The Effect of Financial Meltdown on the Performance of the Nigerian Capital Market
Chapter One
OBJECTIVES OF THE STUDY
The main objective of this study is to examine the effect of the financial meltdown on the Nigerian capital market. Other specific objectives include:
- To determine the impact of share prices manipulation on the Nigerian capital market
- To examine the effects of insider trading on investor’s confidence in the Nigerian capital market.
- To determine if there is a significant relationship between the global economic meltdown and the crises in the Nigeria Stock Exchange.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
Sere- Ejembi (2008) said the capital market through the stock market is a channel through which national economies receive foreign capital flows that make their tendency towards the global economy easily visible.Developments in the market thus become a reflection of global financial developments. The level of responsiveness depends on the level of development, exposure and insulation of the domestic market from the international market.The Nigerian capital market has experienced downward trend in share prices. As noted by Iweala (2008: 9) the capital market during this period (March 5 to November 28) has shed some 33% of its values when it attained a peak of N12.9 billion market capitalization. Much of the downturn was attributed to the mass flight by international hedge fund which played a role influencing sentiment in the markets. Foreign investors had fled the markets over concern of irrationality of the Nigerian Stock Exchange, introducing of circuit breaking which was a deliberate policy to stop price from shedding.Initially, the regulatory authorities and experienced financial policy makers in Nigeria gave the assurance that the Nigerian economy is insulated from the effect of the global crisis. However as other developing economies have started filing the impact the effect is being made pronounced on the Nigerian economy and this could be seen according to Aluko- Olokun, (2009), in form of tumbling equity market, falling exchange rates and capital flow decline, while the stock market bearish period deteriorated substantially leading to loss of investor’s confidence. . Total market capitalization which was about N15 trillion in May, 2008 had crashed to N4 trillion: a colossal decline of over 73 per cent. It has been recorded that Nigeria had the worst case in this barometer.Jenrola and Daisi , investigated the implications of Global Financial Crisis (GFC) on the Nigerian Capital Market Performance using the time series data from 2000-2008. Specifically, they examined the extent and magnitude of contribution of current global meltdown on the performance of the Nigerian Stock Exchange as well as the financial system and their multiplier effect on the real sector of the economy. The study employed a simple regression analysis. The Capital market performance is proxies as Market Capitalization(MC)- the dependent variable while the other explanatory variables to measure the global financial shocks includes number of stocks (NOS), value of trade (VOT), All Share Index(AIS) and dummy variable for Global Financial Crisis (DGFC) respectively. The result revealed that the Nigerian Stock exchange downfall is not attributed to global financial crisis but the instability of macroeconomic variables in Nigeria like unfavourable exchange rate, inflationary pressure, problem of insecurity, inadequate infrastructural facilities. Therefore, it was recommended to policy makers that to resuscitate the Nigerian Capital Market, the Government must provide an enabling business environment and devoid of corruption, aiding and abetting among the regulatory institutions and stability of macroeconomic variables to attract foreign portfolios investors.It was also noted in ( Adeyemi, 2009) that the Nigerian capital market has lost about N1.5 trillion in the value of stocks from the beginning of year 2009. The market index which opened the year at 31,450.78 basis point has dropped by about 30 per cent, earning the Nigerian capital market the inevitable title of ‘the worst performing market in the world’.In spite of the notable achievements recorded in the banking sector such as the consolidation of the banks, growth in the credit system which shows that credit to the private sector grew 435% from N1.52 trillion in 2003 to N8.13tn in February 2009 , the global economic crisis recent events are beginning to cast doubts on the state of the Nigerian banking sector especially with effects of the crisis. Statistics showed that since banks constitute over 65% of market capitalization, the consistent decline in the stock market has affected banking stocks more than any other sector. However, the net effect of this has been loss of confidence evidenced by the exit of foreign players from the market. (www. Abuja inquirer, 6th July 2011).According to Akingbola, 2009, noted that the withdrawal of overseas funds from the money market has impacted negatively on lending to the real sectors of the economy and sustainable economic growth and development cannot strive under this circumstance.Until recently, the capital market had enjoyed a 5 year growth that increased market capitalization by 90 per cent; market capitalization had peaked at an all-time high of N12.6 trillion daily trading values for the month of march 2008 average N16 billion; private placements and public offers alike were typically oversubscribed; real estate values were growing; investors, regulators and market operators were all in agreement-investing in the Nigerian capital market yields superior returns. However, the market capitalization and the NSE All-share index declined by over 60 per cent to their current levels of N5 trillion and about 22 000 respectively; average daily trading values have dwindled by over 80 per cent to about N3 billion; very few equity capital-raising exercises have been brought to the market, real estate prices have declined in some vicinities; and a rise in general investor apathy to investing (Adedokun, 2009). Empirical studies have revealed that the US housing bubbles burst was not without warning (Kritayanavaji,2008) which none the less was ignored. Shuttle worth (2008) stressed that during the period of boom, financial institutions, politian and regulators would defy caution or regulation. The Nigerian capital market exposure to foreign investment shook the market and hence the crash. Singel, (2000) hypothesized that opening up to foreign investors will invariably exposed domestic markets to unfavorable external shocks increasing stock price volatility and consequently raising the cost of capital as shareholders demand higher risk premium.Khor (2009) observes two major ways in which the Western crisis is being transmitted to developing countries: the first is finance and the second is through international trade. The transmission through finance is in the form of toxic assets, foreign capital flow, liquidity crunch and foreign domestic investment (FDI). He also noted that export value fell in Japan by 46 percent, Taiwan, 44 percent, the Philippines,40 percent, Singapore,38 percent, South Korea,34 percent and Malaysia, 28 percent.The effects of the economic melt- down can be described as a dynamic system which changes with time and regularly demands updated information. Consequence to this problem, this research is intended to provide an up-to-date account of the economic melt- down effect on Nigerian Capital Market performance. Even though there are many comments and write-ups on global economic melt- down, this research will give more comprehensive details of its effect on The Nigerian Capital Market investment and the impact on the investors both local and foreign which is the first step in addressing the problem as it is generally known that design of solution to a problem is made easier if the problem is well understood.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine the effect of financial meltdown on the performance of the Nigerian capital market using Selected CBN in Nasarawa state as case study form the population of the study.
SAMPLE SIZE DETERMINATION
A study sample is simply a systematic selected part of a population that infers its result on the population. In essence, it is that part of a whole that represents the whole and its members share characteristics in like similitude (Udoyen, 2019). In this study, the researcher adopted the convenient sampling method to determine the sample size.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the effect of financial meltdown on the performance of the Nigerian capital market
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of financial meltdown on the performance of the Nigerian capital market
Summary
This study was on the effect of financial meltdown on the performance of the Nigerian capital market. three objectives were raised which included: To determine the impact of share prices manipulation on the Nigerian capital market, to examine the effects of insider trading on investor’s confidence in the Nigerian capital market and to determine if there is a significant relationship between the global economic meltdown and the crises in the Nigeria Stock Exchange. The study adopted a survey research design and conveniently enrolled 80 participants in the study. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN staffs in Nasarawa state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
First, Nigeria is a mono-economy with crude oil as a major source of earnings. The global financial crisis adversely affected mostly industrialized and emerging economies with diverse production base whose capital markets were globally integrated. Another plausible reason for this could be the strategic decisions taken by the Central Bank of Nigeria which includes the injection of liquidity into the capital market by the Central Bank of Nigeria (CBN) during the early period of the crisis.
Recommendation
The findings of this study should not be a cause for celebration for the relevant authorities in Nigeria; rather, it constitutes a source for worry for a country like Nigeria. This is because there is a potential danger of relying on only one major source of foreign exchange for a country. In short, the Nigerian budget is usually tied to a particular price of crude oil and when the prices of crude fell in the global market due to the economic meltdown, the budget was systematically reduced. This trend, if allowed to persist, will have a significant adverse effect on the entire economy. This therefore calls for the need of the Federal Government to be more committed to infrastructural development especially in the Manufacturing and Power sectors respectively as this will help to cushion the effect of shocks or breakdowns in one sector on the entire economy. The recent reforms in the Nigerian banking sector could be seen as “a stitch in time”. Probably, the current trends in the Nigerian capital markets simply could be “a tip of the iceberg” if not for the reforms which came at the time it was needed most in the country. Thus, much still need to be done. The recent losses recorded by the nationalized banks under the Sanusi regime (present CBN Governor) is an indication that all is yet to be well with the banking sector. We must not forget that most of the activities of the Nigerian Stock Exchange are directly and indirectly dominated by trends in the Nigerian banking sector. At the international level, there is need for a reform in the financial structure of integrated markets such that lapses in any single market can easily be checkmated and if possible corrected to avoid the kind of chain reaction that was recently experienced resulting from the happenings in the US sub prime mortgage market. Efforts must be made by the CBN and other regulatory bodies to ensure that reforms are in place to see that since our stock market is dominated by the activities of banks in Nigeria, the operations of Nigerian banks must not depend heavily on foreign borrowing. This will to some extent checkmate the effect of credit crunch in advanced countries on the Nigerian economy
References
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