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Capital Market Reform and the Performance of the Nigerian Stock Exchange: An Impact Evaluation
Chapter One
Introduction
1.1 Background of the Study
Mobilization of resources for national
development has long been the central focus of economic development. For sustainable growth and development, funds
must be effectively mobilized and optimally allocated to enable business and
the national economies to harness their resources both human and material for
optimal output (Tokunbo, 2002). The
capital market is an economic institution which promotes efficiency in resource
allocation and capital formation. It enables both corporate organizations and
governments to raise long term funds for financing new projects, as well as for
project expansion and modernization (Onosode, 1990).
According
to Alabede (2004) the role played by the stock market in the economic growth
and development of a nation is recognized the world over. Through that role
long term funds are not only mobilized but channeled for productive
investments. The stock market provides the fulcrum for capital market
activities and it is often cited as a barometer of business direction. According to Obadan (1998), an active stock
market may be relied upon to indicate changes in general economic activities as
mirrored by the stock market index. The indispensable nature of the capital
market in any economy arises from the two major functions it performs: -
mobilizing and channeling of long term investible funds from the surplus sector
to the deficit sector of the economy, Usman, (1998). As a result of this role,
governments place due emphasis on the regulation and control of the capital
market in general and the stock market in particular. In recent times, there has been growing
concern over the role of the stock market in economic growth; hence the market
has been the focus of economists and policy makers.
According to Anyanwu (1993), the
financial market is a complex mechanism made up of procedures, instruments and
institutions through which deficit economic units and the surplus economic unit
are brought together to transact business with one another. In his own
contribution; Ibenta (2000), defined the financial market as a network of
institutional arrangements through which financial resources accumulated by
savers of funds are transferred to ultimate users who may be individuals or
households, corporate bodies or governments for investment in economic
activities, which include both the production and distribution of goods and
services. Ever since government policy began shifting in the direction of
limiting the role of the public sector in business activity, the need for
reform of the capital market became a critical requirement for creating a
viable private sector. The need for
promoting balanced financial intermediation in a system significantly short of
long term funds has been a strong signal that the domestic capital market in
Nigeria was overripe for a major change (Uzor, 2007).
The financial market has two major
segments namely the money and capital markets. Ekoko (2007) describes the
financial market as a “market where institutions exchange financial assets and
liabilities through a process described as intermediation”. The securities
market comprises of two segments – the primary market and the secondary market.
The primary market deals with new issues such as initial public offers (IPO),
right issues, private placement and offers for sale. The secondary market on the other hand
enables trading in existing securities i.e. securities previously issued in the
primary market. Prior to 1998, activities in these two markets were manually
executed. Manual allotment of shares was carried out by issuing houses in the
primary market subject to clearance by SEC while in the secondary market;
trades were characterized by auction/open outcry by stockbrokers on the floor
of the Nigerian Stock Exchange.
From 1998, the Federal Government
embarked on reforms in various sectors of the Nigerian economy including the Nigerian
capital market. The commencement of Automated Stock Market trading in 1999
marked a watershed in the development of the Nigerian capital market. In that
year, the Nigerian Stock Exchange established a subsidiary company called the
Central Security Clearing System (CSCS) to handle the clearing and settlement
of transactions in the stock market. And subsequently in the same year the
exchange commenced electronic transaction in securities.
The Automated Trading System (ATS) alongside the CSCS trading engine has now reduced transaction period to T+3 (i.e. transaction day plus three days) from an average period of three months before the introduction of these measures. This implies debiting a buyer’s account within three days after the transaction, while the seller is enabled to collect his/her cheque within the same period (T+3). The primary market has also come of age with the introduction of electronic transaction processes in an effort to improve service delivery to investors. Already, e-Dividend and e-Bonus payment systems are being implemented in the market.
In an effort to address the problems
associated with manual allotment such as delays in issuance of certificates,
e-Allotment is now being introduced by the Security and Exchange Commission.
As earlier stated these reforms were
aimed at redressing delays associated with concluding security market
transactions and aligning the market with contemporary global best practices
where very significant information technology transformations in security
transactions have already taken place.
The effects/impacts of these reforms individually and collectively need
to be investigated, hence the need for this research.
Capital Market Reform and the Performance of the Nigerian Stock Exchange: An Impact Evaluation
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