The Contribution of the Capital Market to the Nigerian Economy

The Contribution of the Capital Market to the Nigerian Economy

Development does not occur in a vacuum. A necessary condition for rapid economic development is effective mobilization of resources within the economy of interest for economic development to be rapid, it will be essential to establish effecting tools for mobilization and allocation of financial resources. This is done through the capital market.

Capital market therefore, is a market for sale and purchase of medium and long-term securities the market typically consists of those who have long-term funds on the one hand

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and are willing to lend such fund, and those requiring such fund on the other for investment purpose.

Apart from funds mobilization allocation, capital markets are important institution in the efficient sectoral distribution of the available source financial resources.

  • THE CAPITAL MARKET USES THE FOLLOWING INSTRUMENTS FOR ITS OPERATIONS:
  1. Equity securities (common stock)

These are ownership securities that give the holder a legal inters in the ownership and control of a from variously called ordinary shares, common stock or simply equities they represent both the certificate of residual ownership and the risk bearing capital of a firm.

 

  1. Preference shares

There are compromise securities in which an investor relinquishes some of his rights as an unrestricted participant in corporate profit, and acquires a prior right to a limited but seemingly assured part in the profits. Preference shares or preferred stock stand midway between ownership and debt securities and are designed for the benefit of the investors who want priority over the ordinary share- holders.

  1. Long term debt securities

These are securities that entitle the holders to fixed rates of return at agreed intervals and maturity a holder of the long term instruments is preceded from participating in the ownership and control of the firm commonly called debt securities they includes:

(a)     Bounds

(b)     Debentures

(c)      Government securities

(d)     Others

 

  • INSTITUTIONS OF CAPITAL MARKET
  1. The Nigerian securities and Exchange commission
  2. The Nigerian stock exchange
  3. The merchant banks
  4. The development banks
  5. The Non- bank financial Institutions
  6. The second tier securities market
  7. Others

 

(a)     The Nigerian securities and exchange commission.

This is the apex institution for the regulation and         monitoring of the Nigerian.

Capital Market: The commission was established under the securities and exchange commission decree 1979.

Operating retrospectively from April 1, 197, before the establishment of securities and exchange commission (SEC) two bodies had in succession been responsible for the monitoring of capital market activities in Nigeria.

Functions of the Nigerian securities and exchange commission (SEC)

(1)     To determine the price, amount and time at which security of company are to be sold through offer for sale or subscription companies within the grip of the commission’s functions are:

(a)     All public companies

(b)     All enterprises with foreign interest

(2)     To determine the basis of all of most of security of a    public offering to ensure wider spread of shame   ownership.

(3)     To remove all battle necks which may easy transfer of shares.

(4)     To protect investors against misleading or inadequate information, fraud, and deceit on the part of securities      offered for sale hence acting as watchdog of the public.

 

(b)     The Nigerian stock exchange

Stock exchange is a market, which facilitates buying and       selling of shares stocks bonds, debentures and other   securities.

 

It is essentially a secondary market for buying and selling of already existing securities. However some new securities may be traded in the stock exchange.

 

(c)      The merchant bank: merchant banks are financial institutions that engage basically in intimidating funds between surplus and deficit sectors of the economy. They accept deposits and take care of the needs of corporate and institutional customers.

According to the Nigeria banking Amendment . act No 88 of 1979, a merchant bank is any person in Nigeria who is engaged in whole said banking medium and long term financial equipment leasing, debt factoring, investment management of unit trust.

(d)     The development banks

These are banks established for the purpose of providing long-term capital and specialized serve to all vital sectors of the economy for necessary economic development. Each development bank in Nigeria focuses its attention on a particular sector of the Nigerian economy. These sector include: Agriculture, industry commerce rural and urban development housing and export and import. Among the development banks in Nigeria are: bank of industry, Nigeria Agriculture and co-operative and rural development bank (NACRDB) urban development bank, federal mortgage bank etc.

The Non- bank financial institution these are financial institutions though not banks, but competent the activities of the banking institutions by being along term financial assistance to various sectors of the economy. They also participate actively in the capital market they in clued:

  1. Insurance companies
  2. National providence fund
  3. Investment companies
  4. Finance houses and others.

 

  1. The second tier securities market (SSM) on the 27th December commission gave approval to the Nigeria stock exchange to establish a second tier securities market fashioned after the united states over the counter market (OTC), the united kingdom unlisted securities market, and them French second march. The market was set up 30th April 1985 by the Nigerian stock exchange primarily for small and medium scale companies which, needed to raise money though the stock markets such companies, because they might not be qualified to raise such fund through the full listed market.

(The stock exchange) have a choice of falling back on the second tier securities market which is a junior market with diluted and relaxed entry requirements. It is note worthy that although the (SSM) second tier securities market provides enterprises any establishment that registers with the second tier securities market must be a dully-incorporated limited liability company.

The advantages of the second tiers securities market (SSM)

  1. Listing opportunities: small firms are afforded the opportunity of becoming quoted companies and have      access to funds in the organized capital market.
  1. Wider participation in capital market:

This market allows for wider participation in the capital        market activities. Nigerians are given the opportunity to    seek funds from the capital market and also own their           enterprises

  1. Ensures continuity of companies:

This ensures continuity companies after the death of    their key promoters as opposed to the situation where    most private companies collapse after the death of their       key sponsors.

  1. Diluted conditions of listing

The second tier securities market ensures that the stringent conditions for listing in the first tier market are relaxed Quotations are made more attractive to private companies.

2.3     REASONS FOR THE ESTABLISHMENT OF THE         NIGERIAN CAPITAL MARKET.

  1. To introduce a code of conduct, check abuses and regulates the activities of operator in the market.
  2. To provide local opportunities for borrowing and lending for long-term purposes.
  3. To enable the authorities to mobilize long-term capital for the economic development of the country.

(d)     To provide facilities for the quotation and ready           marketability and facilities to raise fresh capital in the          market.

(e)      To provide foreign business with the facility to after their      shares, and the Nigerian public an opportunity to invest        and participate in the shares and ownership of foreign           business.

(f)      Through participation and ownership to provide healthy and mutually acceptable environment for participation and cor-operation in the joint effort to develop the Nigerian economy to the mutual advantages of bath parties.

2.4     FUNCTIONS OF THE NIGERIA CAPITAL MARKET ARE    AS FOLLOWS:

  1. The promotion of rapid capital formation.
  2. The provision of sufficient liquidity for any investor or group of investors.
  3. The provision of an alternation source of funds other than taxation for government.
  4. The mobilization of savings from numerous economic units for economic growth and development.
  5. The creation of an in- built in operational and allocations efficiency within the financial system to ensure that resources are optimally utilized at relatively little costs.
  6. It is an avenue for effecting payments on debt.
  7. It is machinery for mobilizing long-term financial resources for industrial development.
  8. The broadening of the ownership base of assets and the creation of a healthy private sector.
  • PROBLEMS OF NIGERIA CAPITAL MARKET:

The Nigerian capital market is a development one and as such it has some constraints:

  1. Lack of Adequate communication facilities the communication system in Nigeria is not very developed the telephone, telex, and postal systems are not in good functional conditions and they are not found in majority of the rural areas.
  2. Low savings: Accumulated funds for investment of lacking in Nigeria. This is because of the low level of saving caused by low in come of the people.
  3. Death in securities: the instruments used in the capital market are limited when compared to those in the developed countries the member of quoted companies is very small and the shares they after to the market are small in number.
  4. Lack of interest in securities: Majority of investors in Nigeria prefers to invest in real assets as against investment in financial assets. This is because the real investments attract more return than financial investments in Nigeria.

This article was extracted from a Project Research Work Topic

“THE NIGERIAN CAPITAL MARKET AND IT’S CONTRIBUTION TO THE ECONOMY”

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