is no significant relationship between the performance of the manufacturing industry and the performance of Nigeria Capital Market.

H₁: There is a significant relationship between the performance of the manufacturing industry and the performance of Nigeria Capital Market.

Hypotheses two

H_0: The Nigeria Capital Market has no significant impact on the performance of the utilities sector.

H1: The Nigeria Capital Market has a significant impact on the performance of the utilities sector.

1.5 Justification of the Study

Impact of capital market on industrial sector development in Nigeria is not a strange topic as quite a number of researches have been carried out in relation to this issue. Unfortunately, many of the studies earlier conducted in have not utilised extended period and modern estimation methods as employed in this study. For instance, Udegbunam (2002) in his study has examined the effect of openness, stock market development and industrial growth in Nigeria, utilizing annual time series data covering the period from 1970 to 1997 and employing Ordinary Least squares (OLS) as estimation technique. In another study, Oke (2012) has examined the effect of capital market activities on the development of the Nigerian oil industries, utilizing annual time series data covering the period from 1999 to 2009 under the framework of cointegration technique and error correction mechanism. Meanwhile, Victor, Kenechukwu and Richard (2013) have undertook analysis into the effect of capital market on Nigeria’s industrial sector development, using data from 1980 to 2008 employing descriptive statistic methods. This study contributes to the current debate but differs from the previous studies by using a fairly large period of time as well as using current data in analyzing the impact of capital market on industrial sector development in Nigeria.

1.6 Scope and limitation of the Study

Due to factors such as time, financial and academic constrains of the researcher, this study will not be able to take the full Nigerian industry under an umbrella. Hence, the study will only study sub-sectors of the industrial sector, mining sector and manufacturing sector to be precise for the last 15 years (2001-2015).

1.7 Definition of Terms

Nigerian Capital Market: The Nigerian Stock Exchange (NSE) was established in 1960 as the Lagos Stock Exchange. In 1977, its name was changed from the Lagos Stock Exchange to the Nigerian Stock Exchange. As at March 7, 2017, it has 176 listed companies with a total market capitalization of about N8.5 trillion. All listings are included in the Nigerian Stock Exchange All Shares index. In terms of market capitalization, the Nigerian Stock Exchange is the third largest stock exchange in Africa.

 Industry: Industry is the production of goods or related services within an economy. The major source of revenue of a group or company is the indicator of its relevant industry. When a large group has multiple sources of revenue generation, it is considered to be working in different industries.

Stock Price Index: A stock index or stock market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

 Market Capitalization: This refers to the total market value of the equity in publicity traded entity. It also refers to the value of all listed securities based on their market prices.

1.9 Plan of the Study

The research report of this study is divided into 5 chapters. Chapter one consist of introduction to the study and it is sub-divided into 9 headings which are background of the study, statement of problem, research questions etc. Chapter two is the literature review which comprise of the conceptual, empirical and theoretical framework. Chapter three is the research methodology which mainly concerns itself about the design of the study, the method of data collection, sample size, sampling technique, method of data analysis and the decision rule. The second to the last chapter, chapter four comprise of the research data presentation and analysis and the last chapter, chapter five is the summary, conclusion and recommendation of the research.

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