Effects of Financial Sector Liberalization and Capital Market Development in Nigeria
Chapter One
Objectives of the Study
The general objective of this study was to determine the extent to which financial sector liberalization has led to the development of the capital market in Nigeria. To achieve this general objective, the following specific objectives will be examined.
- To examine the impacts of financial sector liberalization on the development of the capital market in Nigeria.
- To examine the impact of financial sector liberalization on the performance of economic growth
CHAPTER TWO
LITERATURE REVIEW
Conceptual Literature
Financial Liberalization
There is argument amongst researchers and economists as to the relevance of the financial system in economic growth and development. The literature is awash with the views of many influential economists like Robinson (1952), Meier and Seers (1984), Lucas (1988), and Stern (1989) who believed that finance plays an important role in economic growth and development of nations.
Liberalization can simply be said to mean a shift from direct policy and regulatory controls to market driven behaviour to set prices and to allocate resources. Financial liberalization as used here refers to the deliberate and systematic removal of regulatory controls, structures, and operational guidelines that may be considered inhibitive of orderly growth competition and efficient allocation of resources in the financial system (Ojo, 1991). The need for financial liberalization could be traced to the Mckinnon and Shaw’s (1973) argument that financial repression reduces the real rate of growth and the real size of the financial system relative to non-financial magnitudes.
From the layman’s perspective, financial liberalization is the removal or loosening of restrictions imposed by the government on the domestic financial market. This view seems to be narrow in explaining the concept of financial liberalization. Kaminsky and Schmukler (2003) opined that financial liberalization consists of the deregulation of the foreign sector capital account, domestic financial sector, and the stock market sector viewed separately from the domestic financial sector.
Johnston and Sundararajan (1999) viewed financial liberalization as a set of operational reforms and policy measures designed to deregulate and transform the financial system and its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework.
Fry (1995) identified the following five prerequisites for successful financial liberalization:
- Adequate prudential and supervision of commercial banks, implying some minimal levels of accounting and legal infrastructure.
- A reasonable degree of price stability.
- Fiscal discipline taking the form of a sustainable government borrowing requirement that avoids inflationary effects. Profit-maximizing, competitive behaviour by the commercial banks.
- A tax system that does not impose discriminatory explicit or implicit taxes on financial intermediation.
This suggests that financial liberalization mainly depends on the assumption of perfect information and perfect competition (Arestis and Demetriades, 1999).
Johnston and Sundararajan (1999) viewed financial liberalization as a set of operational reforms and policy measures designed to deregulate and transform the financial system and its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework. Bencivenga and Smith (1991) argued that in a well-developed financial system where the securities market is also developed, the ability of the financial system to impart liquidity to long-term instruments stimulates savers to hold their wealth in productive assets (debentures, stocks, preferential stocks etc.) and this contributes to productive investment and growth. Economic growth has been described as sustained increase in per capita national output or net national product over a long period of time. It also implies that the rate of increase in total output must be greater than the rate of population growth (Dwivedi, 2006).
The Capital Market
The Capital market is a complex institution and mechanism through which funds are pooled, and made available to Business, Governments and Individuals on long-term basis for Development purpose. That is, the surplus funds of the community are channelled to the deficit units in need of additional funds for medium or long-term investments, or for the modernization of the production line or to broaden the capital base to enhance the enterprise’s leverage (Onoh, 2002).
The Nigerian capital market could be said to have effectively commenced with the establishment of the Central Bank of Nigeria (CBN) in 1959. The capital market was intended to:
- Provide local opportunities for borrowing and lending for long-term purpose.
- Enable Governments to mobilize long-term capital for the Economic Development of the country.
- Provide a healthy and mutually acceptable environment for participation and cooperation of indigenous and expatriates capital in the joint effort to develop the Nigeria Economy to the mutual benefit of both parties.
- Introduce a code of conduct, check abuses and regulate the activities of the operators of the market.
CHAPTER THREE
RESEARCH METHODOLOGY
Types and Sources of Data
Data and the literature for this study were obtained from secondary sources, the CBN statistical bulletin were instrumental in the collection of statistical information used to carry out the least squares regression.
Method of Estimation
The study adopts an econometric model in determining the effect of financial sector liberalization and capital market development in Nigeria.
The multiple regression model is stated thus; Yi = B0 +B1X1i + B2X2i + B3X3i + u Where; Y is the dependent variable, X1, X2 and X3 are the explanatory variables, u is the stochastic disturbance term, and i the ith observation since the data are time series (Porter and Gujarati, 2009).
Model specification
We present the econometric model of financial sector liberalization and capital market development in Nigeria as:
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
Presentation of Results
From the regression result, Gross domestic product (GDP) was the dependent variable and proxy for economic growth while government stock (GS), bonds (BD), and equities (EQ) were the independent variables. The regression results obtained are presented in the table below.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
summary of the finding
This Research work was carried out to examine the relationship between financial sector liberalization and capital market development in Nigeria. This study focused performance of the capital market with the on-going liberalization exercise. In this Research study, an improvement in financial intermediation was considered a necessary condition for stimulating Investment, raising productive capacity and fostering economic growth. Due to the prevalence of financial market imperfections or failure, some form of Government intervention was needed to facilitate credit supply. However, the Central Bank of Nigeria is still assuming a dominant position, that is, an indication that the monetary authorities are controlling the financial system. In order to ensure balance, the monetary stability and fiscal balance is needed for overall economic development.
Conclusion
It can be adduced that financial liberalization is a prominent feature in both developed and developing nations. The Nigeria capital market contributed greatly to the economic growth of the country. This is done through its role in mobilizing funds from the surplus units to the deficit units in the economy and providing the means for ensuring judicious and efficient use of such funds.
From the empirical result government stocks was the crucial variable in the process of financial liberalization. Equities are necessary for the success of financial liberalization.
The study showed that adoption of financial liberalization reforms has been a very laudable initiative given the extent of financial repression that was prevalent prior to these reforms and the stifling effects of repression on both the financial sector itself and on the economy as a whole. Our analysis revealed that the financial liberalization impacted significantly on the capital market development in Nigeria.
Recommendations
For the Nigeria capital market to be a pivotal force for economic growth and development in Nigeria, the following suggestions or recommendations were put forward.
- Government should embark on policies of increasing government stock since it has significant impact on the economy, it should concentrate efforts in fine-tuning the existing policy measures which will not only compel prudence on the part of major operators in the financial market but also will stimulate saving behaviour of all economic agents.
- There is need to boost the value of transactions in the Nigerian capital market through availability of more investment instruments such as derivatives, convertibles, future, and swaps options in the market.
REFERENCES
- Abu-Bader, S. and Abu-Qarn, S.A. (2005), “Financial Development andEconomic Growth: Time Series Evidence from Egypt”, Discussion Paper No. 05-14, Monaster Centre for Economic Research, Ben-Gurion University of the Negev
- Acaravci, S.K., Ozturk, I., Acaravci, A. (2009), Financial development and economic growth: literature survey and empirical evidence from sub-saharan African countries. South African Journal of Economic and Management Sciences, 12(1), 11-27.
- Adamopoulos, A. (2010). Financial Development and Economic Growth an empirical analysis for Ireland. International Journal of Economic Sciences and Applied Research, 3(1), 75-88.
- Agu, C.C., Orji, A., Eigbiremolen. G. (2014), Financial liberalization, interest rate structure and savings mobilization: the Nigerian experience. International Journal of Current Research, 6(2), 5101-5109.