CAPITAL MARKET IMPERFECTIONS AND COMMUNITY
ECONOMIC DEVELOPMENT IN NIGERIA
Ifuero Osad Osamwonyi Ph.D
Department of Business Administration
University of Benin.
Benin City.
JEL Classification: F45
Keywords: Capital market, imperfections, economic development.
A paper presented at the Academy of Management Nigeria on the 23rd of November,
2005 at Abuja.
1
ABSTRACT
The aspect of financial management of interest to this paper is financing and investing
activities of the capital markets. The thrust of the theory of competitive capital markets is
the efficient allocation of resources to production that can generate the highest return.
Capital for community economic development especially for high performing projects
and strong communities should be easily sourced if allocative efficiency exits. The paper
critically profiles the imperfections and weak performance using various indicators in the
capital markets, as the explanation of the deficit supply plaguing capital requirements for
community economic development in Nigeria. Economic development finance
institutions and interventions must address market imperfections in the design and
implementation of community development finance programmes to be effective and to
expand the supply of capital as at when required. Policy recommendations are therefore
made to ensure the required intervention.
1. INTRODUCTION
Financial management consists of financing, investing, dividend and liquidity functions.
The interest of this paper is the sourcing of funds [capital structure decisions] and
investing [long-term utilization of funds]. The thrust of the theory of competitive markets
is the efficient allocation of resources to production that can generate the highest return,
this is the true cost of the resources. In allocating capital, preference will be for
investments offering the highest returns. For the capital market, various forms of
efficiency are important: technical, information, allocative and cost efficacy. Important
here is allocative efficiency. If capital markets were allocative efficient therefore, capital
for community economic development especially for high performing projects and strong
communities will easily be sourced. There will be no need for any form of intervention to
ensure access or to bridge the demand and supply gap [deficit supply]. However, it is
understood that financial capital markets [the interest of this paper] exhibit allocative
inefficiencies in developing countries such as Nigeria, thus the urgent need for
interventions whether at project, programme or policy level to ensure effective and
adequate access to or the supply of the required capital for community economic
development.
This paper is not concerned with capital structure decisions, that is, the substitutability of
forms of capital as such decisions do not generate additional economic development in a
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given country or community. Central here is the urgent need to expend the supply of
capital, that would not otherwise be available. Economic development finance institutions
and interventions must address market imperfections in the design and implementation of
community development finance programmes to be effective and to expand the supply of
capital as at when required. The objectives of this paper are to establish the relationship
between capital market imperfections and community economic development, critically
evaluate the performance of the Nigerian capital with a view to establishing the
imperfections, establish the implications for community development, and provide policy
recommendations that can address the demand-supply gap.
2. THE FINANCIAL MARKET
In every country including Nigeria, there exist a financial system that is responsible for
regulating the financial environment of the economy, determining the types and amounts
of funds to be issued, cost of funds and the uses to which these funds are to be put. The
financial system is made up of two majors markets: the money market and the capital
market. The money market is the market for short-term funds and securities including
treasury bills, one-year treasury certificates, Central Bank notes, negotiable certificates,
commercial papers, commercial and merchant bank savings and other funds of less than
one year duration. The money market is not considered here because of its short tenor
that provides more of liquidity than investments.
The capital market on the other hand is the market for longer-term funds and securities
that tenor exceeds beyond one year. These include long-term loans, mortgage bonds
preference stocks, ordinary shares, Federal Government bonds (also called eligible
development stocks) and industrial loans and debentures. The capital market can be
defined as the section of the financial system that is responsible for channeling efficiently
funds from the surplus to the deficit economic units on a long-term basis. This market is
the source from which companies and industries obtain capital for expansion and
modernization and also from which government borrows on a long-term basis for
development purposes.
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We can also look at the capital market as a network of institutions and individuals made
up of regulators and operators who together bring suppliers and users of capital and
facilitate the smooth operation of the market. These institutions that form the capital
market network includes investment banks, stockbrokers, issuing houses, underwriters,
venture capital companies, professional consultants, fund managers, development finance
companies, collective investments firms, and insurance companies. The statutory
regulator is the Securities and Exchange Commission while the self-regulatory agency is
the stock exchange. In Nigeria, there is the Nigerian Stock Exchange and the Abuja
Commodity Exchange.
A stock exchange a place where securities (bonds, stocks and derivatives) are traded and
where one can raise long-term capital in large amounts. It seeks the efficient allocation of
available capital funds to the diverse uses in the economy and through its extreme
sensitive pricing mechanism ensures the available capital resources are allocated to firms
with competitive returns. It also is a barometer for the condition of the economy.
2. SOME REVIEW OF LITERATURE & THEORETICAL DEVELOPMENT
Perfect Market and Imperfections
The theory of perfect competition to be able to ensure efficient allocation of capital to
investments assumes the existence of many independent buyers and sellers, perfect
information access and insignificant information costs, insignificant transaction costs,
that externalities do not exist as all cost and benefits are reflected in prices, participants
are rational benefit maximizers, and prices reflect true resource costs. Participants are
price takers because they face a demand curve that approximates perfectly elastic
demand.
The failure of these characterizations suggest the following possible imperfections:
There is a lack of competition such as monopoly or oligopoly situations. For the capital
markets in developing countries such as Nigeria, the lack of depth and width dampens
competition. Beyond instruments traded, there is also the low per capita broker ratio in
Nigeria. The formal market itself consists of various trading floors of the Nigerian Stock
4
exchange. The lack of information or high access costs. There is information asymmetry
and information access costs are significant [Osamwonyi, 2003], thus generating
information traders. Transaction costs are significant and the existence of externalities.
Perfectly competitive markets are central to most finance theories such as capital
structure theories and portfolio optimization, equilibrium in asset markets and asset
pricing itself. They are the concern of Efficient Market Hypothesis [EMH], with the
response of the fundamentalist and technician that markets are both information and
operational inefficient hence it is possible to achieve excess return. The presence of
derivatives assumes inefficiencies and shocks. EMH provided such an analytical
framework for understanding asset-pricing behaviour, that it was so established that
Jensen (1978) opined that there was `no other proposition in economics which had more
solid empirical evidence supporting it.’ An efficient market therefore is the ability of the
market to fully impound and process all relevant information; this depends to a large
extent on the competence and the versatility of the market operators and the flexibility of
the market impounding mechanism. This implies that no excess return can be earned as
all participants have fully processed and impounded such relevant information; therefore
current prices only change to the extent that new information has arrived. Excess returns
(if any) should not be statistically significant from zero (Fox and Opong, 1999).
Adelegan, (2003), in attempting to analyze the workings of an efficient capital market
wrote that “the basic case for the theory is that the actions of the many competing
analysts, who make up the market, ensure that it is an efficient processor of information,
and that the share price incorporates instantaneously and in an unbiased manner all
available information.” Thus, agents process information efficiently, and immediately
incorporate this information into stock prices. If current and past information is
immediately incorporated into current process then only new information or `news’
should cause changes in price. Since news is by definition is unforecastable, then price
changes (or returns) should be unforecastable. This independence of forecast errors from
previous information is known as the orthogonality property or that asset price
movements over short horizons are close to a random walk.
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Efficiency in capital markets can be categorized as follows: Allocative efficiency refers to when prices are determined in a way that equates the
marginal rates of return (adjusted for risk) for all producers and savers, that is, resource
savings are optimally allocated to productive investments in a way that benefits everyone
(Adelegan, 2003). Transactional or operational efficiency is concerned with the costs and
risks of exchange of resources and assets in the marketplace. In perfect markets,
transactions costs are assumed to be zero. Information efficiency relates market prices to
information. For information efficiency, Fama (1976) used the terms efficient capital
markets while Jensens and Smith (1985) prefers efficient market theory. There are three
types: weak, semi-strong and strong versions; there have been studies confirming or
rejecting the three versions. In Nigeria, evidences have been found of inefficient capital
market [see Osamwonyi and Anikamadu for example].
Relationship Between the Financial markets and Economic Development
Economic development is an increase of the national income or total volume of
production of goods and services of a country accompanied by improvements in the total
standard of living of the people. It is comprehensively defined as a multi-dimensional
process of a total upward structural shift of the social system in terms of a capacity and
capability to produce, supply, distribute and consume goods and services required by a
growing society with changing taste such that more efficient, higher and more equitable
standard of living is attained and absolute poverty eliminated.
It involves positive
changes in the institutional, attitudinal, technological, economic and demographical
elements of the society. These elements involve production, technological innovation,
education, consumption, real per capita income, equitable distribution of gains of society,
external trade, social, political and adaptive ideological orientation [see Osamwonyi,
1981]. Indicators are various national income measures, per capita income, capital
formation, access to basic needs, and access to credits [see Osamwonyi, 1981].
Economists have long debated the nature and the empirical importance of the relationship
between financial systems and economic growth; historically economists have focused on
banks. Begehot (1873) and Hicks (1969) argued that financial system played a crucial
6
role in igniting industrialization in England by facilitating the mobilizing of capital for
viable projects. However, Robinson (1952) declares that “where enterprise leads finance
follows”. Accordingly economic development creates demands for particular types of
financial arrangement and financial system automatically responds to these demands.
Levine (1996) explored functional approach to explain the role of financial system in
economics development by examining the two channels of capital accumulation and
technology innovation. Levine and Zervos (1998) have been able to show that the level of
financial intermediation is a good predictor of economic growth. Anyanwu (1988) found
that Nigeria stock market is positively and strongly correlated with long run economic
development. Money Market Association of Nigeria in its course on understanding
financial markets (May 1999) asserted that Nigeria is a good example of the negative
consequences of worsening financial system on the economic development of a nation.
Thus the development of a well functioning capital market and money market appears to
play a crucial role in promoting economic development. The capital market may affect
economic development through the mobilization of long-term resources, the provision of
liquidity, risk diversification, privatization, securitization or risk transfers and
determination of the cost of capital for project valuation. market is an exchange system
set up to deal in short-term credit instrument of high quality. Their dealing in this high
quality instrument facilitates the execution of some desirable and profitable project
bearing direct relationship with economic development.
The World Bank in 1990 initiated a study to identify constraints to private sector
development and growth in selected countries of sub-Saharan Africa. The study
concludes that the most severe constraint on private sector development is the scarcity of
credit allocation to the private sector (World Bank 1990). After the Africa Capital Market
Forum in Accra, Ghana in June 1996, the Conference of Council of Africa Ministers of
Finance in 1997 passed a unanimous declaration on the need for speedy development of
capital markets and privatization of state owned enterprises through capital markets.
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Institutional Structure of the Capital Market
It has been argued that to understand the prevalence of capital market imperfections and
their linkage to capital supply gap, the institutional structure of the capital markets must
be explained. Capital markets consist of institutions, channels and instruments through
which savings are accumulated and channeled to household, businesses and governments
and through which the suppliers of capital receive return. They serve to channel longterm funds from suppliers of capital to the demanders.
Capital markets can be classified according to the nature of the securities such as into
primary [where new securities are sold] and secondary [where existing securities are
traded] or as primary securities and derivatives. The classification that serves the interest
of this article is in terms of institutional structure: public and private [formal and
informal].
Public capital markets refer to formal markets which are available to all publics, with
information about the securities available on demand, regulated strictly by Securities &
Exchange Commission [SEC] and the Nigerian Stock Exchange [NSE] for integrity and
confidence. They consist of stock market [equities] and bond market [government and
corporate bonds] and various intermediaries and facilitators. The largest buyers are
institutions investors such as insurance and mutual funds such as pension funds, and
strong individual investors while the major sellers are individuals and corporations for
equity market, large corporations and various levels of government for debt markets.
These markets are characterized by well standardized instruments, effective access to
liquidity and investment information. It is not meant for small to medium firms to raise
capital as costs are relatively low when funds are sourced in huge tranches.
Unlike the public market, the private markets [both formal and informal] are not available
to the general public. It is often done by private placement directly negotiated and
contracted by the two parties or they use institutional intermediary that manages
investments and risks for depositors or investors. The major intermediaries are
commercial and merchant banks, thrift institutions, finance companies, insurance
8
companies, mutual funds, pension funds, and venture capital funds. Strong linkages
between private and public markets are useful to incremental capital generation, reducing
interest costs, improving market access to new investors, and spreading the risks.
1. NIGERIA CAPITAL MARKET [PERFORMANCE AND
IMPERFECTIONS] AND ECONOMIC DEVELOPEMENT
Historical Evolution of the Nigerian Capital Market.
The origins of the Nigerian capital market dates back to the colonial times when the
British government ruling in Nigeria at the time sought funds for running the local
administration. This it did in 1946 when it promulgated the 1946 10-year plan local loan
ordinance for the floatation of the first N300, 000 3% Government stock 1956/61 with its
management vested on the accountant general. In 1951, the colonial administration also
enacted the law for the creation of loan funds for financing public utilities.
In 1957, the Central Bank and other securities act were enacted. As a follow up to these
laws, the colonial administration issued the first N2 million Federation of Nigeria
Development loan stock in May 1959. On September 15, 1960 the Lagos Stock Exchange
was incorporated as a private limited liability company limited by Guarantee under the
provisions of the Lagos Stock Exchange Act of 1960. In 1961, the National provident
fund was established. This enabling act required the fund to invest its surplus funds only
in securities in Nigeria authorized by the trustees investment act of 1957 and 1962 and
restricted to securities created or issued by or on behalf of the Government of the
Federation, but in 1993, the Nigeria Social insurance trust fund (NSITF) was also created
by Decree in 1993 to expand the scope of activities of the National Provident fund and
repeal the National provident fund act. In 1962, the exchange control act was enacted. In
1978, the Securities and Exchange Commission decree was promulgated to replace the
capital issues commission and expand the scope of its activities following the
recommendations of the financial systems review committee (Okigbo committee) of
1976. In 1977, the name of the Lagos Stock exchange was changed to the Nigerian stock
exchange by the indigenization decree of 1977 following the recommendations of the
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industrial enterprises panel (Adeosun panel) of 1975 that branch exchanges should be
established.
In 1978, the first government revenue bond was floated by the defunct Bendel State of
Nigeria. The N20 million 7% Bendel State loan stock 1988 was floated to finance the
state housing development programme. In 1987, the Nigeria Enterprises promotion
Decree 34 (Issue of non voting equity shares) was promulgated permitting public
companies quoted on the Nigeria stock exchange to issue through the Exchange, nonvoting paid-up shares for the subscription of persons whether citizens of Nigeria or not
and whether or not resident in Nigeria. In 1988, the Privatization and Commercialization
Decree 25 was promulgated. In 1990, the Companies and Allied Matters Act (CAMA
1990) was enacted to regulate the incorporation operations and activities of all bodies
corporate in Nigeria specifically, sections 541-623 cover “dealing in the securities of
companies and vest its administration on the Corporate Affairs Commission. In 1991, the
inter-ministerial committee on the Nigeria capital market recommended the
discontinuation of official pricing of securities as well as the establishment of more Stock
Exchange. The branch in Lagos of the NSE was opened in 1961 after the enactment of
the Lagos Stock Exchange Act, 1961; Kaduna, 1978; Port Harcourt, 1980; Kano, 1989;
Onitsha, 1990, Ibadan and Benin 2004. An office has also been opened in Abuja, the
capital of Nigeria.
In 1992, the first municipal bond was floated in the capital market by the Lagos Island
Local government. In 1993, the Federal government, through its budget speech, formally
deregulated the capital market, thus ending the official pricing timing and allotment of
security issues, passing them to the issuing houses to perform. In 1995, the exchange
Control act of 1962 and the Nigerian Enterprises Promotion decree of 1989 was
abrogated to promote greater foreign investment in Nigeria and replaced by Investment
Promotion Decree 1995. In 1999, the Investments & Securities took over SEC. These
were replaced by the Nigerian Investment Promotion decree of 1995. On May 2, 2001,
the Abuja Stock Exchange now Abuja Commodity Exchange.
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Community Economic Development:
Community economic development refers to interventions such as projects, programmes
and policies that are designed for and implemented for specific communities as identified
population at need. It is a package that addresses the issues of structural changes and
evolving needs of an identified geographical area. The affordabilities and recovery
potentials of the areas must be assessable.
Indicators Of Capital Market Performance
[a]The Trading System on the Nigerian Stock Exchange
The trading activities on the Nigerian stock exchange are automated and orders are
executed via computer linked to a central server. In 1992, as part of its efforts to be more
efficient and investor friendly, the exchange incorporated a subsidiary called the central
securities and clearing system (CSCS) Ltd. to manage the automated clearing and
settlement system for the market.
The CSCS which also offer custodial services
commenced operations on April 14, 1997 and since then has been settling and clearing
trades on a T + 5 settlement cycle. T + 5 is the minimum transaction settlement time
recommended for all emerging market by the Federation of International Stock Exchange
(FIB) of which the Nigeria stock exchange is member. On March 2000, the transaction
cycle was further reduced to T + 3 settlement cycle. This has to be improved to T + 1 as
the case with Israel if we are to be competitive in the international capital markets.
The improved delivery and settlement process has reflected positively on the liquidity of
the secondary market as well as placed the Nigerian stock market on the same pedestal as
come of the leading international stock exchanges in the world. Initially, trading was by
the call over system which was replaced in April, 1999 with the automated trading
system (ATS), with bids and offers now matched by stockbrokers on the trading floors of
the exchange through a network of computers. This occurs very business day from
11.00am till bids and offers have been executed (usually around 1.30pm), within the
working days of the exchange.
Prices of new issues are determined by issuing
houses/stockbrokers after due approval of the Securities and Exchange Commission
(SEC), but on the secondary market, prices are made by stockbrokers only. The quoted
11
prices on the market, along with All-share index, are published daily in the NSE daily
official list, the NSE’s CAPNET (an internet facility), newspapers, and on the stock
market page of the Reuters electronic contributor system.
[b] Internationalization
Technology has erased national boundaries, improving access according to OkerekeOnyiuke [2004] and integrating markets and accelerating growth in cross-border listing.
For the Nigerian capital market, there is virtually no listing evidence of any MOU. UBA
is the only Nigerian firm that has been able to execute a level 1 sponsored Global
Depository Receipt (GDR) programme. Thus, the level of competition driven efficiency
is lacking and community access to capital for economic development severely limited.
This is critical when we compare the burden of community development need and the
impact of inflation relative to capital availability. Infrastructural development and asset
securitization from cross-border participation will rapidly enhance access of the average
Nigerian to basic needs if realized. Following the deregulation of the capital market in
1993, the Federal Government in 1995 internationalized the capital market with the
abolition of laws that constrained foreign participation in the Nigerian capital market.
Due to the abrogation of the Exchange Control Act, 1962 and the Nigerian Enterprise
Promotion Act, 1989, foreigners can now participate in the Nigerian market both as
operators and investors. also there are no limits anymore to the percentage of foreign
holdings in any company registered in Nigeria. In November 1996, the exchange
launched its Internet system facilitating communication among local and international
participants in the market.
The stock exchanges of Paris (Paris Bourse), Amsterdam, and Brussels merged to form
Euronext in year 2000, accessible from all of Europe’s financial centers. The numerous
African stock exchanges should merge especially ECOWAS for enlarge capital for
community development; the current fragmentation cannot fund the expected requirements.
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[c] Fiscal Discipline
Major advantages that accrue to state and local governments that patronize the capital
market are:
 More capital projects can be completed, as more resources are released for
government capital expenditure if capital markets funds are incremental not
replacing.
 There will fiscal discipline in use of public funds, as financial reports must be
produced regularly on projects funded by the capital market.
 Raising funds from the capital market for projects that are subject to substantial
cost recovery releases government subventions for social projects.
 The tendency to spend money on ‘white elephant projects’ will be curtailed as
only economically viable projects could be financed from the capital market.
However, these benefits can only accrue if the capital market takes on more stringent
monitoring responsibility via the Trustees and issuing houses instead of depending on
irrevocable authority to the account-general to deduct from source in case of default.
The following state and local government have utilized the capital market to
finance their development projects.
1.
The defunct Bendel State government raised N20 million for its housing
project
2.
Ogun State government raised N30 million for its water project
3.
The defunct Oyo state government raised N30million for public market
development
4.
In 1990, Lagos state government raised N90 million for its New town
development (Lekki peninsula)
5.
Former Kaduna State government raised N60 billion for setting up a ginger
processing plant
6.
In 1996, Lagos Island local government council because the first municipal
council in Nigeria to use the facilities of the Stock Market when it raised
N100 million to complete the Sura Government in Lagos
7.
Early in the year 2000, the Edo state government successfully raised N500
million from the capital market to develop a housing project in Benin.
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8.
First Yobe State Floating bond 2002/2005.
9.
Cross Rivers has a Tourism Bond while FMBN has a FGN guaranteed
1000billion mortgage bond.
TABLE 1: SOME MARKET INDICATORS [1999-2003]
NSE ALL-SHARE INDEX
Month
Jan
Dec
1999
2000
2001
2002
2003
5,494.77
5,752.90
9,542.39
11,031.95
13,210.11
5,266.43
8,111.01
11,104.50
12,137.72
19,942.84
OPERATIONAL HIGHLIGHTS (1999 – 2003)
2003
2002
2001
2000
1999
Mkt Cap.
N1.356t
N763.9b
N662.6b
N478.6b
N299.9b
Shares Traded
N13.30b
6.6b
5.9b
5.0b
3.9b
Value Traded (N)
120.70b
60.3b
57.6b
28.2b
14.1b
53.2m
26.4m
24.1m
19.9m
15.6m
474.79m
237.2m
230.0m
112.2m
55.7m
Daily Av. Vol.
Daily Av. Value (N)
Listed Securities
265
258
261
260
269
20,128.94
12,137.72
10,963.11
8111.01
5266.43
No. of S’broking Firms
240
226
226
187
226
No. of Listed Companies
200
195
194
195
196
The All-Share Index
(As at Year-End)
Source: NSE, (2004) Factbook
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[d]
Volume Of Business On The Nigerian Stock Exchange
The Nigerian Stock exchange as at December 2001 listed a total number of 261
securities out of which 194 were equities, 56 industrial loans and preference shares and
11 gilt-edged securities. Of this total, about 30 percent represents government stocks in
value. The daily average volume grew from 15.6million in 1999 to 53.2 million in 2003,
representing 241% growth in just five years- an annual average of 48.2% [see table 1].
The growth here cannot compare to the nation’s development need, for example housing
requirement using stress approach have been estimated to be well over annual capital
market growth.
TABLE 2: GROWTH IN THE NUMBER OF LISTED SECURITIES (1994 – 2003)
YEAR
GOVT
INDUSTRIAL
STOCKS
EQUITIES
LOANS
(INCLUDING SSM)
TOTAL
1994
35
64
177
276
1995
28
67
181
276
1996
24
69
183
276
1997
22
60
182
264
1998
19
59
186
264
1999
15
58
196
268
2000
12
53
195
260
2001
11
56
194
261
2002
10
53
195
258
2003
14
51
199
264
Source: NSE, (2004) Factbook
[e].
Amount of New Issues
The total amount of new issues of securities raised in a capital market is a major
indicator of how popular the market is as a source of growth funds. This actually
depends on the degree of investor’s confidence and the comparative cost of raising
similar funds from alternative sources in the financial system. The level of interest rate
15
and tax /fiscal policies of government greatly influence the level of activities of the new
issues market, when interest rates and taxes are increased, investors seek their income in
fixed income securities thereby dampening activities in the equities market, while when
interest rates drops and tax policies are favourable, interest in equities is revived and the
number of new issues also increases thereby revitalizing activity in the market. New
issues averaged only N3.71 billion 1980 and 1999.
[f] Demutualization of exchanges
The trend for exchanges to convert from not-for-profit member-owned organization into
for-profit shareholder-owned organizations is becoming popular. This process is called
“demutualization”. The implication of this is that efficiency and capacities of the capital
market to meet development needs will be enhanced, as more capital inflows will be
generated. The advantages include raising pool capital for modernization, separation of
trading privileges from equity, and new governance due to profit motive.
[g].
Market Capitalization
This is the total value of all equity securities listed on a stock exchange. It is a function
of the prevailing market price of quoted equities and the size of their issued and paid up
capital. Market capitalization is the most important measure for assessing the size of a
capital market. The Nigerian market has experienced an equity capitalization growth
from N265.5m to over N14.03bn between 1990 and 1999 an increase of 5000%, within
ten years. The total market capitalization as at December 2001 stood at N653.3 billion.
There are over two million individual investors and about 400 institutional stockholders
in the market. thus making it a very small market compared to other emerging markets in
Africa such as South Africa with US$ 262,478 million as against Nigeria’s US$3,941.67
million. It has since from 2000 increased to over N2.01tr in 2005, an unprecedented over
14,000% increase in just five years.
[h].
Value of Transactions
This shows the liquidity or illiquidity of the Stock Exchange. Traded value is the
quantity of the securities traded multiplied by their prevailing market prices. As at 1999,
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value of transaction stood at N55.7 million and by 2003 was N474.79m. Value of
N474.79million cannot provide the backlog of any of the basic need. If we consider
regional requirements such as South-South or Eastern States for roads, a complete
financing using asset securitization cannot be meet by domestic market.
[i].
The Number of Listed Companies
This is the number of equity listings on a stock exchange and determines also the
popularity and size of a stock market Nigeria had at the 2001 194 equity listings as
compared to South Africa with 668 and Egypt with 1,033. In table 2, total securities
increased from 276 with 177 equities, 64 corporate loans and 35 government stocks to
264, 199, 51 and 14 respectively in 2003. Recapitalization of banks and their bid for intial
public offrs has affected the banking sector significantly.
[j].
The Stock Market Index
This is an average of the prices or equities and the number of securities. It is an
important measure of stock market performance it is apparent that the stock exchange
general index has been raising over the years, averaging 33.33% growth rate between
1984 and 2000 indicating improvement in activity in the market. As at December 2001
the Nigerian Stock Exchange all share index stood at 12440.65. Indeed, it moved from
5,266.43 in December 1999 to 19,932.84 in 2003. The Nigerian stock market index, for
example, showed an average gain of 26.4 percent through the ten years prior to 1999, for
Zimbabwe, the average yearly return was 16.8 percent during this period, while the more
mature South African stock market yielded a more modest return of 12.3 percent.
[k] The failure of these characterizations suggest the following possible
imperfections:
There is a lack of competition in the capital market creating inefficiencies. The lack of
depth and width in terms of value and volume of transaction in the capital market
dampens competition. The market is thin in terms of instruments traded, there is also the
low per capita broker ratio in Nigeria. The thinness can be seen in the various
oversubscribed IPOs of banks in the last two years. The formal market itself consists of
17
various trading floors of the Nigerian Stock exchange. The lack of information or high
access costs. There is information asymmetry and information access costs are significant
[Osamwonyi, 2003], thus generating information traders. Transaction costs are significant
and as well as the existence of externalities. Processing fees total 1.25% of market value
for NSE alone effective 1st July 1999. Listing fee for share capital of N14billion is
N1,350,000. For SEC, offer for sale issue is registered for 1% for the first half billion
Naira, the second-tier registration for local firms is at a flat rate of 0.50% and venture
capital N50,000 for the first year. The various other institutions also have their fees. This
is one of the major problems of providing access for the mortgage market in the capital
market through Mortgage-backed Securities. Mortgage loans given the average income of
the Nigerian family and his affordability given the context of per capita loan demand
cannot afford the prevailing cost profile in the capital market without government
intervention.
4. THE LINK BETWEEN CAPITAL MARKET DEVELOPMENTS
AND ECONOMIC PERFORMANCE
Using MICROFIT 4.0, data for the Nigerian Stock Exchange for 1992 to 2002,
the three models below where fitted to provide some econometric evidence for capital
market and economic development.
GDP = βo + βi MKTC+ β2 VOLTS + β3 VAL + β4ALLS + Ui [1]
GDPIN = βo + βi MKTC + β2VOLTS + β3VAL +β4ALLS + Ui [2]
GFCC = βo + βi MKTC + β2 VOLTS +β3VAL + β4ALLS + Ui [3]
Where GDP
=
Gross domestic product as dependent variable in model 1
GDPIN
=
Per capita income as dependent variable in model 2
GFCC
=
Goss fixed capital formation as independent variable in Model 3 .
The explanatory variables [capital market variables] for each of the model are
MKTC =
Market Capitalization of the NSE
VOLTS
=
VALS =
Value of Transactions on the NSE
ALLS
=
Volume of Transactions on the NSE
The NSE All Share Index.
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Note: - The first three variables proxy economic development while the others represent
the capital market.
The first set of equations here is the relationship between Gross Domestic Product at
current cost (GDPC) and Capital Market variables. Two of the capital market variables;
volume of transaction (VOLT) and value of transaction (VAL) are negatively related to
Gross Domestic Product at current cost (GDPC). The co-efficient values of VOLT and
VAL are –0.5890 and –0.9057 respectively. They exhibit some degree of negativity.
However, market capitalization (MKTC) and All share index (ALLS) are positively
related to the GDPC with values of 2405.1 and 330.0135 respectively. The t-test showed
that only All shares index has a value of 3.88 and thus passes at 5 percent level of
significance. The implication of this is that capital market is important in determining of
the Gross Domestic Product currently. This is important if we realize that the other
variables are subsumed in the All share index. The adjusted coefficient of determination
(R2), which is 0.97 is good. The F-statistic has a value of 142.6, significant at 1 percent.
The second model relates per capita income (GDPIN) with capital market variables. Only
the All shares index (ALLS) is negatively related to GDPIN, the others variables MKTC,
VOLT and VAL are positively related. The t-test shows that MKTC and ALLS passed at
the 1% level of significance with values of 5.56 and -4.3 respectively. The adjusted R2 is
0.75.
The third model relates GFCC to the capital market variables. The Volume of
Transactions (VOLT) and Value of Transactions (VAL) are negatively related. Using the
t-test, Market Capitalization (MKTC) and All share index (ALLS) are important variables
in determination of GFCC during the period under study. The t-values for MKTC are
2.99 and the t-value for ALLS is 3.17, significant at 5% level. The adjusted R2 is 98
percent and the F-statistic is good with 177.5 passing at the 5% level. This suggests that
volume of transaction and ALL share index are important determinants in the formation
of GFCC.
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5. IMPLICATIONS OF CAPITAL MARKETS IMPERFECTIONS FOR
COMMUNITY DEVELOPEMENT IN NIGERIA
The implications of the public markets to community development in Nigeria include:
The high competitive framework of perfect market does not exist in our public capital
markets; thus, cost will continue to be high, creativity will remain weak in product
development, and informal cartels will ensure monopolistic returns.
Relative to the private markets, the public markets generates readily available
information on quoted firms but information asymmetry remains with discrimination
against community development projects. The prevailing high transactions costs relative
to the affordabilities of community economic development will remain limiting not only
the incremental funds availability but also access for the majority. Externalities such as
insider trading and information asymmetry, fiscal irresponsibility on the part of public
sector borrowing and utilization can stifle capital market funding for community
economic development. It is also true that cyclical factors and “herd mentalities” or
simple emotion can drive capital to short-term commerce with little or no development
effect.
The implications of the private markets to community development in Nigeria include:
Given that the economy is driven by informal activities, the level of competition in
supply [which depends on the number and type of private institutions serving the
community] is high. The information costs are borne by the supplier of capital rather than
by the firm securing capital.
The private capital markets exhibit lower transaction cost and are therefore mote
employed in Nigeria. The information asymmetry is reflected in the fragmented markets
with some section exhibiting inefficient cost profiles and discriminatory allocation. In the
formal private capital markets, regulatory influence is strong on capital supply, especially
for depository institutions with implication for in risk aversion. Cyclical factors and “herd
mentalities” also play significant role here in the supply of capital.
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The implications of the identified capital market structure and imperfections for
community economic development are two fold:
[a] The private capital markets and intermediaries are relatively the most important
capital sources for community economic development in Nigeria because of the
spatial spread and informal access. The public capital markets have less spread and
less accessible because of the formal framework and structural requirements. There is
the need therefore to profile the factors shaping private financial institutions and how
these factors influence the supply the capital for community development needs. The
major influences are the market structure and regulatory policies.
[b] Many capital supply gaps result due to the prevailing market imperfections and
they include:

The lack of access to credits and loans by small and medium scale enterprises;

The heavy supply gap in institutional equity capital for most small businesses;

The prevailing short-term nature of the financial markets limiting the availability
of long-term debt for investments and development;

There is low level lending or investment in certain areas of the country
particularly the rural areas, and politically disadvantaged areas such as the NigerDelta; and

The absence of loans and equities for venture financing and research.
Thus it is clear that the prevailing capital market imperfections are detrimental to
community economic development.
6. POLICY RECOMMENDATIONS AND CONCLUSIONS
This study identified the lack of long-term investment capital as a major constraint
community economic development and therefore poverty alleviation in Nigeria. This
problem has been traced to imperfections in the capital markets and inadequate
performance. Interventions are required in terms of policies to expand private sector
allocation of capital [incremental growth], i.e. change the behaviour of existing private
institutions. There is the need to establishing new public or community-based finance
institutions and self-regulatory organizations at the community level. Specific
21
interventions are required which must be coloured to reflect local/regional capital market
conditions and the resulting capital market failures and supply gaps that need to be
addressed. The relevant key issues, the structure appropriate for the relevant community
credit and economic development needs, and supportive mechanism must be identified
and internalized. Specific recommendations are:
a) Policies are required to infuse flexibility in the response capacity of the capital
markets.
b) Creation of new and flexible long-term financial products through securitization
to increase the supply of securities such as mortgage-backed securities to finance
community economic development and projects.
c) Continue deregulation and privatization to ensure internationalization of the
markets, thus enhancing competition and efficiency in capital allocation and real
incremental growth.
d) The regulation of the primary mechanism in the secondary market should be more
flexible to allow for adequate response to changes in economic fundamentals such
as announcement of government budget.
e) Encourage institutions to securitize their assets thus improving access to longterm liquidity.
f) Decreasing the intermediation cost by eliminating stamp duties, reducing list fees
and reducing brokers and dealers registration fees and annual subscription and
deregulating dealers commission.
g) The Nigerian Stock Exchange should make effort to be fully on-line and
technological driven, so that individuals all over the world can trade directly on
line with the stock exchange.
h) Standardizing disclosure requirements for international investments and capital
inflow.
i) Improving accounting and auditing standards to satisfy the information
requirements of financial markets, investors and international financial
community. This will improve integrity and confidence.
j) Setting ethical policies and standard of honesty, fairness equity, diligence,
competence and integrity for market operators.
22
k) Enforcing the general principles of supervision of on-screen trading systemvisibility accessibility etc as recommended by international organization of
securities commission (IOSCO).
In addition, the regulatory bodies of the market need to allow greater freedom of action
among market operators in order to provide incentives to investors to transact businesses.
Both primary and secondary issue prices should be largely dictated by market forces,
except for occasional interventions by the stock exchange to regulate outrageous
speculative activity.
Finally, the regulatory organizations should encourage growth in over-the-counter (OTC)
market to cater to the needs of myriads of private, institutional and small ventures
desirous of taking advantage of the capital market, which are unable to fulfill the rigorous
requirement and high floatation and other cost of going public.
In conclusion, given the strategic position, which the capital market plays in natural
economy, especially in this era of increasing privatization and globalization, the
imperative is on government to free the capital market from the structures of irrelevant
regulation. There is a need to ensure greater transparency in order to attract foreign
investors. The deepening of capital market is a necessity if needed private funds, for
economic development in all ramifications is to be mobilized.
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